L6: US Tax System Flashcards
two aspects of the tax system to focus on
marriage penalty
- costs money to get married because of tax liability
tax expenditure
types of taxation
payroll tax
- tax levied on income earned on one’s job
individual income tax
- tax paid on individual income accrued during the year
corporate income tax
- tax levied on the earnings of corporations
wealth taxes
- tax paid on the value of assets
property taxes
- form of wealth tax based on the value of real estate
estate taxes
- form of wealth tax based on the value of the estate left behind when one dies
sales taxes
- taxes paid by consumers to vendors at the point of sale
excise tax
- tax paid on particular goods like cigarettes, gasoline, alcohol, etc.
key feature of the income tax
most important tax not just in terms of revenue but establishing progressivity of the system
marginal tax rate
percentage that is paid in taxes of the next dollar earned
derivative of tax liability with respect to a change in income
average tax rate
percentage of before-tax income that is paid in taxes
total taxes you pay divided by income
progressive tax rate schedule
want to keep marginal tax rates from being too high since there is a concern around responses it might cause in terms of people trying to rearrange their affairs in response to taxes, which causes deadweight loss
progressive tax system
average tax rises with income
proportional tax system
average tax rates do not change with income so all taxpayers pay the same proportion of income in taxes
regressive tax system
average tax rates fall with income
2 distributional goals in measuring tax fairness
vertical equity: principle that groups with more resources should face higher tax rates than groups with fewer resources
horizontal equity: principle that similar individuals who make different economic choices should be treated similarly by the tax system
three principles a tax system should satisfy (marriage tax)
progressivity
across-family horizontal equity
- couples should pay the same taxes regardless of division of income between spouses
across-marriage horizontal equity
- if people decide to get married, nothing should happen to their tax liability
marriage tax or bonus
rise or fall in the joint tax burden on two individuals getting married
taxable income
income to which the tax schedule applies
many deductions allowed from income
tax expenditure
government revenue losses attributable to tax provisions that allow special deductions from income or provide a special credit, preferential tax rate, or deferral of tax liability
rationale behind tax expenditures
to encourage activities with positive externalities - Pigouvian subsidy
