Chapter+12+The+Design+of+the+Tax+System+(Joon,+Scott,+and+Steven)


 * The Design** **of the Tax System**



**Key Words**

average tax rate: total paxes paid divided by total income
 * budget deficit:** too much spending of government over the government receipts.
 * buget surplus:** excess of government receipts over government spending.
 * marginal tax rate:** the extra taxes paid on an additional dollar of income
 * lump-sum tax:** a tax that everyones pays the equal amount
 * benefits principle:** the idea that people should pay taxes depending on how much benefit they receive from the government
 * abilitiy-to-pay principle:** the idea that taxes should be enforced on people according to how welll that person can pay off.
 * vertical equity**: the idea that people who earn more should pay larger amounts
 * horizontal equity**: the idea that people with similiar earnings should pay similiar amounts
 * porportional tax**: a tax that has same rate for everybody.
 * regressive tax**: a tax that enforces people with higher income to pay at a lower rate than people with lower income.
 * progressive tax**: a tax in which the rate increases as income increases.

We may often blame the taxes. Why are taxes so high? Why do we have to pay such taxes? Why that? Why this? But settle down because sadly, taxes are an inevitable factor in this economy. Without taxes, we won't be able to access various different public goods, exclude externalities, or provided common resources.

**Federal Government**

The federal government imposes various different taxes for us...


 * Individual Income Tax
 * The largest source of federal government's tax revenue
 * Marginial tax rate is applied to each individuals. Simply put, the more money you earn, the more tax you have to pay.
 * Poll Tax
 * Tax on the wages, which the firm pays to the employees
 * Usually used for social security and medicare
 * Corporate Income Tax
 * Tax on the coorperations, based on the amount of profit the cooperations makes.
 * Excise Tax
 * Tax on specific goods, such as cigarattes, gasoline, or alcohol

**Spending of the Federal Government**

There are various different categories which the federal government use the taxes on. The number one spending is the social security. Then, the second largest is the military, followed by income security.

But problems may occur in its spending...


 * Budget Deficit : when government's receipt is lower than its actual spending
 * Budget Surplus : when government's receipt is higher than its actual spending

**State and Local Government**



State and Local Government mainly focuses on two following taxes:


 * Sales Tax: Tax on goods that the consumers buy (clothing, food, etc)
 * Property Tax: Tax on property owners, which is based on their size of their property

Individual income tax and corporate tax are also collected, but they are considered minor.

**Spending of the State and Local Government**

The state and local government mainly focusing on improving their education system from the taxes they collect. That's why we have so many well-designed schools just about every district.



The government also focuses on spending for the poors and providing better road systems.

**Taxes and Efficiency**

Two most important factors the government focuses no when taxing is EFFICENCY and EQUITY

Efficiency focuses on the size of the pie. That is, the government tries to reduce its deadweight loss and administrative burden


 * Deadweight loss occurs when the tax imposed distorts the incentives of the consumers. For example, when people liked buying an icecream for a dollar, some people may began to stop buying icecreams if the government begans to tax an additional of 50 cents.




 * Administrative burden occurs during the time the tax payers fillout the tax forms.

Thus, in order to avoid deadweight loss, government may impose lump-sum tax


 * Lump-sum tax is the tax system that makes everyone to pay the equal amount of tax

**Taxes and Equity**

Equity focuses on the division of the pie. In order come up with a conclusion, government has come up with several various different tax systems


 * Benefits Principle
 * Ability-to-pay Principle
 * Vertical Equity
 * Horizontal Equity
 * Proportional Tax
 * Regressional Tax
 * Progressive Tax

A podcast explaining the following tax systems!



As this chapter explains, there are various different reasons why the government, both federal and local, taxes on various different goods and products. And the government also tries very hard those taxes are both efficient and equity. Thus, do you still believe you should complain about too much taxes?


 * Related Questions**


 * 1) Whats the biggest spending of the federal government tax?
 * 2) Whats the biggest spending of the state and local government tax?
 * 3) Why do deadweight loss occur?

Answers
 * 1) Social Security
 * 2) Education
 * 3) Taxes distort the incentives of the consumers

Student Produced Resource: [|Quizlet Chapter 12] Sources

http://money.aol.com/tax/top-tax-tips-for-procrastinators http://www.balboa-ct.com/government.htm http://www.tgci.com/funding.shtml http://cdibusan.com/international-schools/ http://davidprudente.wordpress.com/2008/11/02/deadweight-loss/