H-chap 16-17 Flashcards
5 characteristics of a good tax
- Justifiable Reason
- Equitably applied
- Certitude regarding amt. of tax
- Convenient to levy
- Economical to collect compared to revenue generated
Contends that taxes should be paid in portion to cost of service received
Cost-Service Theory
Individuals should pay taxes based on benefits received
Benefit-Received Theory
Individuals should pay an amount of taxes consistent with their ability to pay
Ability-to-Pay Theory
Individuals should pay pay taxes according to their marginal utility of income
Equality-of-Sacrifice Theory
Type of tax rates that always remain the same, regardless of size of the base
Proportional Tax Rate
Tax rates increase based on the size of the base
Progressive Tax Rate
Tax rates decrease as the size of the base increases
Regressive Tax Rate
What are the largest sources of federal tax revenues?
Personal income and Social insurance
Increasing dissatisfaction with personal income has brought forth proposals to replace 4 types of taxes.
What are they?
Personal Income Tax
Flat Tax
Consumption Tax
VAT/National Sales Tax
3 major purposes of taxation are
- Covering government costs
- Redistributing Income
- Economic Stabilization
Theoretically if there is a surplus of tax revenues the government can
Reduce taxes
and
Expand its services / repay debt
When tax revenues continue decreasing
Government can reduce spending.
Taxes and government spending are used to try to..
Stabilize total income and outpue
What can be used as a stabilizer of total output bc it can moderate business cycles and help stablize economy
Federal Budget
A surplus of budget (federal) helps
Prevent inflation during peak period
A deficit budget (federal) helps
Offset unemployment during a trough
True or False
A nation will be bankrupt if the federal debt becomes too large unless a majority of share is held by foreign banks and government.
False
The federal government borrows from
Individuals
Businesses
Banks in the Economy
Foreign Institutions
What percentage do foreign and international institution represent in the total national debt?
40%
`The government’s ability to repay is governed by only the
economy’s total assets and government’s ability to tax
Tax base x total tax that must be paid
Tax Rate
Value of the object upon which tax is levied
Tax Base
True or False
Based on the Supply and Demand curve the burden of taxes can be shifted –except for personal income
True
2 Main types of tax levies
Direct Tax: CAN’T be shifted, ex. income
Indirect Tax: CAN be shifted ex. excise tax on g/s
Tax shifting is passing tax burden from the taxpayer to another, what are its 3 main aspects?
- Impact of T: Financial burden entailed
- Incidence of T: Point which burden of tax ultimately rests
- Effect of T: Economic consequence of paying tax
Which is higher, marginal or average tax rate?
Marginal the top being 35%
What are known as employment/payroll taxes and make up 36% of federal budget
Social Security and Social Insurance
Major Tax Proposals (Identify):
a. Collects taxes only at the time the consumer buys the product
b. Collects taxes on each stage of production
d. Single tax rate on incomes
e. Tax on incomes + savings
a. National Sales Tax
b. VAT / Value Added Tax
d. Flat Tax
e. Consumption Tax
Max. amount of federal debt that can be accumulated without going back to Congress to approve advancement on
Debt Ceiling
Deficit Budget is used to cause fiscal stimulus this is a good or bad thing?
Good
Surplus Budget spends less than you have which is supposed to
Bring down the economy
How many deficits since 1997-
70 Deficits
Called for reducing federal deficit by $500 billion
Budget Reduction Act 19
Measure of the potential revenue and spending that would result if what existed?
Full – employment balanced budget
Monetary policies have been what three economic objectives?
Econ. Stability
Econ. Growth
Price Stability
Monetary policy involves…
Regulation of the money supply by the Feds
Increasing the money supply can raise
Aggregate Expenditure during period of unemployment
The goal of fiscal policy
Promote max. income w/ full employment in closed economy
Automatic Stabilizers
Social Security Pension Unemployment compensation Farm price support Federal personal income tax
What activate the economy as a result of a budget deficit
Fiscal stimulus
What slows the economy aw a result of a budget surplus
Fiscal Drag
3 ways the government can pay for its spending
Tax financing
Debt financing (Borrowing from Banks
Creating Money by selling bonds
If the government increases it spending but does not increase the taxes
Total spending for the economy as a whole should increase
If gov decreases taxes
It results in a deficit budget
If gov spending is held but taxes are decreases
Less revenue for government which the has to borrow
2 Forms of discretionary government spending that can raise level of total income and employment
Transfer payments
Public works
- A persistent decline in level of prices
- Slowdown in rate of inflation (usually considered good)
- Persistent increase in level of prices
- When inflation and higher employment are higher at same time
- Inflation that goes out of control and makes currency worthless
A. Deflation B. Disinflation C. Inflation D. Stagflation E. Hyperinflation
- Results from spiral wage and price benefit cost/price increase. Is a backward shift of the aggregate supply curve
- Occurs when aggregate demand exceed aggregate supply
A. Cost-Push inflation
B. Demand - Pull inflation
Wartime inflation involves
Taxation
Voluntary/Forced savings
Wage/Price/Credit controls
Number of other tools
Curve showing relationship between unemployment and inflation
Phillips Curve
Take that a one-time dose of gov spending puts the economy on the road to recovery
Pump Priming
One of the primary causes for the Great Depression
Accumulate consumer and commercial debt fueled by cheap credit
Most serious problem to discretionary government spending
It is difficult to begins = how long it takes to end
so gov deficit grows
Public works is to the
Multiplier effect (one chain reaction will start another which will project the growth of the economy)
3 methods of increasing gov spending:
- Involves increasing money spent by gov. And taxes remain constant
- Referred to as “tax rebate plan” results in deficit budget
- Maintains balanced budget but effect is limited that taxes are raised and private funds are absorbed (eliminating multiplier effect)
- Increase Gov spending hold taxes
- Hold gov. Spending and decrease taxes
- Increase gov spending and taxes proportionately
Monetary and fiscal policies that are used to try increase the equilibrium level of income and output
Expansionary Policies
Monetary and fiscal policies used to try to lower aggregate demand for output to level that can be achieved with full employment of resources
Contractionary Policies
Forces within economy that naturally counteract recession and inflation
Auto Stabilizers
- Activating effect on the economy resulting from budget deficit
- Slowing effect on economy resulting from budget surplus
- Fiscal Stimulus
2. Fiscal drag
Occurs when deficit spending by gov. force private investment spending to contract
Crowding Out
4 general fiscal policies developed to promote max. income and full employment
- Consumption stimulated, marginal propensity increased
- Investment encouraged
- Gov spending increases aggregate expenditures
- Taxes reduced increase in disposable income
Aggregate expenditure remains constant and no increase in total output and employment results.
Idle funds are taxed
Tax Financing
More desirable for raising funds for gov. spending
Aggregate expenditure will show no net increase and interest rates will rise.
Keyword: borrowing
Debt Financing
Treasury sells bonds to Federal Reserve
A.k.a. Printing money or monetizing debt bc. it removes gov. Spending from hands of the public and replaces it with deposits
Financing Creating Money
