Last bit of Microeconomics (week 10) Review

Taxation has 4 functions: fund governments, encourage/discourage activities, reduce (or

increase) economic inequality, and reduce (or increase) economic instability.

Proportional taxation involves everyone paying the same % of their income toward the tax. In
real life, no taxes are exactly proportional, though some come close.

Progressive taxation involves people with higher incomes paying a larger % of their income as
the tax. Progressive taxation reduces inequality. Examples of progressive taxation include the
federal income tax, the state income tax (barely), the estate tax, and corporate taxes (which
effectively are taxes on shareholders)

Regressive taxation involves people with lower incomes paying larger % of their income as the
tax. Regressive taxation increases inequality. Examples of regressive taxation include the social
security tax, property tax (barely), sales tax( barely), and most fees and fines.

Average tax rate is calculated by dividing the total tax paid by total income. Marginal tax rate
reflects what % of your last dollar earned is paid as tax. Middle-class people have the highest
marginal tax rates when you look only at direct taxation, though poor people have by far the
highest when you include means-tested benefits (such as food stamps and subsidized health
insurance) which are lost as income goes up.

Also, we took a look at inequality and how it changed in the past century. Be familiar with the
.pdfs .