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Unformatted text preview: Chapter 12 The Design of the Tax System SOLUTIONS TO TEXT PROBLEMS: Quick Quizzes 1. The two most important sources of tax revenue for the federal government are the individual income tax and payroll taxes. The two most important sources of tax revenue for state and local governments are sales taxes and property taxes. 2. The efficiency of a tax system refers to how low the costs are of collecting a given amount of tax revenue. One tax system is more efficient than another if the same amount of tax revenue can be raised at a lower cost. A tax system can be inefficient because of the deadweight losses that result when taxes distort the decisions that people make and because of the administrative burdens that taxpayers bear as they comply with the tax laws. An efficient tax system has low deadweight losses and small administrative burdens. 3. The benefits principle is the idea that people should pay taxes based on the benefits they receive from government services. It tries to make public goods similar to private goods by making those who benefit more from the public good pay more for it. The ability-to-pay principle is the idea that taxes should be levied on a person according to how well that person can shoulder the burden. It tries to equalize the sacrifice each person makes toward paying taxes. Vertical equity is the idea that taxpayers with greater ability to pay taxes should pay larger amounts. Horizontal equity is the idea that taxpayers with similar abilities to pay taxes should pay the same amount. Studying tax incidence is important for determining the equity of a tax system because understanding how equitable the tax system is requires understanding the indirect effects of taxes. In many cases, the burden of the tax is borne by people other than those who actually pay 227 THE DESIGN OF THE TAX SYSTEM 12 228 ✦ Chapter 12/The Design of the Tax System the tax. Questions for Review 1. Over the past several decades, government has grown more rapidly than the rest of the economy. The ratio of government revenue to GDP has increased over time. 2. The two most important sources of revenue for the U.S. federal government are individual income taxes (about 44 percent of total revenue) and social insurance taxes (about 36 percent). 3. Corporate profits are taxed first when the corporate income tax is taken out of a corporation's income and again when the profits are used to pay dividends to the corporation's shareholders, which are taxed by the individual income tax....
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This note was uploaded on 06/11/2011 for the course ECON 101 taught by Professor Lemche during the Winter '05 term at UBC.
- Winter '05