The document discusses the economic impacts and principles of taxation. It outlines three basic economic impacts of taxes: resource allocation, behavior adjustment, and impact on productivity and growth. It also discusses two principles of taxation: the benefit principle and ability-to-pay principle. Finally, it describes the three main types of taxes in the US: proportional, progressive, and regressive taxes.

1. 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. 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

3. 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

4. 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

5. 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

6. 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

7. 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)

8. 1. What are the four major sources of state government
revenue?
a. Intergovernmental Revenues – funds from the federal
government - used to finance highways, education, welfare,
and hospitals
b. Sales taxes – regressive tax on consumer purchases, largest
source of state tax revenue
c. Employee Retirement Contributions
d. Individual Income Taxes

9. 2. What are four other sources of state government revenue?
a. Interest earnings on surplus funds
b. Tuition & other fees from colleges and other educational
institutions
c. Corporate Income Taxes
d. Hospital fees

10. 3. What are six sources of local government revenue?
a. Intergovernmental Revenues – funds from the state
government
b. Property taxes – tax on real, tangible, and intangible
property – largest source of local tax revenue
real property: real estate, buildings, permanently connected
fixtures (e.g. elevators, air conditioners)
c. State-owned Utilities & Liquor store income
d. Sales Taxes
e. Hospital fees
f. Personal Income taxes

11. 4. What are four types of taxes that may be reflected on a
payroll withholding statement?
a. Federal Income Tax
b. State Income Tax
c. Medicare
d. Social Security Tax
FICA