chapter 6: funding the public sector

tax

a mandatory payment to a local, state, or national government

revenue

government income from taxes and nontax sources

tax base

each type of wealth that is subject to taxes

four most common tax bases

individual income, corporate income, sales, property

individual income tax

a tax based on an individual’s income from all sources: wages, interest, dividends, and tips

taxable income

the amount of income that is actually subject to the tax

marginal tax rate

the tax rate that would apply to an additional $1 of taxable income earned

sales tax

a tax based on the value of designated goods or services at the time of sale

property tax

taxes imposed on assets

corporate income tax

a tax on corporate profits

incidence of a tax

the final burden of that tax

why do governments impose taxes

to pay for the costs of governments, to redistribute wealth, to allocate resources, to promote certain industries, to influence productivity and growth, to change economic behavior

tariff

a tax on goods entering the country from a foreign country

protective tariff

when its major purpose is to raise the cost of import

sin taxes

often imposed on products or activities considered to be unhealthful or damaging to society, such as gambling, alcohol, and cigarettes.

ingredients of a good tax system

equity/fairness, clarity and certainty, simplicity and efficiency, flexibility

benefits received principle

holds that people who benefit directly from public goods should pay for them in proportion to the amount of benefits received

ability-to-pay principle

holds that people should be taxed in accordance with their ability to pay

proportional tax

sometimes called a flat tax, because the rate of tax is the same for all taxpayers

progressive tax

one in which the tax rate also increases as a person’s income increases

regressive tax

the percentage of income paid in taxes decreases as income increases