Economics: Chapter 7 - Taxes

Vocabulary flashcards covering the economic effects of taxes, incidence, deadweight loss, tax structures, and principles of taxation based on Chapter 7 of Microeconomics by Krugman and Wells.

Excise tax

A per-unit tax imposed on the sales of a good or service.

Tax wedge

A price gap created by an excise tax, which raises the price paid by buyers and reduces the price received by sellers.

Tax incidence

A measure of who really bears the burden of a tax, determined by the relative price elasticities of supply and demand rather than who officially pays it.

Tax revenue

The total money collected by a tax, calculated as the tax per unit multiplied by the quantity transacted, representing the area of a rectangle whose height is the tax wedge and width is the quantity sold.

Deadweight loss of a tax

The total surplus lost to society because an excise tax discourages mutually beneficial transactions that would have otherwise occurred.

Administrative costs

The resources used by the government to collect a tax, and by taxpayers to pay or evade it, over and above the monetary amount of the tax itself.

Total inefficiency of a tax

The combined economic cost imposed on society by a tax, equal to the sum of its deadweight loss and its administrative costs.

Laffer curve

A theoretical relationship proposing that raising tax rates initially increases revenue, but beyond a certain threshold causes tax revenue to decline by drastically reducing transactions.

Benefits principle

A principle of tax fairness stating that those who benefit from public spending should bear the burden of the tax that funds that spending.

Ability-to-pay principle

A principle of tax fairness stating that individuals with a greater ability to pay a tax should bear a greater tax burden.

Lump-sum tax

An efficient tax that charges the exact same fixed amount to everyone regardless of actions, choices, or wealth (also called a poll tax).

Trade-off between equity and efficiency

The fundamental policy conflict where a tax system can typically only be made more economically efficient by sacrificing fairness, and vice versa.

Tax base

The measure or value of economic activity or assets (such as income, property, or transactions) on which a tax is imposed.

Tax structure

The formula or set of rules specifying how tax rates depend on the tax base.

Income tax

A tax levied on the personal income earned by an individual or family from wages and investments.

Payroll tax

A tax based on the earnings an employer pays to an employee, often used to finance social programs like pensions and employment insurance.

Sales tax

A consumption tax calculated as a percentage of the total value of goods and services sold.

Profits tax

A tax levied directly on the earnings or profits of corporations and businesses (also known as corporate income tax).

Property tax

A local tax that depends on the assessed value of real estate or property, such as a home.

Proportional tax

A tax system in which the tax rate remains fixed for all taxpayers, taking the exact same percentage of income or wealth regardless of level (also known as a flat tax).

Progressive tax

A tax system in which the tax rate rises as income rises, claiming a larger fraction of income from high-income earners than from low-income earners.

Regressive tax

A tax system in which the tax rate decreases as income increases, claiming a smaller fraction of income from high-income earners than from low-income earners.

Marginal tax rate

The percentage of each additional dollar of income that is taxed away.