1. What are the three basic economic impacts of taxes?

a. Resource allocation – Economic resources such as land, capital, labor, and entrepreneurship either switch industries or go unused

b. Behavior adjustment – taxes used to change behavior, aka sin taxes, on things like tobacco, alcohol, marijuana (in legalized states)

c. Productivity & Growth – taxes may negatively affect economic growth and productivity if they are too high – high income tax? Why work hard? High business tax? Why expand production?

2. What three criteria must be met for taxes to be effective?

a. Equity – taxes should be fair to everybody – what definition of fair?

b. Simplicity – people are more willing to pay taxes if they understand tax laws

c. Efficiency – taxes should be easy to administer and generate revenue efficiently

3. What are the two principles of taxation?

a. Benefit Principle of Taxation

b. Ability-to-Pay Principle – people should be taxed according to their ability to pay, regardless of the benefits they receive

4. What two ideas are the basis of the benefit principle of taxation?

a. Those who benefit from government services should be the ones to pay for them

b. People should pay taxes in proportion to the amount of services or benefits they use

5. What are the two main limitations of the benefit principle of taxation?

a. Those that receive the most benefits/services often have the least ability to pay

b. Benefits hard to measure – e.g., gasoline tax

6. What are the three general types of taxes in the United States today?

a. Proportional tax – same percentage of taxation on everyone, regardless of income (e.g., Medicare taxes)

b. Progressive tax – higher percentage of taxation as income increases (e.g., Federal Income tax)

c. Regressive tax – higher percentage of taxation as income decreases (e.g., sales tax)

7. What determines the category into which a tax is classified?

How much more is paid in taxes as income increases

1. What are the three most important sources of revenue for the federal government?

a. Individual Income taxes

b. Social Security taxes

c. Corporate Income taxes

2. How is the individual income tax paid in most cases?

Automatically deducted from pay by employers, payroll withholding

3. Is the individual income tax a proportional, progressive, or regressive tax?

Progressive

4. What does FICA stand for?

Federal Insurance Contributions Act

5. What are the two components of FICA?

a. Social Security – proportional/regressive tax on all wages/salaries – 6.2% of all income up to $117,000 (maximum of $7,254)

b. Medicare – proportional tax – 1.45% of all income

6. What are five other forms of federal taxation?

a. Excise tax – tax on the manufacture or sale of certain items (gas, liquor) and luxury goods

Luxury goods – goods that have much higher demand at higher income levels (i.e., rich people stuff)

b. Estate tax – tax on the transfer of property when a person dies

c. Gift tax – tax on donations of money or wealth

d. Customs duty – charge on goods brought in from other countries

e. User fees – charges for a good or services (e.g., National Park admission)