Chapter 9 – Sources of Government Revenue

Chapter review questions

o  Chapter 9, Section 1 - p. 236 # 2, 3, 4, 5, 6

o  Chapter 9, Section 2 - p. 245 # 2, 3, 7, 8

o  Chapter 9, Section 3 - p. 253 # 2, 3, 4, 6, 7, 8

1.  The Economics of Taxation

a.  The primary way of running the government is through ______.

b.  Resource Allocation – People react to higher prices in a predictable manner – we ______.

c.  Behavior adjustment – Taxes are used to ______or ______certain types of behavior. To encourage home ownership, homeowners can use the ______from their mortgage as a tax ______. Sin taxes are used to reduce consumption of socially undesirable products such as ______or ______.

d.  Productivity and Growth – Taxes can affect productivity and economic growth by changing the incentives to ______, ______, and ______. Are taxes already too high?

e.  Incidence of a Tax – This is also referred to as the final ______of ______. Who is actually paying the tax?

f.  There are three criteria of taxes.

i.  Equity – Taxes should be ______and ______. Tax ______allow some people to avoid paying taxes and result in ______issues.

ii. Simplicity – Tax laws should be written so that everyone is able to ______them. Many people dislike paying the federal income tax in part because it is too ______.

iii.  Efficiency – Taxes should be easy to ______and successful at generating ______. A good example is the ______. A less efficient example is a tax collected at a ______.

g.  Benefit principle – Those who benefit from government ______and ______should pay in ______to the amount of benefits received. Since the tax is built in to the price, the ______tax is a good example since those who drive more must pay more. Two limitations are involved (those who receive government ______may be the ones who can least afford the tax, benefits are often hard to ______)

h.  Ability-to-pay principle – This is the idea that people should pay taxes according to their ability to pay regardless of the benefits they ______. The individual ______tax is an example. The principle is based on two factors. (we cannot always ______the benefits derived from ______spending, it assumes people with higher ______suffer less ______paying taxes than those with lower incomes)

i.  Three types of taxes

i.  Proportional tax – imposes the same ______rate of taxation on ______; examples include the tax rate on ______and the tax that funds ______

ii. Progressive tax – imposes a higher ______rate of taxation on ______rather than lower ones; uses a progressively higher ______; current individual ______tax code

iii.  Regressive tax – imposes a higher percentage rate of taxation on ______incomes; an example includes a ______tax

2.  Federal, State, and Local Revenue Systems

  1. The first federal income tax was enacted in ______by the ______government to help fund the ______. It was later repealed in ______and found to be unconstitutional in ______. Our current individual income tax was enacted by the ______Amendment in ______. The ______is responsible for taxes.
  2. Government revenue sources
  3. Individual income tax – main source of federal government ______; collected with a ______system; tax code is ______to prevent movement into a higher tax ______due to inflation
  4. FICA taxes – Federal Insurance Contribution Act; Second highest source of revenue; used to pay for ______and ______; referred to as a ______tax
  5. Borrowing – third largest source of revenue; continues with spending ______in the budget but may need to borrow due to ______in tax revenue
  6. Corporate income taxes – fourth largest source of revenue; taxed separately from the individual
  7. Excise taxes – fifth largest source of revenue; tax on the manufacture or sale of items such as ______and ______; regressive
  8. Estate and gift taxes
  9. Estate taxes are taxes on the ______of ______when a person dies ranging from ______to ______percent of the estate value.
  10. The gift tax is a tax on the ______of ______or wealth and is paid by the person who makes the ______preventing the wealthy from avoiding ______.
  11. Custom duties/Tariffs – charge levied on goods brought into the U. S. from other ______; authority to tax is given to ______
  12. Miscellaneous fees – includes a variety of fees including user fees (charges to use a good or service such as entrances to ______); based on the ______principle
  13. State government revenue sources
  14. Intergovernmental revenues – largest source of revenue; funds collected by one level of ______that distributes to another level for ______; majority received from the federal ______to help fund ______, ______, ______, and ______
  15. Sales taxes – tax levied on consumer ______; paid at time of sale; second largest source of revenue; no sales taxes in Alaska, Delaware, Montana, New Hampshire, and Oregon (Largest source of funds in TN)
  16. Individual income taxes – Not in TN
  17. Other revenues – includes interest earnings on ______, tuition and fees collected from state-owned ______, ______, and technical schools, corporate income taxes and hospital fees
  18. Local government revenue sources
  19. Intergovernmental revenues – more than one third of all revenue received in this form from the ______; intended for ______and public ______; federal government contributions are intended for ______
  20. Property taxes – second largest source of revenue; includes real estate, ______, furniture, ______, stocks, bonds, and ______; value is determined by the ______
  21. Utility revenue – third largest source of revenue; income from the supply of water, ______, ______, and telecommunications
  22. Sales taxes – collected in addition to the state sales tax

3.  Current Tax Issues and Reforms

  1. Most of the federal, state, and local taxes are ______directly from your paycheck and are listed in the ______on your stub.
  2. Tax reform in 1981 - Economic Recovery Tax Act included the largest tax reductions for individuals and businesses and capped the highest marginal tax at ______percent. It also introduced the ______credit.
  3. Tax reform: 1986, 1993
  4. Alternative minimum tax –
  1. Ten years of tax cuts began to have an effect. Government spending was growing, taxes were reduced, and borrowing increased.
  2. Tax reform in 1997 – Taxpayer Relief Act – closed some loopholes for the wealthy, reduced tax on capital gains; most complicated
  3. The federal government took in more taxes than it spent in 2001. The surplus led to the lowering of the top four tax brackets.
  4. The child tax credit was increased in 2003 to $1000.
  5. Alternative tax approaches
  6. Flat Taxes – proportional tax on ______after a threshold has been reached; offers the taxpayer ______; would close many tax ______if it did away with ______and ______; reduces the need for ______jobs; no one knows the rate that is needed to replace the current tax system
  7. Value-added taxes – taxes placed on the value that ______add at each stage of ______; controversial; used in Europe; hard to avoid since it is built into the ______, tax incidence is widespread; easy to ______; claimed to encourage people to ______more; tends to be virtually invisible (price increase may be attributed to shortages rather than increase in taxes)