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October 17, 2018 

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ABILITY-TO-PAY PRINCIPLE: A principle of taxation in which taxes are based on the income or resource-ownership ability of people to pay the tax. The income tax collected by our friends at the Internal Revenue Service is one of the most common taxes that seeks to abide by the ability-to-pay principle. In theory, the income tax system is set up such that people with greater incomes pay more taxes. Proportional and progressive taxes follow this ability-to-pay principle, while regressive taxes, such as sales taxes and Social Security taxes, don't.

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Lesson 17: Money | Unit 3: Monetary Aggregates Page: 16 of 25

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  • The concept and definition of M1, which is the sum of currency and coins held by the non-bank public, and checkable deposits.
  • That credit cards are not part of M1, they are not money.
  • That M2 is a broader measure of money that includes M1 plus what we can call near money, that is, temporary savings, a pool of funds that can be accessed quickly and easily.
  • That near monies are savings and that there are several different types of savings: standard savings accounts, certificates of deposit (CDs), money market funds, overnight Eurodollars and overnight repurchase agreements.
  • M3 is equal to M2 plus other near monies which include larger denomination certificates of deposit and longer-term repurchase agreements.
  • Liquid assets L, are the economy's total financial assets that can be converted to M1.

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TAX EFFECTS

The primary reason that governments collect taxes from members of society is to finance government operations and provide public goods. However, taxes also create disincentives to engage in the taxed activity, which causes a change in the allocation of resources. This two consequences of taxes are summarized in two essential tax effects -- the revenue effect and the allocation effect. While all taxes have both, the key to effective government is minimize the allocation effect if the goal is to generate revenue and to minimize the revenue effect if the goal is to change the allocation of resources.

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