Chapter+12+(The+Design+of+the+Tax+System)

The Design of the Tax System   Vocabularies of Chapter 12 : I will be going over the vocabularies first, because these vocabularies cover most of the imporatant aspects of this Chapter!

Budget deficit: an excess of government spending over government receipts. Budget surplus: an excess of government receipts over governement spending.

Average tax rate: total taxes paid divided by total income. Marginal tax rate: the extra taxes paid on an additional dollar of income.

Lump-sum tax: a tax that is the same amount for every person Ability-to-pay principle: the idea that taxes should be levied on a person according to how well that person can shoulder the burden. Verticle equity: the idea that taxpayers with a greater abiliyt to pay taxes should pay lareger amounts. Horizontal equity: the idea that taxpayers with simliar abilities to pay taxes should pay the same amount.

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Proportional tax: a tax for which high-income and low-income taxpayers pay the same fraction of income. Regressive tax: a tax for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers. Progressive tax: a tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers.   Benefits principle: the idea that people should pay taxes based on the benefits they receive from government services

 It is said that Lump-sum tax has the least administrative burden, which has no negative externality or dead weight loss.

Because tax system is controverisal, and many countries and governments pursuit different goals with taxes, the question, "What tax system is the best system?" cannot be answered. - It just depends!

What is administrative Burden? It is the time and effort that is taken by the people who work in the administration. The more work that is needed by the administration, the more burden it is for the people.

The well-designed tax policy tries to avoid these terms, or at least minmize:
 * The deadweight loss that result when taxes distort the decision that people make.
 * <span style="display: block; font-size: 70%; font-family: Arial,Helvetica,sans-serif; color: rgb(8, 7, 7); text-align: left;">The administrative burden that taxpayers bear as they comply with the tax laws.

These are the chapter 12 summery from book: media type="custom" key="3022894"

Questions: Which of the following statements is FALSE regarding government tax revenue in the United States?

a. Around 1900, all state and local governments combined received about twice as much tax revenue as the Federal government. b. During the 20th century, state and local governments increased their tax revenue much faster than the Federal government. c. Federal government tax revenue increased dramatically during World War II. Answer: B

Which of the following is a cost of taxation to taxpayers?

a. The tax payment itself. b. The deadweight cost of taxation. c. The administrative burden of taxation. d. All of the above.

Answer: D

Which of the following tax reforms will encourage people to save more?

a. Replace sales taxes with a bigger capital gains tax. b. Tax dividends more heavily. c. Replace the current income tax with a consumption tax.

Answer: C

Sources: http://rochestertalent.com/pics/shared/payroll.jpg http://websites.swlearning.com/cgi-wadsworth/course_products_wp.pl?fid=M20b&product_isbn_issn=9780324319163&discipline_number=413 The book: Principles of Microeconomics by N. Gregory Mankiw