Chapter 6

Question 1

What are the three sources of funding for governments?

Answer 1

1. User Charges (fees for using government services)
2. Taxes
3. Financing

Question 2

What are the two primary sources of government income?

Answer 2

1. User charged

2. Taxes

Question 3

What is the “government budget constraint?”

Answer 3

The limit on government spending and transfers is imposed by the fact that every dollar the government spends to repay its debts must come from taxes and user charges.

Question 4

Define “tax base.”

Answer 4

The value of goods, services, weather, or incomes subject to taxation.

Question 5

Define “tax rate.”

Answer 5

The proportion of a tax base that must be paid to the government as taxes.

Question 6

Define “marginal tax rate.”

Answer 6

Change in taxes due divided by the change in taxable income.

Question 7

What is a tax bracket?

Answer 7

A specified interval of income to which a specific and unique marginal tax rate is applied.

Question 8

Marginal tax rate applies only to the ______.

Answer 8

Income in the highest tax bracket reached.

Question 9

Define “average tax rate.”

Answer 9

Total taxes due divided by total taxable income.

Question 10

What are the three types of tax systems?

Answer 10

1. Proportional
2. Progressive
3. Regressive

Question 11

What determines the type of tax system?

Answer 11

The relationship between the marginal and average tax rates.

Question 12

Define “proportional taxation.” What is the relationship between the marginal and average tax rates?

Answer 12

Regardless of income, taxes comprise exactly the same proportion.

Average tax rate = marginal tax rate.

Question 13

Define “progressive taxation” What is the relationship between the marginal and average tax rates?

Answer 13

A tax system in which as income increases, a higher percentage of the additional income is paid as taxes.

The marginal tax rate exceeds the average tax rate as income rises.

Question 14

Define “regressive taxation” What is the relationship between the marginal and average tax rates?

Answer 14

A tax system in which as more dollars are earned, the percentage of tax paid on them falls.

The marginal tax rate is less than the average tax rate as income rises.

Question 15

What is the most important tax in the US economy?

Answer 15

The federal personal income tax.

Question 16

Define “capital gain.”

Answer 16

A positive difference between the purchase price and the same price of an asset.

Example: If a stock is purchased for five dollars and then sold for fifteen the capital gain is 10 dollars.

Question 17

Define “capital loss.”

Answer 17

A negative difference between the purchase price and the sale of an asset.

Example: If a stock is purchased for 20 dollars and then sold for 5 dollars the capital loss is 15 dollars.

Question 18

Corporations are usually taxes based on __________.

Answer 18

The difference between their total revenues and their expenses.

Question 19

Define “dividends.”

Answer 19

A sum of money paid regularly by a company to its shareholders out of its profits.

Question 20

If you buy stock in a company that pays dividends, you will often be _______.

Answer 20

Double taxed.

Question 21

Define “retained earnings”

Answer 21

Earning that a corporation saves, or retains for investment in other activities.

Question 22

Define “sales taxes.”

Answer 22

Taxes on the prices paid on most goods and services.

Question 23

What is “Ad valorem taxation?”

Answer 23

Assessing taxes by charging a tax rate equal to a fraction of the market price of each unit purchased.

Question 24

A sales tax is a _________ tax.

Answer 24

Proportional

Question 25

The most likely response to an increase in a tax rate is ________________

Answer 25

A decrease in the tax base.

Question 26

What is an excise tax?

Answer 26

A specific tax levied on a particular good or service. Usually, because the government has found that good to be socially undesirable or the item is so essential that people have no choice but to buy it regardless of the tax rate.

Example: Cigarettes and alcohol, gasoline, etc.