Unit 3: Tax Structures, Inflation, and Purchasing Power

Kinds of Taxes

1. Proportional Tax: Tax for which the percentage of income paid in taxes remains the same for all income levels. (EX: Joe makes $20k/yr and pays 25% in taxes, while Rachel makes $1m a year and pays 25% in taxes).

Kinds of Taxes

2. Progressive Tax: The percentage paid in taxes increases as income increases. (EX: Joe makes $20k/year and pays 10% in taxes, while Rachel makes $1m/year and pays 28% in taxes).

This is the tax structure we have in the US!

Kinds of Taxes

3. Regressive Tax: The percentage paid in taxes increases as income decreases.

IMPORTANT EXAMPLE: SALES TAX!!!

Inflation and the CPI Inflation: The general rise in prices over

time.

How do we measure inflation?

Using the Consumer Price Index (CPI): The CPI calculates the cost of a “market

basket” of goods for the typical URBAN consumer and tracks the percentage increase from year to year.

Effects of Inflation

Why it’s bad…1. It is difficult to predict how much goods and services will cost in the future.2. People lose money on their investments and savings. (Think about it…you have an investment that earns 5% interest, but inflation is 8%).3. People on fixed incomes (social security) are harmed.

Effects of Inflation

Who benefits from inflation?

1. People that owe money. (Think about it…if you owe $20k in school loans and inflation is occurring, that means more $$$ in the economy. It will be easier to pay back the loan.)

Inflation and Purchasing Power

Purchasing Power: How much a dollar will buy you.

As inflation increases, the purchasing power of the dollar decreases.

Review From Before… What is GDP?

Total Dollar Value of all goods and services produced in a country in a given year.

How should fiscal policy be used to expand the economy?

Increase spending, decrease taxes.