ECON-1006EL Chapter Notes - Chapter 18: Taxation In Canada, Tax Rate, Deadweight Loss

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rubygoose773

23 May 2018

School

Laurentian

Department

Economics / Science Èconomique

Course

ECON-1006EL

Professor

Eastman

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ECON-1006EL: MICROECONOMICS

Chapter 18: Taxation and Public Expenditure

Definitions

Progressive tax

A tax that takes a larger percentage of income at higher levels of income

Proportional tax

A tax that takes a constant percentage of income at all levels of income

Regressive tax

A tax that takes a lower percentage of income at higher levels of income

Average tax rate

The ratio of total taxes paid to total income earned

Marginal tax rate

The fraction of an additional dollar of income that is paid in taxes.

Tax bracket

A range of taxable income for which there is a constant marginal tax rate

Direct burden

For an individual tax, the amount of money that is paid collected from taxpayers

Excess burden

The allocative inefficiency or deadweight loss generated by a tax

Transfer payment

A payment to an individual, a firm, or an organization that is not made in

exchange for good or service

Equalization

payments

Transfer of tax revenues from the federal government to the low-income

provinces

Demo grants

Social benefits paid to anyone meeting only minimal requirements such as age or

residence; in particular, not income-tested

Income-tested

benefits

Social benefits paid to recipients who qualify because less than some critical

level

Poverty line

An estimate of the annual family income that is required to maintain a minimum

adequate standard of living

Poverty trap

Occurs when ever individuals have little incentive to increase their pre-tax

income because the resulting loss of benefits makes them worse off

Key Points

• Many economists have concluded that the overall Canadian tax system is roughly

proportional for middle income classes and mildly progressive for low-income and high-

income persons.

• The direct burden of a tax is the amount paid by taxpayers. The excess burden reflects the

allocative inefficiency of the tax.

• Excise taxes and income taxes impose costs in two ways. By taking resources from

market participants (consumers, firms, workers), they impose a direct burden. By

reducing the volume of specific market transaction, they also generate a deadweight

loss—this is the excess burden of the tax.

• An efficient tax system is one that minimizes the amount of excess burden (deadweight

loss) for any given amount of tax revenue generated.

Lecture Notes

• Gov taxes to pay for services

• 3 kinds of taxes: progressive, regressive, aproportional

• progressive: higher percentage of higher income, directly proportional to income (income

tax)

• regressive: inversely proportional to income (sales tax)

• proportional taxes: constant percentage of income (corporate income tax)

• MTR = (change in tax paid/change in income)

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Document Summary

A tax that takes a larger percentage of income at higher levels of income. A tax that takes a constant percentage of income at all levels of income. A tax that takes a lower percentage of income at higher levels of income. The ratio of total taxes paid to total income earned. The fraction of an additional dollar of income that is paid in taxes. A range of taxable income for which there is a constant marginal tax rate. For an individual tax, the amount of money that is paid collected from taxpayers. The allocative inefficiency or deadweight loss generated by a tax. A payment to an individual, a firm, or an organization that is not made in exchange for good or service. Transfer of tax revenues from the federal government to the low-income provinces. Social benefits paid to anyone meeting only minimal requirements such as age or residence; in particular, not income-tested.

Related Questions

1. Do the math. Due to in-kind-transfers, 36 million more Americans were poor in 2010 than in 1965.

2. Which of the core choices that confront every nation is failing in the income distribution inequality? For whom

3. In a progressive tax system the marginal tax rate is the rate imposed on the last dollar of income.

4. If the tax elasticity of supply is 0.15, by how much will the quantity supplied decrease when the marginal tax rate increases from 35 to 45 percent?

Answer 3.8%

5. Had Obama succeeded in raising the top marginal tax rate (News, p. 417), how much more tax would he have paid in 2010? (Use the tax rates in Table 19.1 and the News on p. 415.)

Answer: 52,228.82.

6. What percentage of income is paid in Social Security taxes by a worker earning

(a) $40,000?

(b) $80,000?

(d) What kind of tax is this? (A: progressive; B: regressive; C: proportional)

Answers:

(a) __________.

(b__________.

(c____________.

(d) ____________

7. A nominal tax rate is tax paid divided by taxable income.

8. An effective tax rate is tax paid divided by total income.

The basis that describes the regressive tax burden of property taxes on the renter, who does not own property is tax incidence

violetgoat500

46. In a proportional income tax system,

marginal tax rates increase as the level of taxable income increases.

marginal tax rates are the same regardless of the level of taxable income.

everyone pays the same dollar amount in taxes.

marginal tax rates decline as the level of taxable income declines.

47 A tax system that applies a lower marginal tax rate at higher levels of income is

backward.

regressive.

progressive.

proportional.

48 The average tax rate can be calculated by which of the following formulas?

The change in taxes due divided by the change in taxable income

The change in taxable income divided by the change in taxes due

Total taxable income divided by total taxes due

Total taxes due divided by total taxable income

49 Under a progressive income tax system, the marginal income tax rate paid by taxpayers

declines as their incomes increase

. is unrelated to their incomes.

rises as their incomes increase.

is unchanged as their incomes increase.

50 The tax base is the minimum amount of tax revenue that government must collect each year.

the maximum amount of tax revenue that government must collect each year.

the sum of all incomes earned in the United States.

the value of all goods, services, incomes, or wealth subject to taxation.

51 A capital gain is defined as the tax paid when one sells an asset.

the tax rate one pays when one moves into a higher tax bracket.

an unanticipated increase in income.

the positive difference between the sale price and the purchase price of an asset.

52 Corporate profits are

taxed twiceonce by the corporate tax system, and again by personal tax system when they are paid to stockholders as dividends.

taxed only when a stockholder sells his or her shares of stock.

taxed at too low a rate.

taxed three timesonce by the corporate tax system, again by the personal tax system, and again as capital gains.

53 Social Security taxes are regressive because

they apply only to rich people.

they are not applied to income beyond a certain amount.

they are applied to welfare recipients.

they are applied to retired people only.

54 The largest share of federal government tax receipts is derived from

excise taxes.

individual income taxes.

corporate income taxes.

social insurance contributions.

55 Local government expenditures depend on which taxes?

Social Security taxes

Local property, sales, and excise taxes

Capital gains taxes

Revenues from licenses and permits

56 When the purchase price of an asset is less than its sale price, then there is a

budget deficit.

corporate income tax.

capital gain.

capital loss.

57 The earnings that a corporation saves for investment in other productive activities are

transfers in kind. c

apital gains.

tax incidence.

retained earnings.

58 Tax incidence refers to

determining who sends the taxes into the government.

the distribution of tax burdens among groups, or who really pays a tax.

the tendency of some people to avoid paying taxes at all.

determining the marginal tax rate applied to any increase in income.

59 Social Security taxes are paid by

neither employers nor employees

both employers and employees.

employers only.

employees only.

ivoryfrog360

1) Which of the following explains the distribution of income?

Select one:

a. a positive externality

b. The person on which the final burden of a tax falls

c. An unintended result of taxation

d. The way that income is allocated to individuals, families, and other groups

2)Why can suppliers of goods can more easily shift the incidence of a tax to the consumer if the demand of the good is inelastic?

Select one:

a. Because markets that sell inelastic goods have so much competition, that a tax increase would not be noticed.

b. Because the tax would make marginal utility equal marginal benefit.

c. When taxes are levied, companies legally have to increase their prices.

d. Because the consumer needs the good regardless of the new price.

3)Where is the power to issue taxes granted to the federal government?

Select one:

a. The sixteenth amendment to the constitution

b. The bill or rights

c. The 20th amendment to the constitution

d. The declaration of independence

What are intergovernmental revenues generally used to do?

Select one:

a. Sanitation workersâ benefits

b. To create national parks

c. Educate and provide public welfare

d. Provide public transportation for all state employees

One of the noted advantages of a flat tax is

Select one:

a. all members of congress generally agree with issuing a flat tax

b. The flat tax offers a relatively simple tax process

c. There is a defined and agreed upon tax rate already in place.

d. The flat tax removes behavior incentives that are built into the tax code

6) Which of the following is TRUE regarding the âincidence of a taxâ.

Select one:

a. This is a tax paid by all people to establish social security payments

b. This refers to the individual(s) who take the final burden of the tax

c. This is a loophole designed to help the rich

d. This is a tax on individuals who run oligopolies

Person âAâ earns $10,000 a year and pays 10% of his income in taxes. Person âBâ earns $60,000 a year and pays 20% in taxes. Which kind of tax is being represented?

Select one:

a. A regressive tax

b. A progressive tax

c. A loophole tax

d. A flat tax

ECON-1006EL Chapter Notes - Chapter 18: Taxation In Canada, Tax Rate, Deadweight Loss

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