Reading notes--Principles of Economics (chapter12)

Summary

Chapter 12 is the Design of the Tax System. This chapter introduces different tax systems and the tax system in the US.

US tax system

• The most important taxes for the federal government are personal income taxes and payroll taxes for social insurance.

• The most important taxes for state and local governments are sales taxes and property taxes.

Different tax systems

• Proportional tax is a tax for which high-income and low-income taxpayers pay the same fraction of income.

• Regressive tax is a tax for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers.

• Progressive tax is a tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers.

Principles of tax

• Equity

1.It should obey the benefits principle (the idea that people should pay taxes based on the benefits they receive from government services).

2.It should obey the ability-to-pay principle (the idea that taxes should be levied on a person according to how well that person can shoulder the burden).

• Efficiency

Definitions

1. Average tax rate– total taxes paid divided by total income

2. Marginal tax rate– the amount by which taxes increase from an additional dollar of income

3. Lump-sum tax rate– a tax that is the same amount for every person

4. Benefits principle– the idea that people should pay taxes based on the benefits they receive from government services

5. Ability-to-pay principle– the idea that taxes should be levied on a person according to how well that person can shoulder the burden

6. Vertical equity– the idea that taxpayers with a greater ability to pay taxes should pay larger amounts

7. Horizontal equity– the idea that taxpayers with similar abilities to pay taxes should pay the same amount

8. Proportional tax– a tax for which high-income and low-income taxpayers pay the same fraction of income

9. Regressive tax– a tax for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers

10. Progressive tax– a tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers

Review

There are some exercises in this book. I recorded questions I didn’t answer correctly here.

1. Betty gives piano lessons. She has an opportunity cost of 50 dollars per lesson and charges 60 dollars. She has two students: Archie, who has a willingness to pay of 70 dollars, and Veronica, who has a willingness to pay of 90 dollars. When the government puts a 20 dollars tax on piano lessons and Betty raises her price to 80 dollars, the deadweight loss is_____ and the tax revenue is_____. (Correct answer: C)

a. 10,20

b. 10,40

c. 20.20

d. 20,40

My wrong answer: A