Chapter 9 – Source of Government Revenue

9-1 The Economics of Taxation

CA Standards:

12.3 Students analyze the influence of the federal government on the American economy.

Objectives:

• Explain the economic impact of taxes.

• List three criteria for effective taxes.

• Understand the primary principles of taxation.

• Understand how taxes are classified.

Read pages 216 - 220Economics: Principles & PracticesPrepare for Open notebook Quiz

Write definition of key terms found on page 216 Use glossary in textbook

Key Terms page 210

Sin Tax

Tax Loophole

Benefit Principle of Taxation

Ability-to-Pay Principle of Taxation

Proportional Tax

Average Tax Rate

Progressive Tax

Marginal Tax Rate

Regressive Tax

An enormous amount of money is required to run the federal, state, and local governments of the United States. To keep up with the tremendous demand for government services, total revenue collections by all levels of government have grown dramatically over the years. The single most important way governments raise revenue is through taxes. These revenues have an enormous impact on the economy.

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

- Impact on resource allocation

- Impact on people’s behavior

- Impact on productivity and growth

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

- Equity

- Simplicity

- Efficiency

3. What are the two principles of taxation?

- the benefit principle

- the ability to pay principle

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

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

- People should pay taxes in proportion to the amount of services or benefits they receive

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

- Many government services provide the greatest benefit for those who can least afford to pay for them.

- Benefits are hard to measure.

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

- Proportional

- Progressive

- Regressive

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

- the way in which the tax burden changes as income changes.

Be prepared for open notebook quiz