Public Finance Chapter 8: Taxation

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Questions and Answers

What are taxes primarily used for?

Encouraging private sector growth

Supporting government supplied goods and services (correct)

Reducing national debt

Funding political campaigns

Which of the following describes a purpose of taxation in society?

To encourage tax evasion practices

To limit government expenditure

To increase personal income directly

To finance welfare programs and public services (correct)

Which of the following is NOT a reason for taxation impacting economic growth?

Redistributing purchasing power among citizens

Encouraging the expenditure of tax refunds (correct)

Providing funding for public infrastructure

Discouraging certain undesirable activities

What is wealth defined as in the context of economics?

The net value of a person's accumulated savings and investments Signup and view all the answers

What is true about excise taxes?

They discourage undesirable activities through higher costs. Signup and view all the answers

What is a characteristic of horizontal equity in taxation?

Everyone pays the same tax rate regardless of income. Signup and view all the answers

Which type of tax is primarily imposed on activities that generate income?

Income tax Signup and view all the answers

Which tax is specifically withheld or paid by an employer based on employee wages?

Payroll tax Signup and view all the answers

Which statement about vertical equity in taxation is correct?

It suggests that tax burdens should correspond to the ability to pay. Signup and view all the answers

What is the primary difference between tax evasion and tax avoidance?

Tax evasion involves illicit means, whereas tax avoidance uses legal loopholes. Signup and view all the answers

What is the main purpose of a property tax?

To levy taxes on real estate and tangible assets Signup and view all the answers

How does taxation benefit businesses during an economic downturn?

By funding government programs that provide loans and support. Signup and view all the answers

Which of the following taxes is levied specifically on certain products, such as alcohol and gasoline?

Excise tax Signup and view all the answers

What does the term 'foreign tax' refer to?

Income taxes paid to a foreign government Signup and view all the answers

How does sales tax generally affect consumer behavior?

It raises the price of goods, resulting in lower consumption Signup and view all the answers

What is a unique feature of value-added tax (VAT)?

It is collected at each stage of production of a good Signup and view all the answers

What is the first step in the process of resource reallocation through taxation?

Individuals' ability to spend on market goods decreases. Signup and view all the answers

Which of the following correctly defines a direct tax?

A tax that is paid directly by the taxpayer to the government. Signup and view all the answers

What is considered a common tax base?

Wealth Signup and view all the answers

Which statement best describes wealth as a tax base?

It represents accumulated savings and investments at a given time. Signup and view all the answers

How does an indirect tax primarily affect consumers?

It can lead to increased prices of goods and services. Signup and view all the answers

Why are the three major tax bases related to each other?

They are derived from the same economic activities. Signup and view all the answers

In the context of taxation, what is meant by shifting of a tax?

A taxpayer is able to transfer the tax burden to someone else. Signup and view all the answers

What happens when taxes increase for individuals?

Individuals' ability to save and consume is decreased. Signup and view all the answers

What type of tax applies the same tax rate regardless of income level or tax base size?

Proportional Tax Signup and view all the answers

Which statement best describes a selective tax?

It may allow exemptions from the general tax base. Signup and view all the answers

What does the average tax rate (ATR) measure?

Total taxes paid relative to the tax base value. Signup and view all the answers

Which example best illustrates a general tax?

Income tax on wages. Signup and view all the answers

What is represented by the marginal tax rate (MTR)?

The additional tax on an increase in the tax base. Signup and view all the answers

Which of the following is a characteristic of a selective tax?

It can apply only to specific goods or services. Signup and view all the answers

Which of the following taxes would most likely be an example of a general tax?

Income tax with no deductions. Signup and view all the answers

What is horizontal equity in taxation?

Individuals of the same economic capacity pay the same tax amount. Signup and view all the answers

What is a characteristic of tax evasion?

Failing to pay the taxes that are due. Signup and view all the answers

Which best describes how food and medicine are treated in taxation typically?

They may be exempt from taxation based on necessity. Signup and view all the answers

How do the benefits of tax evasion typically vary?

They increase with the amount of tax saved. Signup and view all the answers

What defines vertical equity in taxation?

Different tax bills are paid by individuals based on their economic ability. Signup and view all the answers

What is the primary incentive for tax evasion?

To save money by not paying due taxes. Signup and view all the answers

Which of the following statements about tax avoidance is true?

It involves changing behavior to minimize tax liabilities. Signup and view all the answers

What could discourage an individual from reporting their true benefits related to government activities?

The fear of higher taxes based on benefits declared. Signup and view all the answers

What tends to happen when labor income faces high taxes?

Workers might refuse overtime work. Signup and view all the answers

What is the primary characteristic of a regressive tax system?

Lower income leads to a higher tax rate in relation to income. Signup and view all the answers

Which tax structure results in the average tax rate increasing with the size of the tax base?

Progressive tax Signup and view all the answers

What do tax brackets represent in a progressive tax system?

The range of income that is taxed at a specific rate. Signup and view all the answers

Which principle argues that taxes should be based on the benefits received from government services?

Benefit principle Signup and view all the answers

In a regressive tax rate structure, which of the following is true?

Marginal tax rate is less than average tax rate for all brackets above the lowest. Signup and view all the answers

What disadvantage does the benefit principle face?

It cannot clearly quantify benefits received from services. Signup and view all the answers

What does the ability-to-pay principle advocate regarding tax distribution?

Those with greater income should pay a higher proportion of their income in taxes. Signup and view all the answers

Under proportional taxation, what remains unchanged regardless of the base size?

Average tax rate Signup and view all the answers

Study Notes

Public Finance - Chapter Eight: Taxation

Taxation is a pecuniary burden imposed on individuals or properties to support government, a payment by a legislative body.
Taxes are compulsory payments linked to activities, used to purchase goods/services or redistribute purchasing power.
Taxation benefits society by funding public projects such as healthcare, education, and transportation, as well as providing unemployment benefits and pensions.
Taxation influences economic growth, discouraging undesirable activities like tobacco and gambling, affecting sales and prices of goods.
Taxes help businesses through funding for long-term loans and in economic recessions/turmoils, improving the country's welfare and the business's prospects.
Taxation reallocates resources from private to public use: reducing private spending by collecting taxes and then using those funds to provide public goods/services as well as income support.
Direct taxes are directly levied on taxpayers - often cannot be passed on to others. Examples include income tax, and corporate income taxes.
Indirect taxes are those that can be passed on – often impacting prices, levied by intermediaries. Examples include sales taxes, and excise taxes.
Tax bases are economic activities upon which taxes can be levied. The most common bases include income, consumption, and wealth.
Income is the sum of annual consumption and savings.
Consumption is annual income, less the amount saved.
Wealth is accumulated savings and investments at a specific point in time.
Important sources of taxes include income, capital, sales/excise, payroll, unemployment, and foreign taxes.
Capital taxes cover items generating profit such as factories/machinery/real estate.
Sales/excise taxes are levied on purchases of goods/services and on particular goods.
Payroll tax is withheld on employee wages.
Unemployment tax funds unemployment assistance for laid-off workers.
Foreign income taxes are imposed on income earned in other countries.
Value-Added Tax is a national sales tax during production phases.

General and Selective Taxes

General taxes cover all components of the economic base, excluding exemptions/deductions.
Selective taxes target specific components of the tax base, allowing exemptions/deductions.

Tax Rates

A tax rate refers to the percentage of taxable income or a corporation's earnings owed to the government.
Tax rates can be calculated as a percentage of the tax base.

Tax Rate Structures

Average Tax Rate (ATR): the total dollar amount of taxes collected, divided by the value of the tax base
Marginal Tax Rate (MTR): the additional tax collected on additional dollar value of the tax base.

Proportional Taxes

Apply the same tax rate regardless of income or tax base size.
Average tax rate remains the same irrespective of income level.

Regressive Taxes

Taxes decline in relation to income.
Average tax rate declines as the tax base increases.

Progressive Taxes

Higher income earners pay higher taxes rates.
Average tax rate increases with the size of the tax base.
Tax brackets define increments of annual income associated with specific marginal tax rates.

Burden of Government Finance Distribution

Benefit principle: Government funds are linked to the services obtained. Payments depend on the benefits received by the consumer.
Ability-to-pay principle: Taxes are based on the capacity to pay; higher earners pay more.

Horizontal and Vertical Equity

Horizontal equity: Individuals with similar economic capacity pay the same amount of tax.
Vertical equity: Taxpayers with differing economic capacity pay different amounts of tax based on chosen principles of fairness.

Tax Evasion and Tax Avoidance

Tax evasion: Non-compliance with tax laws - illegal.
Tax avoidance: Changing behaviour to avoid paying tax - legal.

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Description

Explore the concepts of taxation as outlined in Chapter Eight of Public Finance. This chapter delves into the purpose, implications, and effects of taxes on individuals and society. Learn how taxation supports government operations, influences economic behavior, and funds essential public services.