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PA 410 Midterm
Terms in this set (25)
What are the three economic functions of government?
Stabilization, Redistribution, and Allocation
What is Stabilization
maintain economic growth, full employment, and price stability through monetary and fiscal policies
Monetary policy: interest rate change, controlled by the federal reserve
Fiscal policy: budget and tax change policy
What is redistribution?
maintain a socially preferred distribution of resources and income
What is allocation?
efficiently allocate resources to provide goods and services that meet the society desire; correct market failures
What function(s) does the federal government fulfill and why?
Stabilization; Responsible because it controls the policies and has a nation-wide impact
Redistribution: Responsible because it controls fiscal policy; cannot escape redistribution
What function(s) does the state government fulfill and why?
Redistribution: Big enough to implement limited programs without worrying about mobility
Allocation: Can only be implemented at the state level (ex: State Universities)
What function(s) does the local government fulfill and why?
Allocation: Primary responsibility; more aware of what citizens want and can allocate resources accordingly
When we analyze taxes, what are the two main economic principles we rely on?
Efficiency: the extent to which taxation changes people's economic behavior
Equity: people at a similar income level should pay a similar amount of tax
Are all taxes efficient?
All taxes (except for head tax) are inefficient because they change behavior and create Deadweight Loss
To minimize inefficiency: levy the tax at a broad base (aka make it as low as possible) to create the right amount of revenue
What types of equity are there?
Horizontal equity: people at a similar income level should pay a similar amount of tax
Vertical equity: people at a similar income level should pay a similar amount of tax, but the taxes decrease as your income is lower
Progressive: As income increases, tax increases
Proportional: As income increases, the
percentage stays the same
Regressive: As income increases, the
percentage goes down
Marginal: As income increases, the rate is
applied to the bracket you fall in
Average (effective tax rate): total tax/ total ,
What is the trade-off between equity and efficiency?
there is an inherent trade-off between efficiency and equity of a tax. The more efficient the tax is, the more inequitable the tax is. Vice versa, the more equitable the tax is, the more inefficient the tax is. The balance between efficiency and equity is not settled academically, but politically
Why is sales tax considered a regressive tax? What measures does the government take to make it less regressive?
Sales tax is regressive because poor people spend a larger percentage of their income on consumption and pay a larger percentage of their income towards sales tax
Policies that make it less regressive include exempting certain items from salves tax (aka food, prescriptions, clothing/footwear)
Ex: Family 1: Make $10k, Spend 30% on food. Sales Tax= $700→ 7% sales tax rate
Family 2: Make $100k, Spend 20% on food, Savings is 10k (10%). Now 90k: $72k Taxable goods, 18k Exempt food. Sales Tax=72k→ 7.2 sales tax rate.
Please describe three different types of intergovernmental grants and name at least one example for each type.
Categorical Matching Open-Ended: Programs where the gov will match a certain ratio of money (Ex: Medicaid)
Categorical Non-Matching Close Ended: Block Grant: feds will set how much money you will recieve (Ex: TANF and K12)
Non-categorical Non-Matching Close Ended: General Revenue Sharing; Mostly Between state and local gov (Ex: )
What is the purpose of grants?
Minimize fiscal disparity
Capture the spillover effect
Stimulate the provision of a particular good or service
What is the difference in the purpose of borrowing between federal vs. state and local governments? What is the main institutional factor that leads to such a difference?
Federal: the federal government debt consists of public (owed to investors) and Nonpublic (owed to other parts of the gov) and does not face a Balance budget requirement (BBR); it can borrow day to day operating spending and long-term capital
State and Local: faces BBR and cannot borrow for everything. BBR only applies to operating budget (day to day operations) and RARELY borrow for capital budget (long-term spending)
What is Medicaid?
A healthcare program for the poor, which is jointly funded by the federal and state governments, regulated by the federal gov, but administered by the state gov.
What is the funding mechanism for Medicaid? What does such a funding mechanism hope to accomplish?
Open-ended grant with state spending on Medicaid match by federal grants
Matching is based on FMAP (rates from 50% to 80% of what the state can pay) -> poorer the state, the higher the FMAP
Intended to help poorer state citizens get the assistance needed despite having lower funds aka EQUITY
Why is property tax considered a regressive tax?
Property tax is considered regressive because the consumption of housing accounts for a larger percentage of income for the poor than for the rich. At the same property tax rate, property tax accounts for a larger percentage of income from the poor than the rich
What measures does the government take to make property tax less regressive?
Homestead exemption: a set amount of assessed value is exempt from the property tax levy. As the set amount accounts for a larger percentage of smaller assessed value, low-income families benefit from a property tax saving of larger percentage than a high-income family
Circuit breaker: property tax cannot exceed a certain percentage of income
What is the main difference between user fees and taxes?
Fees are voluntary payment for a particular service you use and the amount of the fee is also linked to the amount of the service you use. Taxes are mandatory payment for no specific service you use
When is it appropriate to fund government services with user fees and when is it appropriate to fund them with general tax dollars?
Fees are used to pay for a service that one directly benefits from, but not others, meaning that the benefit can be identified and isolated. Taxes are used for a general benefit such as public goods or public safety.
What are the two main types of municipal bonds?
General Obligation Bonds: issued by states, cities, or counties and are not secured by assets. Instead, the bonds are backed by the faith and credit of the issuer
Revenue Bonds: they are backed by gov's taxing power but by revenues from a specific project or source, like highway tolls or lease fees
What are the three major differences between these two types of municipal bonds?
GOB: Requires voter approval, doesn't generate revenue, benefits the public RB: Does require voter approval. generates revenue, benefits the individual
Why should governments together at all three levels spend close to $700 billion dollars on k-12 education in 2017? Why did state governments distribute close to half that amount to local school districts? Discuss the formula on which the distribution of state grants to school districts is based and the policy goal that is to be achieved through such formula
Help equalize the disparity of finances in schools To better the quality of education.
Because if local districts had to pay for all finances there would be wealth disparity that would affect the quality of education.
Grants=(Foundation x #of students)PropertyValue x Property Tax Rate
Formula's goal is to guarantee a minimum amount of money spent per pupil to equalize the standard of education
Earned income tax credit is probably the most popular anti-poverty welfare program in this country. Please briefly discuss how it is structured (you don't have to remember very specific numbers as long as you can discuss in very general terms) and why it is favored by both political parties.
People work and earn credit which incentives people to work more and contribute to the economy which in turn lowers the poverty level
It's favored by both political parties because it gets people working (Republicans) and lowers poverty(Democrats). You have to work for it. It offers an incentive during a phase in because it gives you $.45 for every $1 you make. It works to not offer a disincentive in phase out by offering $.21 per every $1 made. It is also refundable. It has to be.
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