Public goods and tax terminology Flashcards
what are public goods? define pure public goods as well.
goods that are produced by public finance and are financed with tax. pure public goods cannot be divided between individuals
explain non-excludability of public goods
it is very expensive or impossible to exclude someone from getting this good. when a good is excludable, the price is set at P = MC or MC = MR
can non-excludable goods be rival? what does it mean?
yes. rival goods still have MC > 0 once they are provided, while non-rival goods have MC=0 once they are provided.
state three possible states of the public budget.
surplus: G < T
balance: G = T
deficit: G > T
persistent deficit results in debt, EU max is when debt reaches 60% of the budget
define average tax rate
= taxes paid / tax base = T/X
define marginal tax rate and explain what it means.
= change in taxes paid / change is tax base = ΔT/ΔX
= if tax base increases by 1 eur, then taxes paid will increase by Z eur.
define effective tax rate
= tax paid / full tax base (without any tax reliefs)
full tax base = tax base 1
state three kinds of tax rates
- proportional (ATR is constant)
- progressive (ATR increases with increasing X)
- —slice system (each slice taxed according to bracket)
- —slab system (all income taxed with highest slab)
- —indirect progression (income taxed if it’s above threshold) - regressive (ATR decreases with increasing X)
- —indirect regression (income taxed if it’s below threshold - even if it is higher, like slice system)
define statutory tax rate
tax rate as it is stated by law
state four different tax reliefs and how they work
- zero-rated first bracket
- tax allowance = tax deduction = part of income is not taxed (e.g. 40% of income from investments)
- tax exemption = type of income is not taxed at all
- tax credit = lowers T, not X
explain how withholding tax works. what is different when there is a non-resident included?
employers withhold this tax from employees (their salary) and it counts as tax credit against the employee’s PIT at the end of year.
if a non-resident gets their tax withheld in Country1, then in their country (2), they have two options:
1. credit method (C1 tax counts as credit in C2)
2. exempt method (C1 tax is exempt in C2)
define tax avoidance. is it legal?
yes, it’s legal. it’s a way of minimising the amount of tax liability.
define tax evasion. is it legal?
no, it is not legal. it means evading taxes by not paying them at all.
what are the three parameters of tax residency?
- 183+ days per year lived in this country
- permanent address in this country
- where center of vital interests (school, work, etc.) is
any one of these is enough, you don’t need to have all three
explain tax incidence and how it occurs.
it is a result of tax shifting, meaning shifting the burden of taxes onto another person.
there are three possibilities:
1. all burden is on producer (when demand is perfectly elastic —) = backward shifting
2. burden is shared (when demand is normal \ )
3. all burden is on consumer (when demand is perfectly inelastic | ) = forward shifting
in all three cases, producer pays the entire tax!
-> tax incidence is determined by demand elasticity
