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401(k) plan  A savings plan under which an employee can earmark a portion of his or her salary each year, with no income tax liability incurred on that portion.
Accelerated depreciation  Allowing firms to take depreciation allowances faster than true economic depreciation.
Accessions tax  A tax levied on an individual's total lifetime acquisitions from inheritances and gifts.
Actuarially fair insurance premium  An insurance premium for a given time period set equal to the expected payout for the same time period.
Actuarially fair return  An insurance plan that on average pays out the same amount that it receives in contributions.
Ad valorem tax  A tax computed as a percentage of the purchase value
Additive social welfare function  An equation defining social welfare as the sum of individuals' utilities.
Add-on accounts  Personal accounts that are funded from workers' resources rather than by diverting money from the payroll tax.
Adjusted gross income (AGI)  Total income from all taxable sources less certain expenses incurred in earning that income.
Adverse selection  The phenomenon under which the uninformed side of a deal gets exactly the wrong people trading with it (that is, it gets an adverse selection of the informed parties).
Agenda manipulation  The process of organizing the order in which votes are taken to ensure a favorable outcome.
Aid to Families with Dependent Children (AFDC)  Program of cash transfers from 1935 to 1996. Anyone whose income was below a particular level and met certain other conditions was entitled to a cash benefit indefinitely.
Alternative minimum tax (AMT)  The tax liability calculated by an alternative set of rules designed to force individuals with high levels of preference income to incur at least some tax liability.
Annuity  Insurance plan that charges a premium and then pays a sum of money at some regular interval for as long as the policyholder lives.
Arm's length system  A method of calculating taxes for multinational corporations by treating transactions between domestic and foreign operations as if they were separate enterprises.
Assessed value  The value a jurisdiction assigns to a property for tax purposes.
Assessment ratio  The ratio of a property's assessed value to its market value.
Asymmetric information  A situation in which one party engaged in an economic transaction has better information about the good or service traded than the other party.
Average indexed monthly earnings (AIME)  The top 35 years of wages in covered employment, indexed each year for average wage growth. The AIME is used to compute an individual's Social Security benefit.
Average tax rate  Ratio of taxes paid to income.
Benefit-cost ratio  The ratio of the present value of a stream of benefits to the present value of a stream of costs for a project.
Benefits-received principle  Consumers of a publicly provided service should be the ones who pay for it.
Bequest effect  Theory that people may save more in order to finance a larger bequest to children in order to offset the intergenerational redistribution of income caused by Social Security.
Biased estimate  An estimate that conflates the true causal impact with the impact of outside factors.
Bracket creep  When an increase in an individual's nominal income pushes the individual into a higher tax bracket despite the fact that his or her real income is unchanged. See also tax indexing.
Budget constraint  The representation of the bundles among which a consumer may choose, given his income and the prices he faces.
Budget line  See budget constraint.
Cap-and-trade  A policy of granting permits to pollute, with the number of permits set at the desired pollution level, and allowing polluters to trade the permits.
Capital gain (loss)  An increase (decrease) in the value of an asset.
Capital intensive  An industry in which the ratio of capital to labor inputs is relatively high.
Capitalization  The process by which a stream of tax liabilities becomes incorporated into the price of an asset.
Capitation-based reimbursement  A system in which health care providers receive annual payments for each patient in their care, regardless of services actually used by that patient.
Cartel  An arrangement under which suppliers band together to restrict output and raise price.
Carve-out accounts  Personal accounts that are funded by diverting payroll tax revenues away from the traditional Social Security system.
Cash flow  The difference between revenues and expenditures.
Catastrophic insurance policy  An insurance policy that has a high deductible and generous coverage for high medical costs.
Categorical grants  Grants for which the donor specifies how the funds can be used.
Centralization ratio  The proportion of total direct government expenditures made by the central government.
Certainty equivalent  The value of an uncertain project measured in terms of how much certain income an individual would be willing to give up for the set of uncertain outcomes generated by the project.
Charter schools  Public schools that operate under special state government charters. Within limits established by their charters, these schools can experiment with a variety of approaches to education and have some independence in making spending and hiring decisions.
Circuit breakers  Transfers to individuals based on the excess of residential property tax payments over some specified portion of income.
Clientele effect  Firms structure their financial policies to meet different clienteles' needs. Those with low dividend payments attract shareholders with high marginal tax rates, and vice versa.
Club  A voluntary association of people who band together to finance and share some kind of benefit.
Coase theorem  Provided that transaction costs are negligible, an efficient solution to an externality problem is achieved as long as someone is assigned property rights, independent of who is assigned those rights.
Coinsurance  A percentage of the cost of a medical service that the insured must pay.
Command-and-control regulations  Policies that require a given amount of pollution reduction with limited or no flexibility with respect to how it may be achieved.
Commodity egalitarianism  The idea that some commodities ought to be made available to everybody.
Community rating  The practice of charging uniform insurance premiums for people in different risk categories within a community, thus resulting in low-risk people subsidizing high-risk people.
Compensated demand curve  A demand curve that shows how quantity demanded varies with price, holding utility constant.
Complements  Two goods are complements if an increase in the price of one good leads to decreased consumption of the other good.
Congestion pricing  A tax levied on driving equal to the marginal congestion costs imposed on other drivers.
Consumer surplus  The amount by which consumers' willingness to pay for a commodity exceeds the sum they actually have to pay.
Consumption smoothing  Reducing consumption in high earning years in order to increase consumption in low-earning years.
Consumption-type VAT  Capital investments are subtracted from sales in the computation of the value added.
Contract curve  The locus of all Pareto efficient points.
Control group  The comparison group of individuals who are not subject to the intervention being studied.
Copayment  A fixed amount paid by the insured for a medical service.
Corporation  A state-chartered form of business organization, usually with limited liability for shareholders (owners) and an independent legal status.
Correlation  A measure of the extent to which two events move together.
Cost effective  A policy that achieves a given outcome at the lowest cost possible.
Cost-based reimbursement  A system under which health care providers receive payment for all services required.
Cost-benefit analysis  A set of procedures based on welfare economics for guiding public expenditure decisions.
Cost-effectiveness analysis  Comparing the costs of the various alternatives that attain similar benefits to determine which one is the cheapest.
Counterfactual  The outcome for people in the treatment group had they not been treated.
Cross-sectional data  Data that contain information on entities at a given point in time.
Crowd out  When public provision of a good substitutes for private provision of the good.
Crowding out hypothesis  Government borrowing decreases private investment by raising the market interest rate.
Cycling  When paired majority voting on more than two possibilities goes on indefinitely without a conclusion ever being reached.
Deadweight loss  The pure waste created when the marginal benefit of a commodity differs from its marginal cost.
Debt  The total amount owed at a given point in time; the sum of all past deficits.
Deductible  The fixed amount of expenditures that must be incurred by the insured within a year before the insured is eligible to receive insurance compensation.
Deductions  Certain expenses that may be subtracted from adjusted gross income in the computation of taxable income.
Deficit  The excess of expenditures over revenues during a period of time.
Demand curve  A graph of the demand schedule.
Demand schedule  The relation between the price of a good and the quantity demanded, ceteris paribus.
Dependency ratio  The ratio of Social Security beneficiaries to covered workers.
Diagnosis related groups  Classification system used to determine prospective compensation payments in the Medicare Hospital Insurance program.
Difference-in-difference analysis  An analysis that compares changes over time in an outcome of the treatment group to changes over the same time period in the outcome of the control group.
Differential commodity tax  See excise tax.
Diminishing marginal rate of substitution  The marginal rate of substitution falls as we move down along an indifference curve.
Discount factor  The number by which an amount of future income must be divided to compute its present value. If the interest rate is r and the income is receivable T periods in the future, the discount factor is (1 + r)T.
Discount rate  The rate of interest used to compute present value.
District power equalization (DPE) grant  Grant to local government to raise local revenue to a level that would be achieved if the local property tax base were at a certain hypothetical level.
Double taxation  Taxing corporate income first at the corporate level, and again when it is distributed to shareholders.
Double-dividend effect  Using the proceeds from a Pigouvian tax to reduce inefficient tax rates.
Double-peaked preferences  If, as a voter moves away from his or her most preferred outcome, utility goes down, but then goes back up again.
Earned income tax credit (EITC)  A tax credit for low-income individuals.
Econometrics  The statistical tools for analyzing economic data.
Economic depreciation  The extent to which an asset decreases in value during a period of time.
Economic incidence  The change in the distribution of real income induced by a tax.
Economic profit  The return to owners of a firm above the opportunity costs of all the factors used in production. Also called supranormal or excess profit.
Edgeworth Box  A device used to depict the distribution of goods in a two good–two person world.
Education Savings Account  A tax-preferred savings vehicle. Contributions are not tax deductible, but funds accumulate tax free. Funds may be withdrawn to pay for higher education expenses of a child.
Elasticity of substitution  A measure of the ease with which one factor of production can be substituted for another.
Emissions fee  A tax levied on each unit of pollution.
Endowment point  The consumption bundle that is available if an individual neither borrows nor saves.
Entitlement programs  Programs whose expenditures are determined by the number of people who qualify, rather than pre-set budget allocations.
Equilibrium  A situation that tends to be maintained unless there is an underlying change in the system.
Equivalent variation  A change in income that has the same effect on utility as a change in the price of a commodity.
Excess burden  A loss of welfare above and beyond taxes collected. Also called welfare cost or deadweight loss.
Excise tax  A tax levied on the purchase of a particular commodity.
Exclusionary zoning laws  Statutes that prohibit certain uses of land.
Exemption  When calculating taxable income, an amount per family member that can be subtracted from adjusted gross income.
Expected utility  The average utility over all possible uncertain outcomes, calculated by weighting the utility for each outcome by its probability of occurring.
Expected value  The average value over all possible uncertain outcomes, with each outcome weighted by its probability of occurring.
Expenditure incidence  The impact of government expenditures on the distribution of real income.
Expensing  Deducting the entire value of an asset in the computation of taxable income.
Experience rating  The practice of charging different insurance premiums based on the existing risk of the insurance buyers.
Experimental study  An empirical study in which individuals are randomly assigned to the treatment and control groups.
External debt  The amount a government owes to foreigners.
Externality  A cost or benefit that occurs when the activity of one entity directly affects the welfare of another in a way that is outside the market mechanism.
Federal system  Consists of different levels of government that provide public goods and services and have some scope for making decisions.
Fee for service  See cost-based reimbursement.
Fiscal federalism  The field that examines the functions undertaken by different levels of government and how the different levels of government interact with each other.
Flat income tax  A tax schedule for which the marginal tax rate is constant throughout the entire range of incomes.
Flat-of-the-curve medicine  The notion that at a certain point, the additional health gains of greater spending on health care are relatively limited.
Flypaper effect  A dollar received by the community in the form of a grant to its government results in greater public spending than a dollar increase in community income.
Foundation aid  Grant designed to ensure a minimum level of expenditure.
Free rider  The incentive to let other people pay for a public good while you enjoy the benefits.
Full integration  See partnership method.
Full loss offset  Allowing individuals to deduct from taxable income all losses on capital assets.
Fully funded  A pension system in which an individual's benefits are paid out of deposits that have been made during his or her working life, plus accumulated interest.
Functional distribution of income  The way income is distributed among people when they are classified according to the inputs they supply to the production process (for example, landlords, capitalists, laborers).
Functional finance  Using fiscal policy to keep aggregate demand at the desired level, regardless of the impact on deficits.
General equilibrium analysis  The study of how various markets are interrelated.
General sales tax  A tax levied at the same rate on the purchase of all commodities.
Generational accounting  Method for measuring the consequences of government fiscal policy that takes into account the present value of all taxes and benefits received by members of each generation.
Global system  A system under which an individual is taxed on income whether it is earned in the home country or abroad.
Gross estate  All property owned by the decedent at the time of death.
Haig-Simons (H-S) definition of income  Money value of the net increase in an individual's power to consume during a period.
Health Maintenance Organization  Organization that offers comprehensive health care from an established network of providers, often using capitation-based reimbursement.
Health Savings Accounts (HSAs)  A type of insurance plan in which a person has a catastrophic insurance policy, and the person or the person's employer puts money in an account that can be used to pay for out-of-pocket medical expenses. The contributions to the account are tax deductible.
Hicks-Kaldor criterion  A project should be undertaken if it has a positive net present value, regardless of the distributional consequences.
Horizontal equity  People in equal positions should be treated equally.
Horizontal summation  The process of creating a market demand curve by summing the quantities demanded by each individual at every price.
Hospital insurance  Part A component of Medicare that covers inpatient medical care and is funded through a payroll tax.
Hot spots  Localized concentrations of emissions.
Human capital  The investments that individuals make in education, training, and health care that raise their productive capacity.
Impure public good  A good that is rival and/or excludable to some extent.
Imputed rent  The net monetary value of the services a homeowner receives from a dwelling.
Incentive-based regulations  Policies that provide polluters with financial incentives to reduce pollution.
Income effect  The effect of a price change on the quantity demanded due exclusively to the fact that the consumer's income has changed.
Income splitting  Using the arithmetic average of family income to determine each family member's taxable income, regardless of whose income it is.
Independence of irrelevant alternatives  Society's ranking of two different projects depends only on individuals' rankings of the two projects, not on how individuals rank the two projects relative to other alternatives.
Indifference curve  The locus of consumption bundles that yields the same total utility.
Indifference map  The collection of all indifference curves.
Individual Retirement Account (IRA)  For qualified individuals, a savings account in which the contributions are tax deductible and the interest accrues tax free, provided the funds are held until retirement. On withdrawal, both contributions and accrued interest are subject to tax.
Inferior good  A good whose demand decreases as income increases.
In-kind transfer  Payments from the government to individuals in the form of commodities or services rather than cash.
Instrumental variables analysis  An analysis that relies on finding some variable that affects entry into the treatment group, but in itself is not correlated with the outcome variable.
Insurance premium  Money paid to an insurance company in exchange for compensation if a specified adverse event occurs.
Insurance trust  A trust that is the legal owner of a life insurance policy. It allows the beneficiaries of the policy to avoid the estate tax.
Internal debt  The amount that a government owes to its own citizens.
Internal rate of return  The discount rate that would make a project's net present value zero.
Intertemporal budget constraint  The set of feasible consumption levels across time.
Inverse elasticity rule  For goods that are unrelated in consumption, efficiency requires that tax rates be inversely proportional to elasticities.
Investment tax credit (ITC)  A reduction in tax liability equal to some portion of the purchase price of an asset.
Invoice method  Each firm is liable for taxes on total sales but can claim the taxes already paid by suppliers as a credit against this liability, provided this tax payment is verified by invoices from suppliers.
Itemized deduction  A specific type of expenditure that can be subtracted from adjusted gross income in the computation of taxable income.
Job lock  The tendency for workers to remain in their job in order to keep their employer-provided health insurance coverage.
Keogh Plan  A savings plan that allows self-employed individuals to exclude some percentage of their net business income from taxation if the money is deposited into a qualified account.
Labor intensive  An industry in which the ratio of capital to labor inputs is relatively low.
Laffer curve  A graph of the tax rate–tax revenue relationship.
Life-cycle model  The theory that individuals' consumption and savings decisions during a given year are based on a planning process that considers lifetime circumstances.
Lindahl prices  The tax share an individual must pay per unit of public good.
Linear income tax schedule  See flat income tax.
Loading fee  The difference between the premium an insurance company charges and the actuarially fair premium level.
Local public good  A public good that benefits only the members of a particular community.
Lock-in effect  The disincentive to change portfolios that arises because an individual incurs a tax on realized capital gains.
Logrolling  The trading of votes to obtain passage of a package of legislative proposals.
Lump sum tax  A tax whose value is independent of the individual's behavior.
Majority voting rule  One more than half of the voters must favor a measure for it to be approved.
Managed care  Any of a variety of health care arrangements in which prices are kept down by supply-side control of services offered and prices charged.
Marginal  Incremental, additional.
Marginal cost  The incremental cost of producing one more unit of output.
Marginal rate of substitution  The rate at which an individual is willing to trade one good for another; it is the absolute value of the slope of an indifference curve.
Marginal rate of transformation  The rate at which the economy can transform one good into another good; it is the absolute value of the slope of the production possibilities frontier.
Marginal tax rate  The proportion of the last dollar of income taxed by the government.
Marriage neutral  Individuals' tax liabilities are independent of their marital status.
Maximin criterion  Social welfare depends on the utility of the individual who has the minimum utility in the society.
Means-tested  A spending program whose benefits flow only to those whose financial resources fall below a certain level.
Median voter  The voter whose preferences lie in the middle of the set of all voters' preferences; half the voters want more of the item selected and half want less.
Median voter theorem  As long as all preferences are single peaked and several other conditions are satisfied, the outcome of majority voting reflects the preferences of the median voter.
Medicaid  Federal- and state-financed health insurance policy for the poor.
Medicare  Federally funded government program that provides health insurance to people aged 65 and over and to the disabled.
Merit good  A commodity that ought to be provided even if people do not demand it.
Monopoly  A market with only one seller of a good.
Moral hazard  When obtaining insurance against an adverse outcome leads to changes in behavior that increase the likelihood of the outcome.
Natural monopoly  A situation in which factors inherent to the production process lead to a single firm supplying the entire industry's output.
Neutral taxation  Taxing each good at the same rate.
Nominal amounts  Amounts of money that are valued according to the price levels that exist in the years that the amounts are received.
Nominal income  Income measured in terms of current prices.
Nominal interest rate  The interest rate observed in the market.
Normal good  A good for which demand increases as income increases and demand decreases as income decreases, other things being the same.
Normal retirement age  Age at which an individual qualifies for full Social Security retirement benefits. Historically, it was 65, but is now gradually being increased to 67.
Observational study  An empirical study that relies on observed data that are not obtained from an experimental setting.
Off-budget deficit  The deficit resulting from off-budget expenditures and revenues.
Off-budget items  Federal expenditures and revenues that are excluded by law from budget totals.
On-budget deficit  The deficit resulting from on-budget expenditures and revenues.
Original position  An imaginary situation in which people have no knowledge of what their economic status in society will be.
Overlapping generations model  A model that takes into account the fact that several different generations coexist simultaneously.
Panel data  Data that contain information on individual entities at different points of time.
Pareto efficient  An allocation of resources such that no person can be made better off without making another person worse off.
Pareto improvement  A reallocation of resources that makes at least one person better off without making anyone else worse off.
Partial equilibrium models  Models that study only one market and ignore possible spillover effects in other markets.
Partial factor tax  Tax levied on an input in only some of its uses.
Partnership method  Each stockholder incurs a tax liability on his or her share of the earnings of a corporation, whether or not the earnings are distributed.
Pay-as-you-go (unfunded)  A pension system in which benefits paid to current retirees come from payments made by current workers.
Peak  A point on the graph of an individual's preferences at which all the neighboring points have lower utility.
Perfect price discrimination  When a producer charges each person the maximum he or she is willing to pay for the good.
Performance standard  A command-and-control regulation that sets an emissions goal for each individual polluter and allows some flexibility in meeting the goal.
Personal accounts  Retirement savings accounts managed by individuals as part of a Social Security privatization plan. They are also known as "individual accounts" or "personal savings accounts."
Personal net worth tax  A tax based on the difference between the market value of all the taxpayer's assets and liabilities.
Pigouvian tax  A tax levied on each unit of an externality- generator's output in an amount equal to the marginal damage at the efficient level of output.
Point-of-service plan  Similar to PPO, yet also assigns each enrollee a primary care provider to serve as a gatekeeper.
Political economy  The field that applies economic principles to the analysis of political decision making.
Poverty line  A fixed level of real income considered enough to provide a minimally adequate standard of living.
Preferred Provider Organization  Organization that provides health care from providers who accept lower fees for access to the network and that give incentives to enrollees to obtain services from within the network of providers.
Present value  The value today of a given amount of money to be paid or received in the future.
Present value criteria  Rules for evaluating projects stating that (1) only projects with positive net present value should be carried out; and (2) of two mutually exclusive projects, the preferred project is the one with the higher net present value.
Price elasticity of demand  The absolute value of the percentage change in quantity demanded divided by the percentage change in price.
Price elasticity of supply  The absolute value of the percentage change in quantity supplied divided by the percentage change in price.
Primary insurance amount (PIA)  The basic Social Security benefit payable to a worker who retires at the normal retirement age or becomes disabled.
Private good  A commodity that is rival and excludable in consumption.
Privatization  The process of turning services that are supplied by the government over to the private sector for provision and/or productions.
Producer surplus  The amount that producers receive in payment in excess of what they would require to supply a given quantity of a commodity.
Production possibilities curve  A graph that shows the maximum quantity of one output that can be produced, given the amount of the other output.
Progressive  A tax system under which an individual's average tax rate increases with income.
Proportional  A tax system under which an individual's average tax rate is the same at each level of income.
Prospective payment system  Payment system, currently used by the Medicare Hospital Insurance program, in which the compensation level is set prior to the time that care is given.
Public economics  See public finance.
Public finance  The field of economics that analyzes government taxation and spending.
Public good  A good that is nonrival and nonexcludable in consumption.
Public sector economics  See public finance.
Publicly provided private goods  Rival and excludable commodities that are provided by governments.
Pure public good  A commodity that is nonrival and nonexcludable in consumption.
Quasi-experimental study  An observational study that relies on circumstances outside of the researcher's control to mimic random assignment.
Ramsey rule  To minimize total excess burden, tax rates should be set so that the tax-induced percentage reduction in the quantity demanded of each commodity is the same.
Rate schedule  The tax liability associated with each level of taxable income.
Real amounts  Amounts of money adjusted for changes in the general price level.
Real income  A measure of income that accounts for changes in the general price level.
Real interest rate  The nominal interest rate corrected for changes in the level of prices by subtracting the expected inflation rate.
Realized capital gain  A capital gain resulting from the sale of an asset.
Regression line  The line that provides the best fit through a scatter of data points.
Regression-discontinuity analysis  An analysis that relies on a strict cut-off criterion for eligibility of the intervention under study in order to approximate an experimental design.
Regressive  A tax system under which an individual's average tax rate decreases with income.
Regulatory budget  An annual statement of the costs imposed on the economy by government regulations. (Currently, there is no such budget.)
Rent-seeking  Using the government to obtain higher than normal returns ("rents").
Repatriate  To return the earnings of a subsidiary to its parent company.
Replacement ratio  The ratio of average Social Security benefits to average covered wages.
Resource-based relative value scale system  Set of values based on time and effort of physician labor used to determine physicians' fees in the supplementary medical insurance component of Medicare.
Retirement effect  To the extent the Social Security in people to retire earlier, people may save more in order to finance a longer retirement.
Retrospective payment system  Payment system, originally used by the Medicare Hospital Insurance program, in which compensation is paid after the care is completed and thus provides little incentive to economize on costs.
Revenue sharing  A grant from the federal government to a state or locality that places no restrictions on the use of funds.
Risk aversion  A preference for paying more than the actuarially fair premium in order to guarantee compensation if an adverse event occurs.
Risk premium  The amount above the actuarially fair premium that a risk-averse person is willing to pay to guarantee compensation if an adverse event occurs.
Risk smoothing  Paying money in order to guarantee a certain level of consumption should an adverse event occur.
Roth IRA  A tax-preferred savings vehicle. Contributions are not tax deductible, but funds accumulate tax free.
Rule definition of horizontal equity  The rules that govern the selection of taxes are more important for judging fairness than the outcomes themselves.
Safety valve price  Within a cap-and-trade system, a price set by government at which polluters can purchase additional permits beyond the cap.
School accountability  A system of monitoring the performance of schools through standardized tests and either issuing "report cards" on the schools' test performances or linking financial incentives to the test outcomes.
School voucher  A voucher given to a family to help pay for tuition at any qualified school. The school redeems the voucher for cash.
Selective sales tax  See excise tax.
Shadow price  The underlying social marginal cost of a good.
Single-peaked preferences  Utility consistently falls as a voter moves away from his or her most preferred outcome.
Size distribution of income  The way that total income is distributed across income classes.
Social insurance programs  Government programs that provide insurance to protect against adverse events.
Social rate of discount  The rate at which society is willing to trade off present consumption for future consumption.
Social Security Trust Fund  A fund in which Social Security surpluses are accumulated for the purpose of paying out benefits in the future.
Social Security wealth  The present value of one's expected Social Security benefits minus expected payroll taxes paid.
Social welfare function  A function reflecting society's views on how the utilities of its members affect the well-being of society as a whole.
Standard deduction  Subtraction of a fixed amount from adjusted gross income that does not require documentation.
Standard error  A statistical measure of how much an estimated regression coefficient might vary from its true value.
State Children's Health Insurance Program (SCHIP)  Program that expanded Medicaid eligibility to some children with family incomes above Medicaid limits.
Statutory incidence  Indicates who is legally responsible for a tax.
Subsidiary  A company owned by one corporation but chartered separately from the parent corporation.
Substitutes  Two goods are substitutes if an increase in the price of one good leads to increased consumption of the other good.
Substitution effect  The tendency of an individual to consume more of one good and less of another because of a decrease in the price of the former relative to the latter.
Supplemental Security Income (SSI)  A welfare program that provides a minimum income guarantee for the aged and disabled.
Supplementary medical insurance  Part B component of Medicare that covers physician services and medical services rendered outside the hospital and is funded by a monthly premium and by general revenues.
Supply schedule  The relation between market price of a good and the quantity that producers are willing to supply, ceteris paribus.
Surplus  The excess of revenues over spending during a period of time.
Sustainable solvency  Expected present values of revenues and expenditures are equal into the indefinite future.
Tax avoidance  Altering behavior in such a way as to reduce your legal tax liability.
Tax credit  A subtraction from tax liability (as opposed to a subtraction from taxable income).
Tax effort  The ratio of tax collections to tax capacity.
Tax evasion  Not paying taxes legally due.
Tax expenditure  A loss of tax revenue because some item is excluded from the tax base.
Tax indexing  Automatically adjusting the tax schedule to compensate for inflation so that an individual's real tax burden is independent of inflation.
Tax-interaction effect  The increase in excess burden in the labor market stemming from the reduction in real wages caused by the Pigouvian tax.
Tax life  The number of years an asset can be depreciated.
Tax Reform Act of 1986 (TRA86)  Tax legislation that eliminated a number of itemized deductions and other tax preferences, and lowered marginal tax rates for many taxpayers.
Tax shifting  The difference between statutory incidence and economic incidence.
Tax wedge  The tax-induced difference between the price paid by consumers and the price received by producers.
Taxable estate  The gross estate less deductions for costs of settling the estate, outstanding debts of the estate, and charitable contributions.
Taxable income  The amount of income subject to tax.
Technology standard  A type of command-and-control regulation that requires firms to use a particular technology to reduce their pollution.
Temporary Assistance for Needy Families (TANF)  Welfare program passed in 1996 under which payments to recipients are available only on a temporary and provisional basis.
Territorial system  A system under which an individual earning income in a foreign country owes taxes only to the host government.
Theory of the second best  In the presence of existing distortions, policies that in isolation would increase efficiency can decrease it, and vice versa.
Third-party payment  Payment for services by someone other than the consumer.
Time endowment  The maximum number of hours an individual can work during a given period.
Time inconsistency of optimal policy  When the government cannot implement an optimal tax policy because the policy is inconsistent with the government's incentives over time, and taxpayers realize this fact.
Time-series data  Data that contain information on an entity at different points in time.
Transfer price  The price that one subsidiary charges another for some input.
Transitional equity  Fairness in changing tax regimes.
Treatment group  The group of individuals who are subject to the intervention being studied.
Underground economy  Those economic activities that are either illegal, or legal but hidden from tax authorities.
Unified budget  The document that includes all the federal government's revenues and expenditures.
Unified transfer tax  A tax in which amounts transferred as gifts and bequests are jointly taken into account.
Unit tax  A tax levied as a fixed amount per unit of commodity purchased.
Unrealized capital gain  A capital gain on an asset not yet sold.
User cost of capital  The opportunity cost to a firm of owning a piece of capital.
User fee  A price paid by users of a government-provided good or service.
Utilitarian social welfare function  An equation stating that social welfare depends on individuals' utilities.
Utility  The amount of satisfaction a person derives from consuming a particular bundle of commodities.
Utility definition of horizontal equity  A method of classifying people of "equal positions" in terms of their utility levels.
Utility possibilities curve  A graph showing the maximum amount of one person's utility given each level of utility attained by the other person.
Value added  The difference between sales and the cost of purchased material inputs.
Value-added tax (VAT)  A percentage tax on value added at each stage of production.
Vertical equity  Distributing tax burdens fairly across people with different abilities to pay.
Vertical summation  The process of creating an aggregate demand curve for a public good by adding the prices each individual is willing to pay for a given quantity of the good.
Voting paradox  With majority voting, community preferences can be inconsistent even though each individual's preferences are consistent.
Wealth substitution effect  The crowding out of private savings due to the existence of Social Security.
Welfare economics  The branch of economic theory concerned with the social desirability of alternative economic states.
Workfare  Able-bodied individuals who qualify for income support receive it only if they agree to participate in a work-related activity.







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