Government taxes exist because there is a mutual benefit when tax dollars are distributed to persons needing that supplement from the government. If the person receiving the tax is better off, it is better for society. Without taxation, there would be individuals who did not contribute to the betterment of society, and others that did. Without everyone's contribution, there would not be enough funds.
Vertical equity means 'unequals are treated unequally' This means that people with low incomes are treated differently than those with high incomes. Higher income should mean a higher tax rate, and a lower income should mean a lower tax rate.
A progressive tax occurs when the percentage of tax increases as the amount of income rises.
A proportional tax means that the percentage of tax stays the same, and is merely multiplied by the amount of income.

A regressive tax falls as a percentage of income if income decreases.
Horizontal equity means that 'equals should be treated equally'. If two people have the same net income, they should be charged the same amount of tax.
Supply side subsidy-money given to help produce a good or service, tries to help reduce the internal cost of producing that good. An example would be a scholarship given to medical student. One problem with this is that the rich and poor both pay the same price for the end good, making it go against the principle of vertical equity.
A demand side subsidy generally requires the recipient to pass a test to make sure that they qualify for and need the subsidy. Medicare is an example of this type of subsidy. One problem with this is that all 50 states have different guidelines for the qualifications, meaning that horizontal equity is not possible because of the different rules in different places.


Suppose that the following chart is a normal worker's willingness to work, given the pay they currently receive, W, the amount of hours they will work is H.
Now, if we add a tax, we can see that the amount of money the worker makes has gone down.
The worker used to get a surplus of AWS, because they were being paid more than what they would have willingly worked for. Now, the amount of hours they will work has gone down to H-T, and the amount the worker makes over the amount they would work for has gone down to A,W-T, SW. Also, all the hours they would have worked at the higher rate have been lost. This is called a welfare loss.


Sample Questions
1. Horizontal Equity means:

A. Equals are treated equally
B. Unequals are treated unequally
C. Equals are treated unequally
D. Unequals are treated equally

2. What kind of tax rate would charge a man making 70,000 dollars a tax of 7,000 and a man making 10,000 dollars a tax of 1,000?

A. Proportional tax
B. Regressive tax
C. Progressive Tax
D. Unfair tax

3. A loan or scholarship is a supply side subsidy.
T/F

4. There is loss in willingness to work when wages are decreased.
T/F

5. Which of the following is false?

A. Individuals with 45,000 net income with 9,000 tax and an 80,000 net income with 20,000 tax have the
same proportional tax rate.
B. A progressive tax rate means the rich pay less taxes than the poor.
C. A regressive tax rate increases as income decreases..
D. All are false.

Answers:

1 A Equals are treated equally.
2. A Proportional tax
3. True
4. True
5. D. All are false


Santerre, Rexford E., and Stephen P. Neun. 4th ed. Crawfordsville: Thomson Southwestern, 2007. 254-257.

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