Midterm

Question 1

When should Governments Intervene?

Answer 1

• Market forces will be the most efficient all else equal
• Profit motive will produce efficient/cost effective goods at needed amount

Question 2

Non-rivalrous

Answer 2

use by one person doesn’t stop others from full use with no cost

Question 3

Non-excludable

Answer 3

An additional person can’t be excluded if don’t pay

Ex.: defense, safety, environmental protection, certain infrastructure

Question 4

Externalities (insufficient protection from market effects)

Answer 4

Market will provide sufficient amount if not more, as true cost not captured

Ex. Car exhaust, water provision, vaccines

Question 5

Adverse Selection

Answer 5

Excluding “problem” groups for better profits/reduced costs when sellers have information that buyers do not have, or vice versa, about some aspect of product quality

Question 6

Moral Hazard

Answer 6

When market structure provides reverse incentives. Ex: Government bail outs, flood insurance, social security in some ways, FDIC insurance

Question 7

Economic Stabilization

Answer 7

economic stability is a goal.

Question 8

Monetary Policy

Answer 8

Fed and interest rate moves

Question 9

Fiscal/Government Policy

Answer 9

Direct purchases, business incentives, tax reductions

Question 10

Redistribution

Answer 10

Take from one party and give to another to address market failures, economic stability, or other public policy aim

Question 11

Source of property tax sales tax

Answer 11

local and state

Question 12

Source of income tax

Answer 12

local, state, and federal

Question 13

Pure Public Goods

Answer 13

Good that is both non-excludable and non-rivalrous. Use by one person neither prevents access by other people, nor does it reduce availability to others. (Lighthouses, Dams)

Question 14

Progressive Tax

Answer 14

Individuals with higher incomes are subject to higher tax burdens, while
those with lower incomes face lower tax burdens as a % of their respective incomes

Question 15

Perverse incentives

Answer 15

Incentive that has an unintended and undesirable result that is contrary to the intentions of its designers.

Question 16

Yield

Answer 16

Return on an investment, often expressed as a percentage. It is commonly associated with bonds and other fixed-income securities. The yield represents the income generated by an investment relative to its cost or current market value.

Question 17

Horizontal Equity

Answer 17

Individuals with same income levels → Should pay same amount of tax

Question 18

Vertical Equity

Answer 18

Those with higher incomes should bear a larger tax burden (progressive tax)

Question 19

administrative burdens

Answer 19

costs, complexities, and difficulties associated with complying with government regulations, policies, and procedures. These burdens are primarily related to the administrative tasks and responsibilities that individuals, businesses, or organizations must undertake to meet regulatory requirements.

Question 20

Nonspendable Fund Balance

Answer 20

resources that can’t be spent because they are generally not in cash form (inventories, prepaid expenses)

Question 21

Restricted Fund Balance

Answer 21

Resources that have limitations imposed by 3rd parties or legal restrictions

Question 22

Committed Fund Balance

Answer 22

Resources that are earmarked for specific purposes by highest level of government (can be reversed but through the process by which funds were originally committed by) sometimes through the formal appropriations/budget process

Question 23

Assigned Fund Balance

Answer 23

Resources that are intended for specific purposes determined by government and have far more flexibility in use than the above.

Question 24

General Fund

Answer 24

Used for general governmental purposes, general operations, day-to-day (ex. Capital projects)

Question 25

Fiduciary Fund

Answer 25

Assets held on behalf of others, such as individuals, external organizations, or other governmental units (pensions)

Question 26

Proprietary Fund

Answer 26

Self-supporting or internal operating funds to account for business-type activities that focus on generating revenue and cover operating expenses (ex. Enterprise funds)

Question 27

Component Units

Answer 27

Businesses that are quasi-governmental, but are generally large enough that operate separately but need to be included in the audit for accounting purposes. Ex: Hospitals, airports, etc.

Question 28

Above the line deductions

Answer 28

• These items are considered income. Available to all taxpayers, not dependent on standardized vs. itemized deduction, this income is not taxable if used certain ways
• ATL deductions are available to all taxpayers, regardless of whether they take the standard deduction or itemized deductions
• Considers encouraging specific financial behaviors, promoting economic growth
• Ex. Student loan interest, retirement contributions, health savings accounts

Question 29

Below the line deductions

Answer 29

• Deducted after adjusted gross income is calculated
• Deductions are variable based on whether you take the itemized or standard deduction
• More targeted relief to incentivize more specific behaviors
• Ex. Mortgage interest, charitable contributions, SALT
• Main difference between ATL and BTL: BTL deductions are less valuable as a % of taxable income

Question 30

Alternative Minimum Tax

Answer 30

Parallel tax system that encourages fairness by enforces a minimum tax on high-income individuals, corporations, trusts, etc. regardless of deductions, credits, etc.

Question 31

Corporate Income Tax

Answer 31

Corporations are separate legal entities from individual owners. Company profits and dividends distributed to individual shareholders are both subject to income tax (corporate and individual).

Question 32

Consumption tax

Answer 32

• European mostly
• Excise, sales, and value added tax (VAT)
• Theoretically, better to tax individual choices (consumption) rather than production
• Regressive if low-income and high-income are purchasing identical item.
• May be progressive if low-income households purchase cheaper alternatives and high-income households purchase pricier alternatives.

Question 33

Excise Tax

Answer 33

 Special taxes (luxury, sumptuary, benefit base, regulatory)
 Depends on how you define
 Think: soda tax

Question 34

Sales tax

Answer 34

 Applied to general base
 Collected by businesses, remitted to taxing authority
 charged at final stage of transaction (as opposed to VAT)
 exemptions may include – food, clothes, medicine

Question 35

Use tax

Answer 35

 Alternative to sales tax
 based on where it is used, stored, consumed, etc.

Question 36

VAT (value added tax)

Answer 36

European mostly
tax levied at each supply chain stage where” value is added”
tax levied on (value-costs already taxed)

Question 37

User fees

Answer 37

o Consumption or utilization-based fees charges levied on individuals or entities using a specific government-provided (or government-regulated) good or service.
o Typically flat fee, sometimes a rate, depends on activity, scope, user
o Help to generate revenue for specific activities, goods, or service provision (goes back to dept/agency)
o As opposed to tax revenue, which are used for a myriad of government activities and expenditures (General fund)
 Barton Springs
 Downtown parking fees

Question 38

Municipal Utility Districts

Answer 38

o special districts typically created for issues relating to water, drainage, sewage
o typically used to help support suburban development
o Independent from city/county government, limited taxing and bond issuing authority

Question 39

Cash basis

Answer 39

• Record transactions (expenses & revenues) when cash is received or paid (enters or leaves account)
• Think: only posted credits or debit on your card statement is recorded

Question 40

Accrual basis

Answer 40

• Record transactions when revenue is earned or expenses are incurred, regardless of when actual money is moved
• Think: ”pending” credits or debits are recorded

Question 41

Modified Accrual Basis

Answer 41

• Hybrid of cash and accrual accounting, with specific rules governing revenues and expenditures
• Focuses current financial resources not total
• Emphasizes short-term financial activities and focuses on use of resources within a specific period
• Revenues must be measurable (reasonably estimated) and available (are collectible/will be collected soon)
• Expenditures are recorded when expected to draw on current resources (focus on short-term financial accounting)

Question 42

Double –entry bookkeeping

Answer 42

• Every transaction is recorded in two different accounts
• Every transaction is entered as a debit in one account and a credit in another
• Debits and credits MUST balance
• Total debits must equal the total credits for all transactions
• This allows gov. to account for change in form of assets or liabilities
• Ex. Gov. buys police cars. They would debit the cash account and credit the physical asset account (change in form from money to physical vehicle).

Question 43

What is an Asset?

Answer 43

• Def: Resources/items owned/controlled by government
• Ex: Cash, investments, receivables, land, equipment, capital assets, taxes receivables

Question 44

What is a Liability?

Answer 44

• Def: What the government owes to someone or claims others have on assets
• Ex: Accounts payable, payroll payable, debt payable, due to other funds

Question 45

What is Equity/Fund Balance?

Answer 45

Difference between what Government owns and what owes others (think net worth)

Question 46

Modified accrual basis

Answer 46

An accounting method commonly used in public finance. It lies between cash basis accounting and accrual basis accounting, incorporating elements of both to suit the specific needs of government entities.