Personal income tax

Question 1

What are payroll taxes?

Answer 1

Tax withheld from an employee’s salary who transfers to the government. They are used to finance social security

Question 2

What is individual income tax?

Answer 2

Tax paid by individuals on income accrued during the years

Question 3

How is individual income tax different from payroll tax if they both include labor earnings?

Answer 3

Individual income tax applies to a broader set of income sources:

• Interest earnings from household savings
• Rent
• Capital gain
• It is sometimes applied to family income

Question 4

What is tax vertical equity?

Answer 4

Groups with more resources should pay higher taxes. It is applied in relative terms (higher SHARE of the income)

Question 5

What is tax horizontal equity?

Answer 5

Individuals who are similar, but make different economic lifestyle choices, should be treated the same by the tax system

Question 6

What is the marginal tax rate?

Answer 6

Percentage of the next euro of taxable income that is paid in taxes. To put it simply, the tax applied on the last euro

Question 7

What is the average tax rate?

Answer 7

Percentage of total income that is paid in taxes

Question 8

What is the definition of progressive taxation?

Answer 8

As income increases, tax liability increases more than proportionally, avg tax rate increases with income
At any rate marginal tax > avg tax rate

Question 9

What is a proportional/flat tax rate?

Answer 9

When all tax payers pay the same income SHARE

Question 10

What type of tax is being applied when marginal tax > avg tax rate for any rate?

Answer 10

Progressive taxation

Question 11

What type of tax is being applied when marginal tax < avg tax rate for any rate?

Answer 11

Flat rate

Question 12

What is the definition of regressive taxation?

Answer 12

• Avg tax decreases with income

- Marginal tax rate < avg tax rate

Question 13

What are the two ways we can achieve progressive taxation?

Answer 13

Income brackets and tax deductions

Question 14

What are the two types of tax deductions?

Answer 14

1- An amount is subtracted from income BEFORE the tax rate is applied. The rate is constant
2- An amount is subtracted AFTER the tax rate is applied

Question 15

Which method of tax deduction is more effective to achieve vertical equity and why?

Answer 15

An amount is subtracted AFTER the tax rate is applied
td-f
-Because “td” increases with income and individuals with lower incomes will benefit from higher deduction
-Sometimes f decreases with income

Question 16

What is comprehensive income definition?

Answer 16

Total income = potential annual consumption, that is, the salary + any NET increase on the income. So tax is computed based on that

Question 17

With tax deductions is personal income base higher or lower than comprehensive income?

Answer 17

Lower

Question 18

Without tax deductions is personal income tax

base higher or lower than comprehensive income?

Answer 18

Higher

Question 19

On what can deductibility be applied to?

Answer 19

Not desired consumption, costs of earning income (legitimate costs of doing business) and on activities that may produce positive externalities such as charity and home property

Question 20

What is the best desirable system of taxes?

Answer 20

Progressivity
Horizontal equity among families
Horizontal wrt to marriage choices
But it is impossible to satisfy them all simultaneously

Question 21

What are the pros of individual taxation?

Answer 21

Neutrality wrt marriage
Neutrality wrt labor supply choice
VERTICAL EQUITY but not horizontally

Question 22

What are the cons of family-based taxation?

Answer 22

• Doesn’t guarantee horizontal equity wrt marriage
• Penalizes families with homogeneous return wrt heterogeneous
• Negatively influence labor supply of the lower income spouse bc it is subject to higher tax

Question 23

What would be a solution to the family-base taxation?

Answer 23

Flat rate, but that would violate progressivity