Understanding Tax Codes

These flashcards cover key concepts related to tax codes, including reasons for taxes, types of taxes, and impacts on economic decisions.

What are the four main reasons for taxes in the government?

Raising revenues, transfer payments, financing government operations, and correcting market failures.

What is the primary tax used by the federal government to raise revenues?

Individual income taxes.

What are transfer payments used for?

To redistribute income, primarily for programs such as Social Security and Medicare.

How is the average tax rate calculated?

Total amount of taxes paid divided by income.

What is the marginal tax rate?

The amount of taxes paid on an additional dollar earned.

What happens to Tracy's decision about a side gig if her marginal tax rate is 50%?

She may not take the job if the after-tax pay is less than her opportunity cost.

Explain the difference between a progressive, proportional, and regressive tax.

Progressive tax has increasing average rates, proportional tax has constant average rates, and regressive tax has decreasing average rates.

What is deadweight loss in the context of taxation?

A transaction that doesn't happen due to tax rates affecting decisions.

What does it mean for a tax code to be progressive?

The higher your income, the higher your average tax rate is.

How does the U.S. federal tax code compare to other countries?

It is extremely progressive, more so than nearly any other country.