Chapter 7: Taxes - Tax Fairness and Efficiency

Question 1

What two principles determine tax fairness and efficiency?

Answer 1

• benefits principle
• ability-to-pay principle

Question 2

What is the benefit principle of tax fairness?

Answer 2

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

Question 3

What is the ability-to-pay principle of tax fairness?

Answer 3

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

Question 4

What is a lump-sum tax?

Answer 4

• same for everyone, regardless of any action people take

Question 5

Why are the fairest taxes in terms of the ability-to-pay principle not a good idea?

Answer 5

• it distorts incentives the most and perform badly on efficiency grounds

Question 6

A well designed system has a ___ __ between equity and efficiency. Why?

Answer 6

• trade off
• the system can be made more efficient only by making it less fair, vice versa (think PPF)

Question 7

A well designed system has a ___ __ between equity and efficiency. Why?

Answer 7

• trade off
• the system can be made more efficient only by making it less fair, vice versa (think PPF)

Question 8

What is the tax base?

Answer 8

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

Question 9

What is tax structure?

Answer 9

• specifies how the tax depends on the tax base

Question 10

What is income tax?

Answer 10

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

Question 11

What is payroll tax?

Answer 11

• a tax that depends on the earnings an employer pays to an employee

Question 12

What is sales tax?

Answer 12

• a tax that depends on the value of goods sold (aka excise tax)

Question 13

What is profits tax?

Answer 13

a tax that depends on a firm’s profits

Question 14

What is property tax?

Answer 14

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

Question 15

What is wealth tax?

Answer 15

a tax that depends on an individual’s wealth

Question 16

Once we define tax base, the next question is how the tax depends on the base. The simplest tax structure is called a proportional tax. What is that?

Answer 16

• aka flat tax
• same percentage of the base regardless of the taxpayer’s income or wealth

Question 17

What three principles are included in proportional tax?

Answer 17

• progressive tax
• regressive tax
• marginal tax rate

Question 18

What is a progressive tax?

Answer 18

• takes a larger share of the income of high-income taxpayers than of low-income payers

Question 19

What is a regressive tax?

Answer 19

• takes a smaller share of the income of high-income taxpayers than of low-income taxpayers

Question 20

What is the marginal tax rate?

Answer 20

• percentage of an increase in income that is taxed away

Question 21

Why is there a mix between progressive and regressive taxes in the Canadian System?

Answer 21

• the difference between levels of government and the fact that different taxes are based on different principles

Question 22

Why do some govts do not make much effort to the ability to pay principle? (2)

Answer 22

• provincial and especially local governments
• bc they are subject to tax competition, meaning a province or local govt that imposes high taxes on ppl with high income faces the prospect that those people may move to other locations where taxes are lower

Question 23

Should we tax using household income as the tax base, or personal income? (4)

Answer 23

• it is normative
• issues of vertical and horizontal equity
• Canada vs US
• Women’s Labour Force participation

Question 24

What is the top marginal income tax rate?

Answer 24

• the amount of money a Canadian owes in federal income taxes is defined in terms of marginal tax rates on successively higher “brackets” of income