Negative Feedback
Balancing effect (prices increase quantity decreases)
Demand
Positive Feedback
Supply
Unbalancing effect Prices increase quantity increases
What does a tax do?
Tax adds to price quantity moves toward market equilibrium rather than society equilibrium. Use as a balance. Negative effect is on you having little choice.
Who does tax effect?
Consumer: mostly by their surplus (room for choice).
Tax as a graph
2 demand curves that cross the y intercept. Original surplus is from p1 to q1. To find surplus=1/2 b X h. Triangle 2 - triangle 1/triangle 1=Change in percent. Angle of line shows the willingness to buy. The sharper it is the more they want it.
What is the largest source of revenue for the government?
Individual Income Tax.
Taxable Income
Total income - number of dependents- deductibles
Marginal Tax Rate
the tax rate applied to each additional dollar of income.
Because the marginal tax rate rises as income rises, higher-income families pay a larger percentage of their income in taxes.
Payroll Tax
a tax on the wages that a firm pays its workers.
Social Insurance
revenue from payroll taxes earmarked to pay for Social Security and Medicare.
Corporate Income Tax
government taxes each corporation based on its profit� the amount the corporation receives for the goods or services it sells minus the costs of producing those goods or services
Corporate profits are, in essence, taxed twice. They are taxed once by the c
Excise tax
taxes on specific goods
Transfer Payment
a government payment not made in exchange for a good or service
Largest category of spending
National Defense
Second largest category of spending
includes both the salaries of military personnel and the purchases of military equipment .Spending on national defense fluctuates over time as international tensions and the political climate change
Income Security
1)TANF
2)Food Stamps
3)Unemployment Compensation
Income security spending tends to rise during recessions, when people's incomes fall and the number of unemployed increases.
Health Spending
Makes fifth of the federal budget.
What are the types of Category Spending
Transfer Payments, National Defense, Income Security, Health Spending, Net Interest
Net Interest
When government borrows from the public they pay interest on a loan. The more indebted the government, the larger the amount it must spend in interest payments.
Budget Deficit
Spending exceeds receipts. Government creates deficit from borrowing from the public. That is, it sells government debt to the private sector, including both investors in the United States and those abroad
Budget Surplus
Receipts exceeds Spending. Government uses excess receipts to reduce outstanding debts.
Two most important taxes for state and local government?
Sales taxes and Property Taxes
Biggest Expenditure?
Education
Second biggest expenditure?
Public Welfare
Third most spending
Highways
Primary aim for taxes?
To raise revenue for the government.
Two objectives to alternate tax systems?
Efficiency and Equity
When are taxes considered efficient?
it raises the same amount of revenue at a smaller cost to taxpayers. imposes small deadweight losses and small administrative burdens. Lump-Sum:a person's decisions do not alter the amount owed, the tax does not distort incentives and, therefore, does not
What are two costs that taxes try to minimize?
The deadweight losses that result when taxes distort the decisions that people make
The administrative burdens that taxpayers bear as they comply with the tax laws
Deadweight loss of a tax
the reduction in economic well- being of taxpayers in excess of the amount of revenue raised by the government.
Deadweight loss
the inefficiency that a tax creates as people allocate resources according to the tax incentive rather than the true costs and benefits of the goods and services that they buy and sell.
What causes inefficiency in a tax?
Administration Burden-The resources devoted to complying with the tax laws are a type of deadweight loss. Administration burden could be reduced by simplifying the tax laws.
The Average Tax Rate?
total taxes paid divided by total income.
Marginal Tax Rate
extra taxes paid on an additional dollar of income.marginal tax rate measures how much the tax system discourages people from working.determines the deadweight loss of an income tax.
Lump Sum Tax
everyone owes the same amount, regardless of earnings or any actions that a person might take. shows clearly the difference between average and marginal tax rates. Most efficient tax and minimal administration burden. Take same amount out of taxes for bot
Benefits Principle
people should pay taxes based on the benefits they receive from government services. Wealthy pays for more public services so they should be taxed more heavily for these programs.
Ability to pay Principle
that taxes should be levied on a person according to how well that person can shoulder the burden.o This principle is sometimes justified by the claim that all citizens should make an "equal sacrifice" to support the government. Create two notions of equi
Vertical Equity
taxpayers with a greater ability to pay taxes should contribute a larger amount.
What are the systems of Vertical Equity
Proportional, Regressive, Progressive
Proportional System
all taxpayers pay the same fraction of income.
Regressive System
high- income taxpayers pay a smaller fraction of their income, even though they pay a larger amount.
Progressive System
high- income taxpayers pay a larger fraction of their income
Horizontal Equity
taxpayers with similar abilities to pay should contribute the same amount
What is central to evaluating tax equity
Tax incident-study to see who bears the burden of taxes.
Flypaper Theory
the burden of a tax sticks wherever it first lands.
GDP
measures both the total income earned in the economy and the total expenditure on the economy's output of goods and services, The growth rate measures how rapidly real GDP per person grew in the typical year
Productivity
the amount of goods and services produced for each hour of a worker's time/ the quantity of goods and services produced from each unit of labor input.
What are the determinants of productivity
Physical Capital, Human Capital, Natural Resources
Physical Capital
The stock of equipment and structures used to produce goods and services.capital is a factor of production used to produce all kinds of goods and services, including more capital
Human Capital
knowledge and skills that workers acquire through education, training, and experience
Natural Resources
inputs into production that are provided by nature, such as land, rivers, and mineral deposits.