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taxes Flashcards

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1
Q

What is proportional (flat) taxation?

A

A tax system in which the tax rate stays the same at all income levels (e.g., Estonia’s 15 % flat income tax).

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2
Q

Define progressive taxation.

A

A system where the marginal tax rate rises as taxable income rises, based on the “ability-to-pay” principle.

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3
Q

Define regressive taxation.

A

A system where the average tax rate falls as income rises; sales taxes are the classic example.

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4
Q

Which equity/efficiency trade-off is commonly cited for progressive vs. proportional taxes?

A

Progressive taxes improve equity (redistribution) but can reduce efficiency; proportional/regressive taxes are more efficient but less equitable.

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5
Q

What is tax efficiency?

A

Raising revenue with minimal economic distortion (low deadweight loss) and low admin costs.

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6
Q

Name the curve illustrating an optimal revenue-maximizing tax rate.

A

The Laffer Curve.

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7
Q

What happens past the revenue-maximizing point on the Laffer Curve?

A

Higher rates reduce the taxable base, so total revenue falls.

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8
Q

Why can highly progressive systems be hard to administer in weak tax states?

A

Complexity, loopholes, and low transparency spur evasion and undermine collection.

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9
Q

Give two behavioral factors that raise voluntary compliance.

A

High tax salience (clear, visible taxes) and trust that revenue funds valued public services.

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10
Q

What does a structural progressivity index depend on?

A

Only the tax schedule t(y).

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11
Q

What does a distributional progressivity index depend on?

A

Both the tax schedule t(y) and the income distribution f(y).

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12
Q

Range and meaning of the Suits Index.

A

–1 (perfectly regressive) to +1 (perfectly progressive); 0 = proportional.

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13
Q

Range and interpretation of the Kakwani Index.

A

–1 to +1; positive → progressive, negative → regressive.

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14
Q

Formula for the Kakwani Index.

A

K=C_t − G where C_t = tax concentration coefficient, G = pre-tax Gini.

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15
Q

What does the Reynolds-Smolensky (RS) Index measure?

A

Reduction in inequality due to taxes: RS=G_pre − G_post.

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16
Q

When is the RS Index positive?

A

When taxes decrease income inequality (post-tax Gini < pre-tax Gini).

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17
Q

Purpose of the Atkinson Index in tax analysis.

A

Quantifies inequality with an explicit aversion parameter ε; shows welfare-equivalent income loss.

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18
Q

Define Average Effective Tax Rate (AETR).

A

Total tax paid divided by total income (T/Y).

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19
Q

Define Marginal Effective Tax Rate (METR).

A

Tax on an additional €1 of income (dT/dY).

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20
Q

Why is METR crucial for work-supply incentives?

A

It tells a worker the share of their next euro kept vs. taxed, affecting labor supply decisions.

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21
Q

A Suits Index of –0.14 implies what about the tax system?

A

It is regressive; lower-income groups pay more relative to their income share.

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22
Q

If pre-tax Gini = 0.50 and post-tax Gini = 0.35, what is RS?

A

RS=0.15 → inequality fell by 0.15 due to taxation.

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23
Q

Atkinson Index result of 0.075 with ε=0.5 means?

A

Only 7.5 % of income could be redistributed to equalize welfare without losses—society is mildly inequality-averse.

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24
Q

Atkinson Index of 0.273 with ε=1.5?

A

Up to 27.3 % could be redistributed—society is strongly inequality-averse.

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25
Name three common direct taxes.
Personal income tax, corporate profit tax, capital gains tax.
26
What direct tax targets net wealth outright?
A wealth tax (now rare).
27
Give three typical indirect taxes.
VAT, excise duties, customs duties.
28
Why are indirect taxes often regressive?
They take a larger share of low-income households’ budgets.
29
Define tax salience.
The visibility of a tax to payers; higher salience tends to heighten behavioral response.
30
What are framing effects in taxation?
How labeling a levy as a “penalty” vs. “fee” shifts taxpayer reactions.
31
Main trade-off policymakers face with progressivity.
Equity gains vs. potential efficiency losses (work, saving, investment disincentives).
32
How does globalization complicate steep progressive rates?
High-income, mobile individuals can shift income or relocate to avoid taxation.
33
What two cumulative curves are needed to calculate the Suits Index?
The Lorenz curve of income and the concentration curve of taxes.
34
In a proportional tax, how would the two curves relate?
They would coincide, giving a Suits Index of 0.
35
Which curve lies below the other in a progressive tax?
The tax concentration curve lies above the income Lorenz curve (greater share from rich).
36
Which lies below in a regressive tax?
The tax curve lies below the income curve (greater share from poor).
37
38
What does 'fairness in taxation' aim to ensure?
That every taxpayer contributes a fair share toward public costs.
39
Why is 'fair share' controversial?
Fairness is subjective—people disagree on how to define or measure it.
40
Name the two best-known principles for judging tax fairness.
Ability-to-Pay and Benefit principles.
41
State the ability-to-pay principle.
Taxes should be levied according to each person’s capacity to bear the burden.
42
Which equity concept naturally follows from ability-to-pay?
Vertical equity—higher-ability taxpayers pay more, absolutely and relatively.
43
Give a real-world tax that embodies ability-to-pay.
Progressive personal income tax.
44
What measurement problem haunts ability-to-pay?
Defining and quantifying 'ability' (income vs. consumption vs. wealth).
45
Why can extreme progressivity backfire under this principle?
High marginal rates may discourage work, saving, or trigger capital flight.
46
State the benefit principle.
People should pay taxes in proportion to the benefits they receive from public goods.
47
Which type of taxes best illustrate the benefit principle?
User fees, fuel taxes for roads, social-insurance payroll taxes.
48
Why is the benefit principle hard to apply to national defense?
Defense is non-excludable/non-rivalrous, so individual benefits can’t be priced.
49
How can rigid application of the benefit principle hurt equity?
Low-income users might pay more than their ability to pay.
50
Define horizontal equity.
People with equal ability/pay should owe equal tax.
51
Define vertical equity.
People with greater ability should pay more tax.
52
How can taxing capital income at lower rates than labor income breach equity?
It violates horizontal equity by treating equal totals differently.
53
Historically, which base has dominated ability-to-pay taxation?
Comprehensive income.
54
What is the growing challenger to income as the fairness base?
Consumption, via VAT or expenditure taxes.
55
Why do some argue consumption is a fairer base?
It taxes spending power equally regardless of when someone spends.
56
Hobbes’s famous fairness claim about saving vs. spending?
Tax spending, not saving, because saving ultimately benefits others.
57
What does a consumption tax not tax that an income tax does?
Returns on saved capital (interest, dividends, gains).
58
How does perceived fairness influence tax compliance?
Greater perceived fairness → higher voluntary compliance.
59
Give two digital tools that improve fairness through enforcement.
Real-time e-invoicing and automatic third-party reporting.
60
How does tax avoidance threaten fairness goals?
It lets resource-rich taxpayers shift burden to compliant ones.
61
Why do modern tax systems blend both principles?
To balance redistribution (ability-to-pay) with efficiency/accountability (benefit).
62
What kind of tax is simultaneously ability- and benefit-based?
Social-insurance contributions (pay now, receive pension later).
63
Which principle justifies regressive fuel excise—ability or benefit?
Benefit (pay for road use regardless of income).
64
Bottom-line essence of 'fair' taxation?
An equitable share that taxpayers both can shoulder and believe reflects the benefits they receive.
65
What is meant by a country’s tax system?
The complete set of taxes, rules, and institutions in force in a specific place at a specific time.
66
List the three main ways taxes are classified by base.
Income (PIT, CIT), property/wealth (real-estate, inheritance), consumption (VAT, excises).
67
Distinguish direct from indirect taxes.
Direct taxes are paid straight to government by the bearer (e.g., PIT); indirect taxes are remitted by producers but embedded in prices (e.g., VAT).
68
Give one example each of a central and a local tax.
Central—VAT; Local—municipal property tax.
69
Which four core functions do taxes serve?
Fiscal (revenue), redistributive, stimulative (behavioural), regulatory (correct externalities).
70
Name six criteria of a well-designed tax system.
Fairness, stability/predictability, neutrality, sufficiency, simplicity/clarity, efficiency.
71
What does neutrality mean in taxation?
Taxes should distort economic choices as little as possible.
72
Why is simplicity valuable beyond equity?
Lowers admin/compliance costs and reduces avoidance opportunities.
73
Define tax policy.
The coordinated set of measures by which a state applies tax principles to meet fiscal, economic, and social goals.
74
Give three common objectives of tax policy.
Raise revenue, foster growth/employment, reduce inequality.
75
What is a tax reform in one sentence?
A deliberate change to part(s) of the tax system to move it closer to defined policy goals.
76
Two analytical steps every reform must include?
(1) Diagnose the current system, (2) map a path to the target system.
77
Why is understanding tax evasion vital before reform?
Design must anticipate and close avoidance channels or reform will under-deliver.
78
Why do tax systems differ across countries?
Divergent economic structures, political regimes, and social values.
79
Contrast typical Nordic vs. developing-country tax mixes.
Nordics rely more on progressive direct taxes; developing states lean on indirect taxes (ease of collection).
80
What was Slovakia’s landmark 2004 reform?
A 19 % flat income tax replacing progressive brackets.
81
One critique of Slovakia’s flat tax.
Insufficient progressivity to address inequality.
82
Mirrlees on personal income tax design?
Simple, progressive schedule with few brackets and alignment with social contributions.
83
Recommended VAT treatment according to Mirrlees?
Apply to all final consumption with minimal exemptions.
84
What does Mirrlees suggest taxing instead of general property transfers?
Land value and (potentially) inheritances/gifts, not routine financial transactions.
85
Mirrlees stance on environmental taxation?
Tax emissions/congestion directly to price externalities.
86
Formula for total tax burden.
Taxes paid + admin cost + compliance cost + excess burden (deadweight loss).
87
Who mainly bears compliance costs?
Taxpayers (time, software, advisers).
88
What determines statutory vs. economic tax incidence?
Relative price elasticities of buyers and sellers.
89
Define excess burden.
The welfare loss from distorted choices beyond the tax revenue collected.
90
Give two methods used to measure administrative cost.
Direct costing of tax offices; activity-based costing (ABC).
91
Why are compliance costs often larger than admin costs?
Millions of individual taxpayers spend time/money fulfilling obligations.
92
Policy trade-off between complexity and cost?
More complex rules can be fairer, but raise admin/compliance costs.
93
What income effect does a tax hike create?
Real income falls, reducing demand or labour supply.
94
Explain the substitution effect of a selective tax.
Consumers switch from taxed to untaxed goods → efficiency loss.
95
How does tax morale influence collections?
Higher perceived fairness boosts voluntary compliance.
96
Name one digitalisation tool that curbs evasion.
Real-time e-invoicing / automatic third-party reporting.
97
Six dimensions used to evaluate a tax system?
Efficiency, equity, revenue adequacy/elasticity, simplicity/transparency, admin efficiency, behavioural impact.
98
Which index helps gauge vertical equity post-tax?
The Gini coefficient (pre- vs. post-tax) or Kakwani index.
99
Why is elasticity important for revenue planning?
Highly elastic taxes grow with the economy; inelastic ones may lag behind.
100
How does globalisation threaten corporate tax bases?
Mobile capital and inter-state tax competition trigger a “race to the bottom.”
101
What conflict arises when a government relies heavily on VAT?
Efficiency and ease of collection vs. regressivity and equity concerns.
102
Why are wealth taxes difficult in consumption-tax systems?
Consumption frameworks exclude capital income; taxing wealth would double-tax saved returns.
103
Give one reason local property tax is costlier to administer than VAT.
Requires decentralised assessment, valuation, and collection infrastructure.
104
Summarise the overarching goal of modern tax reform in one phrase.
Move closer to a system that is simultaneously fair, efficient, simple, and sustainable.

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