Taxes Chapter 1

Tax

A payment required by a government that is unrelated to any specific benefit or service received from the government.

Tax Rate

The level of taxes imposed on the tax base, usually expressed as a percentage.

Tax Base

Defines what is actually taxed and is usually expressed in monetary terms.

Marginal Tax Rate

The tax rate that applies to the next additional increment of a taxpayer’s taxable income.

Average Tax Rate

The taxpayer’s average level of taxation on each dollar of taxable income.

Effective Tax Rate

The taxpayer’s average rate of taxation on each dollar of total income (both taxable and nontaxable).

Proportional Tax Rate

Imposes a constant tax rate throughout the tax base.

Progressive Tax Rate

Imposes an increasing marginal tax rate as the tax base increases.

Regressive Tax Rate

Imposes a decreasing marginal tax rate as the tax base increases.

Implicit Taxes

Indirect taxes that result from a tax advantage the government grants to certain transactions.

Sufficiency

Assessing the aggregate size of the tax revenues that must be generated to ensure the tax system provides these revenues.

Equity

Determines how the tax burden should be distributed across taxpayers.

Horizontal Equity

Two taxpayers in similar situations pay the same tax.

Vertical Equity

Taxpayers with greater ability to pay tax pay more tax relative to those with a lesser ability to pay tax.

Dynamic Forecasting

Forecasting that predicts possible responses by taxpayers to new tax laws.

Static Forecasting

Forecasting that ignores how taxpayers might alter their activities in response to a tax law change.