Chapter 6

Question 0

Tax base

Answer 0

The values of goods, services, wealth, or incomes subject to taxation

Question 1

Government budget constraint

Answer 1

The limit on government spending and transfers imposed by the fact that every dollar the government spends, transfers, or uses to repay borrowed funds must ultimately be provided by the taxes it collects

Question 2

Tax rate

Answer 2

The proportion of a tax base that must be paid to a government as taxes

Question 3

Marginal tax rate

Answer 3

The change in the tax payment divided by the change in income, or the percentage of additional dollars that must be paid in taxes. The marginal tax rate is applied to the highest tax bracket of taxable income reached

Question 4

Tax bracket

Answer 4

A specified interval of income to which a specific and unique marginal tax rate is applied

Question 5

Average tax rate

Answer 5

The total tax payment divided by total income. It is the proportion of total income paid in taxes

Question 6

Proportional taxation

Answer 6

A tax system in which, regardless of an individual’s income, the tax bill comprises exactly the same proportion

Question 7

Progressive taxation

Answer 7

A tax system in which, as income increases, a higher percentage of the additional income is paid as taxes. The marginal tax rate exceeds the average tax rate as income rises.

Question 8

Regressive taxation

Answer 8

A tax system in which as more dollars are earned, the percentage of tax paid on them falls. The marginal tax rate is less than the average tax rate as income rises

Question 9

Capital gain

Answer 9

The positive difference between the purchase price and the sale price of an asset. If a share of stock is bought for $5 and then sold for $15, the capital gain is $10

Question 10

Capital loss

Answer 10

The negative difference between the purchase price and the sale price of an asset

Question 11

Retained earnings

Answer 11

Earnings that a corporation saves, or retains, for investment in other productive activities; earnings that are not distributed to stockholders

Question 12

Tax incidence

Answer 12

The distribution of tax burdens among various groups in society

Question 13

Sales taxes

Answer 13

Taxes assessed on the prices paid on a large set of goods and services

Question 14

Ad valorem taxation

Answer 14

Assessing taxes by charging a tax rate equal to a fraction of the market price of each unit purchased

Question 15

Static tax analysis

Answer 15

Economic evaluation of the effects of tax rate changes under the assumption that there is no effect on the tax base, meaning that there is an unambiguous positive relationship between tax rates and tax revenues

Question 16

Dynamic tax analysis

Answer 16

Economic evaluation of tax rate changes that recognizes that the tax base eventually declines with ever higher tax rates, so that tax revenues may eventually decline if the tax rate is raised sufficiently

Question 17

Excise tax

Answer 17

A tax levied on purchases of a particular good or service

Question 18

Unit tax

Answer 18

A constant tax assessed on each unit of a good that consumers purchase

Question 19

Social security contributions

Answer 19

The mandatory taxes paid out of workers’ wages and salaries. Although half are supposedly paid by employers, in fact the net wage s of employees are lower by the full amount

Question 20

Rate of return

Answer 20

The proportional annual benefit that results from making an investment

Question 21

Inflation-adjusted return

Answer 21

A rate of return that is measured in terms of real goods and services; that is, after the effects of inflation have been factored out.