Chapter+12+The+Design+of+the+Tax+System.JAKS

=Chapter 12. = =The Design of the Tax System =



 Definitions
Average tax rate: rate of total taxes paid divided by one's total income Budget deficit: government spending is higher than government receipts Budget surplus: government receipts are higher than government spending Marginal tax rate: rate of extra taxes paid for each additional dollar of one's income Lump-sum tax: all people to pay the exact same amount of tax Benefits principle: idea that argues that people should pay taxes according to how much benefits they receive from the government Ability-to-pay principle: taxes should be levied on each person's ability to pay Vertical equity: Taxpayers with greater ability to pay should pay larger amounts Horizontal equity: Taxpayers with similar abilities to pay should pay the same amount Proportional tax: tax where everyone pays the same percentage of income as tax Regressive tax: high-income taxpayers pay a smaller percentage of income than low-income taxpayers Progressive tax: high-income taxpayers pay a larger percentage of their income than low-taxpayers


 *   Learning Objectives**

This chapter examines the designs of the tax systems. Questions such as how the U.S. government raises and spends money or how government balances the equity and efficiency will be answered after looking at the principles of taxation.
 * Introduction**

About 2/3 of all taxes are collected by the federal government.
 * The Federal Government**

Receipts: the amount of money or revenue that the federal government gets. A large source of revenue is the individual income tax.

Individual Income tax: This is the type of tax that takes up the largest revenue for the federal government's tax revenue. Every April 15th, American families have to write out a tax form to organize how much tax they owe the government. In the form, they are required to report their income from: -wages -interest from savings -dividends from corporations -small profits from small businesses The government then determines the tax liability of the family.

Pay roll tax: tax on wages. This revenue, which the government receives, is called social insurance tax because it is used for social security and medicare. Corporation tax: tax on each corporation based on the profit of the corporation. Excise tax: tax on specific goods like gasoline, cigarettes, alcoholic beverages.

Biggest Spending: -social security (for helping the elderly) -national security (salaries for military men, and military equipment) -income security (payments to the poor for shelter, food)

40% of the taxes paid go to the state/local government
 * State and Local Government**

Receipts: 1. Sales tax: tax paid when goods are bought from stores. 2. Property tax: tax collected from property owners based on the value of their land. 3. Also from fees for fishing license, tolls from roads and bridges, and fares for public transportation.

Biggest Spending: 1. education for schools and public universities 2. helping the poor 3. maintaining/building roads and buildings

Administrative Burden: the time that taxpayers spend to fill out tax forms, the time that is needed to organize tax records, and the resources that the government needs to use to set up tax laws. Deadweight loss: caused by changing incentives, tax incentives change people’s behaviors. If the total surplus decreases more than the tax revenue, there is deadweight loss of the tax.
 * Costs of Taxes**

An efficient tax would have low administrative burden and deadweight loss.



Lump-sum tax The most efficient tax system is the lump-sum tax. This tax requires the exact same amount of tax. The amount is determined regardless of income and everyone has to pay a set amount of money. This tax efficient because everyone pays the same amount, and causes less administrative burden. This tax is very efficient but not equitable. It would be unfair for poor families because they have to pay the same amount as everyone else.
 * Types of Tax Systems**

Proportional tax Proportional tax requires that everyone pay the same percentage of their income as tax. For example, they might be asked for 5% of their income as tax. This system is more equitable than the lump-sum tax because rich families pay more and poor families pay less. The amount is determined by how much income a family makes.

Regressive tax The regressive requires that high income families pay a smaller percentage of income than low income families. This type of tax system is supposed to cause a trickle-down effect, which is a theory that when the rich people pay a small amount of taxes, they will spend more money, which will "trickle down" to the rest of the market, and improve the economy in the long run

Progressive tax The progressive tax is the most equitable. It requires high income families to pay a larger percentage of their income than low income families. Therefore, for example, a high class family pays 10%, middle class pays 10%, and lower class pays 5%. However, this tax system has the highest administrative burden. Also, this tax system has the most dead weight loss because it distorts incentives; the tax motivates people to work less and lower their income, so they won't have to pay as much tax. = = = = = = =**THANK YOU **=

**Review Questions **
  Deadweight losses occur in markets in which  A transfer payment is a government payment  An efficient tax system in one that imposes small  Lump-sum taxes <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"> Answers12.Jaks
 * 1) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">firms decide to downsize
 * 2) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">the government imposes a tax
 * 3) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">profits fall because of low consumer demand
 * 4) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">equilibrium price rises, causing a loss in consumer surplus
 * 1) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">to companies that provide goods or services to government agencies
 * 2) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">designed to transfer funds from one agency of the government to another
 * 3) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">which transfers revenue from the federal government to state government
 * 4) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">not made in exchange for a good or service
 * 1) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">deadweight losses and administrative burdens
 * 2) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">marginal rates and dead weight losses
 * 3) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">administrative burdens and transfers of money
 * 4) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">marginal rates and transfers of money
 * 1) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">are most frequently used to tax real property
 * 2) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">do not distort incentives
 * 3) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">are the most distortionary tax
 * 4) <span style="border-collapse: separate; color: #000000; font-family: arial,helvetica,sans-serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">are used in taxing sales

**<span style="background-color: #811a9e; color: #ffffff; display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; text-align: center;">Work Cited **
image: http://www.ghowto.com/images/taxman.jpg image: http://www.emh.co.kr/images/dead_weight_loss.gif questions: mrski <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">