Chapter 16.4, Problem 1R

To determine

To evaluate the significance of benefit received principal, ability to pay principle, proportional tax, progressive tax, regressive tax.

Explanation of Solution

Benefit received principal, Is that the benefits earned rule suggests that those who receive the greatest benefit from the government, either directly or indirectly, will pay the greatest amount of taxes, in theory fair.

Ability to pay principle, Capacity to pay is an economic principle which states that the amount of tax an individual pays should depend on the level of burden that the tax would generate relative to the individual's wealth.

Proportional tax, The key advantage of proportional tax is that taxpayers can measure easily and efficiently the amount of tax they are expected to pay to the Government. This tax is nominal in terms of income and wealth distribution and thus does not suggest any systemic change in the society's socio-economic set-up.

Progressive tax, A progressive tax system reduces the tax burden on those who can afford to pay the least. It puts more money in the hands of low-wage workers, who are likely to spend all that money on consumer commodities and in the process stimulate the economy.

Regressive tax: Regressive tax helps reduce demand for such products as cigarettes and alcohol. It allows people to earn something more like a fee. The amount of tax will be fixed and will not fluctuate on the earned revenue.

Economics Concept Introduction

Introduction: Tax policy plays two main roles in supporting economic growth. It is only through taxation that forced savings can be produced which is so important for accelerating the rate of capital creation in the economy.