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Chapter 18

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Queen's University
ECON 110
Ian James Cromb

Chapter 18 – The Economic of Environmental Protection  Progressive tax: a tax that takes a larger percentage of income at high levels of income.  Proportional tax: a tax that takes a constant percentage of income at all levels of income.  Regressive tax: a tax that takes a lower percentage of income at high levels of income.  Average tax rate: the ratio of total taxes paid to total income earned.  Marginal tax rate: the fraction of an additional dollar of income that is paid in taxes.  Tax bracket: a range of taxable income for which there is a constant marginal tax rate.  Since a progressive tax takes a larger share of income from high-income people than it does from low income people, progressive taxes reduce the inequality of income. A regressive tax increases the inequality of income.  Although the main purpose of the tax system is to raise revenue, tax policy is potentially a powerful device for income redistribution because the progressivity of different kinds of taxes varies greatly.  The most important taxes in Canada are the personal income tax, the corporate income tax, excise and sales taxes (including the nationwide GST), and property taxes.  The progressivity of a tax is determined by how the average tax rate (taxes paid divided by income) changes as income changes. If the average tax rate rises as income rises, the tax is progressive. If the average tax rate falls as income rises the tax is regressive.  Vertical Equity concerns equity across income groups; it focuses on comparisons between individuals or families with different levels of income. This concept is central to discussions of the progressivity of taxation.  Horizontal Equity concern equity within a given income group; it is concern with establishing just who should be considered equal to whom in terms of ability to pay taxes.  Ability to pay is the principle that taxes should vary according to an individual's level of wealth or income.  Benefits received is a concept of tax fairness that states that people should pay taxes in proportion to the benefits they receive from government goods and services  Direct burden: for an individual tax, the amount of money that is collected from taxpayers  Excess burden: the allocative inefficiency or deadweight loss generated by a tax  Excise taxes and income taxes impose costs in two ways. By taking resources from market participants (consumers, firms, workers), they impose a direct burden. By reducing the volume of specific market transactions, they also generate a deadweight loss—this is the excess burden of the tax.  An efficient tax system is one that minimizes the amount of excess burden (deadweight loss) for any given amount of tax revenue generated.  Evaluating the tax system involved evaluating the efficiency and progressivity of the entire system, rather than of individual taxes within the system. For a given amount of revue to be raised, efficiency and progressivity can be altered by changing the mix of the various taxes used.  The total Canadian tax structure is roughly
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