Microeconomics chapter 18 (Public Finance: Expenditures and Taxes)

Who does the Federal government employ and pay salaries to?

members of Congress, the armed forces, Justice Department lawyers, meat inspectors, etc.

Who does the state and local governments hire and pay?

teachers, bus drivers, police, and firefighters

What 3 revenue sources do governments rely on to finance goods and services?

1) taxes
2) borrowing
3) proprietary income generated by government-run or government-sponsored businesses

The vast majority of money raised by the 3 revenue sources come from what?

taxes

Labels refer to net taxes to indicate what?

that they also include "taxes in reverse" in the form of transfer payments to households and subsidies to businesses

What are examples of net taxes going from businesses to government?

subsidies to farmers, shipbuilders, and airlines as well as income, sales, and excise taxes paid by businesses to government

What is included in the net taxes going from households to government?

transfer payments made by government to households, which include welfare payments and Social Security benefits

What are the two kinds of outlays when examining government purchases of goods and services and government transfer payments?

1) Government purchases are EXHAUSTIVE; the products purchased require the use of resources and are part of the domestic output. Ex. purchase of missile requires the labor of physicists and engineers along with steel, explosives, etc.
2) Transfer payments

Have government spending and tax revenues increased or decreased?

increased - they are 35% of U.S. output

When is Tax Freedom Day?

around April 17th (Dr. Moore said 18th this year in class)

What happens on Tax Freedom Day?

the average worker had earned enough (from start of year) to pay his or her share of the taxes required to finance government spending for the year

What are the 3 sources that funds are used to pay for government purchases and transfers?

taxes, proprietary income, and funds that are borrowed by selling bonds to the public

What can government's borrowing "crowd out

private-sector investment (Ex. billion dollars borrowed by fed. government on roads is billion dollars not lent to private companies to fund for new technology)

Deficit spending

government spending that is financed by borrowing (gov'ts budget is "in deficit" if it's spending in given time exceeds money that it collects from taxes and proprietary income during time period)

4 areas of federal spending

1) pensions and income security
2) national defense
3) health
4) interest on public debt

For Federal tax revenues, what are the 3 largest revenue sources?

1) personal income tax
2) payroll taxes
3) corporate income tax

Personal income tax

the kingpin of the federal tax system and merits special comment. It is levied on taxable income (on the incomes of households and unincorporated businesses after certain exemptions)

What kind of tax is the federal personal income tax?

Progressive tax, meaning that people with higher incomes pay a larger percentages of their incomes as taxes than do people with lower incomes

Marginal tax rate

the rate at which the tax is paid on each additional unit of taxable income

Average tax rate

the total tax paid / total taxable income

Progressive tax

a tax whose average rate rises as income increases

Payroll taxes

taxes based on wages and salaries - used to finance 2 compulsory federal programs for retired workers: Social security and Medicare

Corporate income tax

levied on a corporation's profit - the difference between its total revenue and its total expenses (tax rate is 35% for all of these taxes)

Sales and excise taxes

taxes on commodities or on purchases (sales taxes are calculated as a percentage of the price paid for a product, and excise taxes are levied on a per-unit basis)

What is the primary revenue source of most state governments?

sales taxes

How many states do not levy a personal income tax?

7

What do individual states receive from the federal government?

large intergovernmental grants

What are the local levels of government?

counties, municipalities, townships, and school districts, as well as cities and towns

Property taxes

local governments obtain about 75% of their tax revenue from these taxes

What do local governments receive a considerable amount of?

proprietary income (Ex. revenue from government-owned utilities providing water, electricity, natural gas, and transportation)

What does the "other" category consist of in graph with job functions at local and state levels?

parks and recreation workers, fire fighters, transit workers, and librarians

What does the "other" category consist of in graph with job functions at federal level?

justice and law, corrections, air transportation, and social insurance administration

Why do people hate taxes?

-they disrupt income flow to workers and investors
-the many variety which people have to pay
-it discourages beneficial economic activity

Tax burden

the size, distribution, and impact of the total costs that taxes impose on society

Benefits-received principle

asserts that households should purchase the goods and services of government in the same way they buy other commodities Ex. $ collected as gas taxes is typically used to finance highway construction and repairs (people who benefit from good roads pay the

Problems with benefits-received principle

1) How will the government determine the benefits that individual households and businesses receive from national defense, education, the court system, and police and fire protection? (others benefit from good roads, for example)
2) the principle cannot l

Ability-to-pay principle

asserts that the tax burden should be apportioned according to taxpayers' income and wealth (people who make more should pay more)

What do proponents of the ability-to-pay principle say?

each additional dollar of income received by a household yields a smaller amount of satisfaction or marginal utility when it is spent

When is a tax a progressive tax?

if its average rate increases as income increases

When is a tax a regressive tax?

if its average rate declines as income increases

When is a tax a proportional tax (aka flat taxes or flat-rate taxes)?

if its average rate remains the same regardless of the size of income

Why is proportional tax also called flat tax?

their average rates do not vary with (are flat with respect to) income levels

Proportional income tax

tax rates are such that a household pays 10 % of its income in taxes regardless of the size of its income

Which type of taxes fall more heavily on people with high incomes?

progressive taxes

Which type of taxes fall more heavily on people with low incomes?

regressive taxes

What kind of taxes are sales taxes?

regressive taxes

What kind of taxes are personal income taxes?

progressive taxes

What kind of taxes are corporate income taxes?

proportional taxes (can be somewhat regressive when labor productivity and wages decline)

What is the federal payroll tax aka?

FICA (Federal Insurance Contributions Act) - it is regressive

Why are taxes on buildings regressive?

1) property owners add the tax to the rents that tenants are charged
2) property taxes, as a percentage of income, are higher for low-income families than for high-income families because the poor must spend a larger proportion of their incomes for housin

Tax incidence

the degree to which a tax falls on a particular person or group

Which way does supply curve shift when excise tax gets added?

Upward (leftward)

Why does equilibrium quantity decline?

because of the tax levy and the higher price that is imposed on consumers

With a specific supply, the more inelastic the demand for the product...?

the larger is the portion of the tax shifted to consumers

How is the demand for products such as liquor, cigarettes, automobile tires, telephone service, etc.?

inelastic

With a specific demand, the more inelastic the supply...?

the larger is the portion of the tax borne by producers

An example of a product with an inelastic supply and therefore one where the burden of an excise tax would mainly fall on producers

Gold

Efficiency loss of the tax

society's sacrifice of net benefit because the tax reduces production and consumption of the product below their levels of economic efficiency, where MB = MC (see page 418 graph)

The greater the elasticities of supply and demand...?

the greater the efficiency loss of a particular tax

Two examples of tax goals being as important as minimizing efficiency losses from taxes

-redistributive goals (government may impose progressive taxes as a way to redistribute income)
-reducing negative externalities (excise tax on producers might improve allocative efficiency by reducing output)

Sin taxes

excise taxes that are intended to reduce the production and consumption of products with negative externalities (ex. taxes on cigarettes and alcohol in particular are referred to as this)

Part of the employers' half of the FICA tax gets shifted to who?

workers in the form of lower before-tax wages (employers "collect" some of the payroll tax they owe from their workers. This reduces market wages that employers pay workers)

In the short run, the incidence of the corporate income tax falls on who?

the company's stockholders (owners) who bear the burden of the tax through lower dividends or smaller amounts of retained corporate earnings

Specific excise tax

one levied only on a particular product

Why do sales taxes tend to be shifted in their entirety from producers to consumers?

a sales tax covers a wide range of products, and there is little chance for consumers to avoid the price boosts that sales taxes entail.

What do economists view as progressive, regressive, or proportional?

-the federal tax system is progressive
-the state and local tax structures are largely regressive
-the overall U.S. tax system is progressive
-the overall U.S. tax system is more progressive than that of other rich countries (most other countries rely on