Chapter 12 Econ. Vocabulary

Infrastructure

Taxes supply revenues to support the functions of government, such as national defense and criminal justice. They are used to pay for _______, such as roads and bridges, and to fund welfare and public services, such as education and health care.

Tax equity

One of the most hotly debated issues is the principle of _______, the idea that the tax system should be fair.

Although economists support the principle of equity, they differ over how best to achieve it.

Ability-to-pay principle

The ____________ mirrors Smith's first maxim. It says that citizens should be taxed according to their income or wealth. People with higher incomes should pay more tax. People with lower incomes should pay less tax.

Benefits-received principle

The ____________ says that those who benefit from a particular government program should pay for it. For example, people who drive should pay for the upkeep of the highway system.

Tax incidence

The economic burden of a tax — what economists call ________ — may not fall on the person who pays the tax bill.

The allocation of the burden of a tax between consumers and producers. ________ is said to fall on the group that bears the burden of tax, no matter from whom the tax is collected.

Deadweight loss

A _________ occurs when the cost to consumers and producers from a tax —due to lost productivity or sales — is larger than the size of the tax revenue it generates.

A loss of productivity or economic well-being for which there is no corresponding gain.

Tax base

The ______ is the thing that is taxed, such as personal income, a good sold at a store, or a piece of property. Taxes are defined according to their ______. For example, income tax is based on personal income.

Tax rate

The ________ is the percentage of income — or of the value of a good, service, or asset — that is paid in tax. For example, if the income _______ were set at 20 percent, taxpayers would have to pay an amount equal to 20 percent of their taxable income.

The percentage that is levied on the value of whatever is being taxed, such as income or property.

Proportional tax

A _________ is a tax that takes the same share of income at all income levels. For example, a ________ of 10 percent would tax all incomes at that rate.

A __________ applies the same tax rate to all taxpayers, regardless of income.

Flat tax

In recent years, Estonia and several other Eastern European countries have adopted a proportional income tax, or ______. For example, Slovakia introduced a ______ in 2004 so that rich and poor alike pay a 19 percent tax on income.

Progressive tax

A ________ is a tax that takes a larger share of income as income increases. A ________ is based on the ability-to-pay principle. Most federal taxes, including the federal income tax, are ______.

A ________ applies a higher tax rate to high incomes than to low incomes.

Regressive tax

The third tax structure, the _______, is a tax that takes a smaller share of income as income increases. Governments do not set out to impose higher tax rates as incomes fall.

A _______ applies the same tax rate to everyone. But the tax paid represents a larger share of a poorer taxpayer's income than of a wealthier taxpayer's income.

Tax code

The Internal Revenue Service is responsible for issuing federal income tax forms and processing tax returns. The IRS also works to ensure compliance with the _______, the set of laws that govern federal taxes. Over time, these laws have grown in size and complexity.

Withholding

The IRS collects taxes from workers using a "pay as you earn" system. Under this system, also known as _______, employers take out a certain amount of tax from each paycheck.

W-2 form

At the beginning of each year, most workers receive a _______, which lists their wages for the previous year and the amount of tax that was withheld.

Taxpayers submit tax returns between January 1 and April 15.

Audit

If the IRS questions the accuracy of a taxpayer's return, it may order an ______, or formal review of the return. Taxpayers who fail to comply with tax laws may face fines or, like Al Capone, imprisonment.

Marginal tax rate

As income rises, the ________ rises as well. The ________ is the rate at which the last dollar a person earns in a given year is taxed. These ________ make the income tax a progressive tax.

Payroll tax

The second-largest share of federal tax revenue comes from _______. A ________ is a tax on the wages a company pays its employees. Of the several kinds of ________, the two most important are the Social Security tax and the Medicare tax.

Social Security tax

The ________ is set at a fixed rate, which is paid half by the employer and half by the employee. People who are self-employed pay the entire tax themselves. In 2013, the total _________ rate was 12.4 percent.

Medicare tax

The _______ is also split evenly between employer and employee. In 2013, the total ________ rate was 2.9 percent, half of which —1.45 percent-was withheld from employees' earnings. The _______ is not capped.

Unemployment tax

Many states also levy payroll taxes. An __________ is a state payroll tax that is used to assist workers who lose their jobs.

State disability tax

Some states also levy a __________, which funds state programs to help workers who are injured on the job.

Property taxes

Taxes on property are a major source of revenue for many state and local governments. ________ are commonly levied on real property, which consists of land and buildings. Some governments also tax personal property, such as cars and boats.

Assessed value

Property taxes are proportional taxes that charge a fixed percentage of the value of a property which is calculated by an assessor. If the _______ of a property changes— a common occurrence in the real estate market— property taxes change, too.

Sales tax

Another important source of state and local revenue is the _______. Such a tax levies a percent charge on the purchase of a wide variety of goods and services, from manufactured items to meals served in restaurants. ______ are relatively easy to collect and provide critical funding for state and local governments.

Corporate income tax

Governments at all levels levy various types of business taxes. The largest business tax is the federal _________, which is applied to the profits of corporations. Like individual income taxes, _______ are progressive, applying a higher tax rate to higher levels of corporate income.

Excise taxes

________ are typically levied on goods and services a government wants to regulate. For example, alcohol and cigarettes are taxed to discourage their use.

Sin taxes

Because of their association with alcohol and cigarettes, excise taxes are sometimes called ________. Like other sales taxes, excise taxes are generally regressive.

Luxury taxes

_______, as the name implies, are levied on the sale of luxury goods, such as fur coats and private jets. _______ are progressive, because the consumption of luxury goods increases as income increases.

User fees

_______ and tolls are fixed charges levied on the use of a public service or facility. Fees and tolls are based on the benefits-received principle, because those who use a facility pay the tax. _______ and tolls are proportional taxes in that everyone pays the same rate, regardless of income.

Estate tax

The federal government imposes an _______ on assets left to heirs by someone who dies. The heirs, or inheritors of such assets, pay the tax.

Inheritance tax

Many states also levy an estate tax, sometimes called an _______, on top of the federal tax. Estate taxes are progressive, because larger estates are taxed at a higher rate.

Federal deficit

Even with these four major taxes, the government typically does not take in enough revenue to cover all its expenditures. This gives rise to the ________, the shortfall between tax revenues and government expenditures in any given year.

National debt

To make up this difference, the government borrows money. Selling government bonds to make up for a federal deficit adds to the ______, however. The _______ is the total amount owed by a nation's government as a result of borrowing.

Fiscal year

Every year, the federal government draws up a budget to determine how it will spend its revenues. Like all government budgets, it is based on a _______, rather than a calendar year. A _______ is a 12-month accounting period.

Mandatory spending

In the federal budget, spending is divided into two broad categories: ______ and discretionary. _______ is spending that is fixed by law. The only way for Congress to change the amount of money allocated to _______ is to enact new legislation.

Entitlements

The two main categories of mandatory spending are interest on the national debt and ________. ________ are programs through which individuals receive benefits based on their age, income, or some other criteria. ________ programs include Social Security, Medicare, and welfare.

Discretionary spending

The other main category of spending, __________, is made up of expenditures that may be raised or lowered as Congress sees fit. As mandatory spending has grown in recent years, the share of revenue available for ________ has shrunk.

Tax referendums

In addition, citizens play a much larger role in tax policy at the local and state levels than at the federal level. Many states and localities require voters to approve tax hikes through ________ —direct popular votes on an issue.

Lotteries

State and local governments also rely on certain revenue sources that are not used at the federal level, such as property and sales taxes. Many states also run _______, large scale legal gambling games organized to raise money for a public cause.