Chapter 7

Question 1

Excise tax

Answer 1

• A tax on sales of a good or service

Question 2

incidence

Answer 2

• a mesaure of who really pays it

Question 3

What does the incidence of an excise tax depend on?

Answer 3

The price elasticity of supply and the price elasticity of demand

Question 5

Where does the burden fall when price elasticity of demand is low and of supply is high with excise taxes?

Answer 5

Falls mainly on consumers

Question 6

Where does the burden fall when the price elasticyt of demand is high and supply is low?

Answer 6

The burden of an excise tax falls mainly on producers

Question 7

Tax revenue =

Answer 7

Area of shaded rectangle

Question 8

tax rate

Answer 8

• amount of tax people are required to pay per unit of whatever is being taxed

Question 9

sin taxes

Answer 9

Taxes created to discourage undesirable behavior

Question 10

administrative costs

Answer 10

• the resources used by government to collect the tax, and by taxpayers to pay it, over and above the amount of the tax, as well as to evade it.

Question 11

The larger the number of transactions that are prevented by the tax…

Answer 11

The larger the deadweight loss

Question 12

Two principles of tax fairness:

Answer 12

1. Benefits principle
2. Ability-to-pay principle

Question 13

Benefits principle

Answer 13

Those who benefit from public spending should bear the burden of the tax that pays for that spending

Question 14

Ability-to-pay principle

Answer 14

Those with greater ability to pay a tax should pay more tax

Question 15

lump-sum tax

Answer 15

• a tax that is the same for everyone, regardless of any actions people take.
• better than other taxes at promoting economic efficiency

Question 16

Trade-off between equity and effiency:

Answer 16

The system can be made more efficient only by making it less fair, and vice versa

Part of a well-designed tax system

Question 17

Tax base

Answer 17

the measure or value, such as income or property value, that determines how much tax an individual or firm pays

Question 18

Tax structure

Answer 18

Specifies how the tax depends on the tax base

Question 19

Income tax

Answer 19

A tax that depends on the income of an individual or family from wages and investments

Question 20

Payroll tax

Answer 20

A tax that depends on the earnings an employer pays to an employee

Question 21

Sales tax

Answer 21

A tax that depends on the value of goods sold (excise tax)

Question 22

Profits tax

Answer 22

A tax that depends on a firm’s profits

Question 23

Property tax

Answer 23

A tax that depends on the value of property, such as the value of a home

Question 24

Wealth tax

Answer 24

a tax that depends on an individual’s wealth

Question 25

Proportional tax

Answer 25

The same percentage of the tax base regardless of the taxpayer’s income or wealth

aka flat tax

Question 26

Progressive tax

Answer 26

Takes a larger share of the income of high-income taxpayers than of low-income taxpayers

Question 27

Regressive tax

Answer 27

Takes a smaller share of the income of high-income taxpayers than of low-income taxpayers

Question 28

Marginal tax rate

Answer 28

The percentage of an increase in income that is taxed away

Question 29

tax competition

Answer 29

A state or local government that imposes high taxes on people with high income could lose those people to locations where taxes are lower