Chapter+12+The+Design+of+the+Tax+System+JBS

=Chapter 12 The Design of the Tax System JBS =

**Key Terms : **
 **Budget deficit :** An excess of government spending over government receipts


 * Budget surplus** : An excess of government receipts over government 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


 * Benefits principle** : the idea that people should pay taxes based on the benefits they receive from government services


 * Ability-to-pay principle** : the idea that taxes should be levied on a person according to how well that person can shoulder the burden


 * Vertical equity** : the idea that taxpayers with a greater ability to pay taxes should pay larger amounts


 * Horizontal equity** : the idea that taxpayers with similar abilities to pay taxes should pay the same amount


 * 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 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 






The Federal Government - It raises this money in a number of ways  State and Local Government - collect about 40%
 * Receipts
 * The largest source of revenue for the federal government is the individual income tax
 * Wages from working, interest on savings, dividends from corporations in which it owns shares, and profits from any small businesses it operates
 * Family's tax liability is then based on its total income
 * Marginal tax rate - the tax rate applied to each additional dollar of income
 * Spending
 * A transfer payment is a government payment not made in exchange for a good or service
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Budget deficit - When government spending is over receipt
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Budget surplus - When government spending is below receipt

<span style="color: #00ff00; font-family: Tahoma,Geneva,sans-serif;">
<span style="font-family: Tahoma,Geneva,sans-serif;">Deadweight Losses - Because taxes distort incentives, they entail deadweight losses.

Administration Burden - INEFFICIENCY!

Marginal Tax Rates vs. Average Tax Rate <span style="font-family: Tahoma,Geneva,sans-serif;"> Lump-sum Taxes: same amount of tax for everyone <span style="font-family: Tahoma,Geneva,sans-serif;"> Ability to Pay Principle: taxes should be levied on a person according to how well they live <span style="font-family: Tahoma,Geneva,sans-serif;">Vertical Equity is the idea that amount of tax is depended on people's ability.
 * <span style="font-family: Tahoma,Geneva,sans-serif;">Average tax rate is total taxes paid divided by total income, while the marginal tax rate is the extra taxes paid on an additional dollar of income
 * **<span style="font-family: Tahoma,Geneva,sans-serif;">Good ** || **<span style="font-family: Tahoma,Geneva,sans-serif;">Bad ** ||
 * <span style="font-family: Tahoma,Geneva,sans-serif;">It is Efficient because there is no administrative burden since government does not need to hire tax lawyers and accountants || <span style="font-family: Tahoma,Geneva,sans-serif;">It is not Equal = It is not fair to poor people! ||
 * <span style="font-family: Tahoma,Geneva,sans-serif;">There are two types: Horizontal and Vertical Equity. Horizontal equity states that taxpayers with similar abilities to pay should the same amount.

1. Proportional - all taxpayers pay the same fraction of income 2. Regressive - high income taxpayers pay a smaller fraction of their income 3. Progressive - high income taxpayers pay a larger fraction of their income No obvious answer that is fair.



<span style="font-family: Tahoma,Geneva,sans-serif;">
<span style="font-family: Tahoma,Geneva,sans-serif;"> 1. What is lump-sum tax? 2. Give two reasons why wealthy people should pay more taxes than poor people 3. What is horizontal equity and vertical equity?

<span style="color: #00ff00; font-family: Tahoma,Geneva,sans-serif;">**Conclusion:**
<span style="font-family: Tahoma,Geneva,sans-serif;">The efficiency of a tax system refers to the costs it imposes on taxpayers. The equity of a tax system concerns whether the tax burden is distributed fairly among the population. There are two types of tax, vertical and horizontal equity. In vertical equity, there are proportional, regressive and progressive tax system.

<span style="color: #ff0000; font-family: Tahoma,Geneva,sans-serif;">**Bibliography:** <span style="font-family: Tahoma,Geneva,sans-serif;">http://www.wallstreetsignals.com/us-finance-~-bxp37842.jpg http://www.nicholsoncartoons.com.au/cartoons/new/2003-09-24%20Tax%20man%20should%20be%20more%20efficient%20350wb.JPG