Unit 2

Question 1

Tax Rate

Answer 1

The % of income that’s paid in taxes

Question 2

What are the 3 types of taxes?

Answer 2

Progressive, Flat, Regressive

Question 3

Progressive Taxes

Answer 3

HIGHER tax rate on those with HIGHER incomes

Tax rates are always MARGINAL tax rates - moving up a tax bracket means you’ll pay the higher rate on only PART of the income you earn

Question 4

How do we calculate for a tax bill?

Answer 4

1)

2)

3)

4) Finally, ADD the values together

Question 5

Why do we calculate tax bills the way we do?

Answer 5

INCENTIVES.

Would be a terrible incentive structure if being in a higher tax bracket = paying a higher tax rate on all income you’ve earned

Question 6

Why do high-income people tend to itemize deductions?

Answer 6

INCENTIVES!

The savings from a lower taxable income are much LARGER when the income is taken from a higher tax bracket

Question 7

Tax Avoidance

Answer 7

A legal way people avoid paying taxes or lessen the amount they have to pay

Question 8

What happened during the 1950s?

Answer 8

The highest tax rate was over 90%, which people did not want to pay. Back then, tax avoidance skyrocketed and became commonly practiced

Question 9

Flat Taxes

Answer 9

CONSTANT tax rate
Everyone pays the SAME PORTION OF INCOME

Question 10

How do FLAT taxes differ from PROGRESSIVE taxes?

Answer 10

Not as complicated as those progressive taxes and takes a more simpler approach:

1) Doesn’t come with asymmetric incentives about deductions

2) Shifts some tax burden away from the richest to other groups

Question 11

Regressive Taxes

Answer 11

LOWER tax rate on those with HIGHER incomes

Question 12

What are two examples of REGRESSIVE taxes?

Answer 12

1) Sales Tax: Low-income households spend the vast majority of their income while HIGH-income households spend a SMALLER portion of their income

• Scenario: 6% Sales Tax
  Poor Household: Spends all their income, pays 6% of income towards sales tax
  vs.

Rich Household: Spends half their income, pays 3% of their income on sales tax

2) Fines: A $300 parking ticket is a much SMALLER share of a HIGH income compared to a low income

(a problem avoided by adjusting fines based on income)

Question 13

Sales Tax

Answer 13

A consumption tax imposed by the government on the sale of goods and services

*NOT ALL SPENDING IS SUBJECT TO A SALES TAX (e.g. food)

Question 14

Tax Revenue

Answer 14

Money collected from taxes on income, profits, property transactions, goods & services, etc.

Question 15

What are the 3 sources of tax revenue?

Answer 15

Income Tax, Payroll Taxes, Corporate Taxes

Question 16

Income Tax

Answer 16

PROGRESSIVE tax on income, including capital gains & interest, paid DIRECTLY by the individual

Used to:
- Fund public services
- Pay government obligations
- Provide goods for citizens

Question 17

What are the 2 types of income tax?

Answer 17

1) PERSONAL - Levied on an individual’s wages, salaries, or other types of income

2) BUSINESS - Applies to corporations, partnerships, small businesses, and the self-employed

Question 18

The relationship between the U.S. and progressive income tax

Answer 18

The U.S. has a progressive tax system, even after deductions!

Look at how the vast majority of income tax collected by the IRS comes from high-income households

Question 19

Payroll Taxes

Answer 19

Tax on income, paid DIRECTLY & INDIRECTLY by the individual

• Directly: You pay because some of it comes out of your paycheck explicitly
• Indirectly: Your employer pays the rest
• Includes the taxes employees and employers pay on wages, tips, and salaries

Used to:
- Fund Social Security programs + Medicare
(of course, part of Medicare is funded from general funds)

Question 20

Corporate Taxes

Answer 20

FLAT tax companies pay on profits

Question 21

Can companies sometimes pay 0 taxes?

Answer 21

Yes & No!

No: Some taxes exist where they have to pay (FICA taxes - even though employees pay a sizable portion of it, it’s not all of it; State & Local taxes) and there’s many firms who pay loads of corporate taxes

Yes: In some cases, companies can avoid taxes Because

• Some revenue is held offshore, so it’s not taxed
• The government allows for deductions (similar to personal income taxes in this way)

Question 22

What happened with Amazon in 2017 and 2018? Why did it happen?

Answer 22

Amazon paid 0 federal corporate taxes - all an intended and natural result of the tax code

The tax code allows Amazon to DEDUCT investment and employee stock compensation from its taxable profits

It purposely does this to incentivize firms to invest their profits + spread ownership power to company employees

Question 23

What are the 2 types of government spending?

Answer 23

Mandatory, Discretionary

Question 24

Mandatory Spending

Answer 24

Spending the government has to spend due to STATUTORY CRITERIA and HAS NO LIMITS

this is also called entitlements (gov benefits with guaranteed access assuming you meet the criteria)

• social security, medicare, welfare, food stamps

Question 25

Discretionary

Answer 25

Spending the government decides on with EXPLICIT NUMBERS ATTACHED (so it has set limits)

• Includes defense & non-defense spending (funding for NASA, the NIH, veterans’ healthcare, transportation)

Question 26

Transfers

Answer 26

Money the government spends on others but doesn’t get anything in return

• Medicare, farm subsidies, unemployment insurance
• Both mandatory and discretionary spending include transfers

Question 27

Which of the following is a transfer?

a. Buying a fighter jet
b. Building a road
c. Doing medical research at NIH

Answer 27

None are transfers

Question 28

Deficit

Answer 28

Government spends MORE than it takes from taxes

(in other words: SPENDING FOR A YEAR > REVENUE FOR A YEAR)

Question 29

Government Bonds

Answer 29

Government borrows money to make up the difference in spending and revenue

• Borrowed money makes up the total debt (how much the gov owes in total)

Question 30

Why can’t we say that paying off debt is a matter of higher income taxes?

Answer 30

It’s not that simple

The HIGHER the income rate
The LARGER the incentive to AVOID paying those taxes is (whether it’s via deductions, exemptions, or simply not working)

Question 31

Laffer Curve

Answer 31

• Income Rate = 0%, government collects NO revenue
• Income Rate = 100%, no incentive to work & government still collects NO revenue
  (gov would still probably collect some revenue since some people would be motivated by other reasons to do their job, but most people would not be working)
• Don’t know the exact shape of the curve
• Don’t know how flat the curve is