Topic: money and financial institutions

Basically, money is what money does. This means that money can be any substance that functions as a Medium of Exchange, a Measure of Value, and a Store of Value.

As a medium of exchange, money is something generally accepted as payment for goods and services

As a measure of value, money expresses worth in terms that most individuals understand.

Money also serves as a store of value. This means goods or services can be converted into money that is easily stored until some future time.

The different forms of money are in use in the United States today. The most familiar are coin and currency. The term coin refers to metallic forms of money. The term currency refers to paper money issued by government.

Banks fulfil two distinct needs in a community. For one they provide a safe place for people to deposit their money. For another, they lend excess funds to individuals and business temporarily in need of cash. In effect, banks act as functional institutions that bring savers and borrowers together.

To gain a clear understanding of the way in which a bank operates, let us examine the bank’s liabilities and assets.

Its liabilities are the debts and obligations to others. Its assets are the properties, possessions, and claims on others. The balance sheet also reflects net worth — the excess of assets over liabilities, which is a measure of the value of a business.

Most bank deposits return to the community in the form of loans. The bank, however, might invest some of the cash in bonds. The bonds would be a good investment for two reasons. One is that they earn the interest and therefore are more attractive than cash. The other is that they have a high degree of liquidity, that is they can be converted into cash in a very short period of time.

In time, the bank would grow and prosper diversifying its assets and liabilities in the process. It might use some of its excess funds to buy state or local bonds. It might loan some funds on a short-term basis to other banks. The bank also might try to attract more depositors by introducing different kinds of accounts. Once the bank attracts more funds, it can make more loans and more profits.

U N I T 16

Topic: taxation

There are three types of taxes in the United States: proportional, progressive and regressive.

A proportional tax is one that imposes the same percentage rate of taxation on everyone, no matter what their income. Even when income goes up, the per cent of total income paid in taxes does not change.

A progressive tax is one that imposes a higher percentage rate of taxation of people with high incomes than on those with low incomes.

A regressive tax is one that imposes a higher percentage rate of taxation on low incomes than on high incomes

Sales Taxes

A sales tax is a general tax levied on consumer purchases of nearly all products. It is added to the final price paid by the consumer.

For the most part, sales taxes are collected by individual merchants at the time of the sale and are turned over weekly or monthly to the proper government agency. The sales tax generally is a very effective means of getting revenue for states and cities.

Property Taxes

A major source of revenue is the property tax — a tax on real property and tangible or intangible personal property. Real property includes land, buildings and anything else permanently attached to them. Tangible property is all tangible items of wealth not permanently attached to land or buildings, such as furniture, automobiles, the stock of goods in retail stores and clothing.

In order to have an effective tax system, government must have criteria or standards.

One such criterion is that a tax yields enough revenue.

A second criterion is clarity. Tax laws should be written so that both the taxpayer and tax-collector can understand them.

A third criterion is ease of administration. A tax should be easy to collect.

A final criterion is fairness. Taxes should be imposed justly. However, this is hard to do because people do not always agree about what is or is not fair when it comes to taxes.

In general taxes are based chiefly on two principles: the Benefit Principle and the Ability-to-Pay Principle.

The Benefit Principle of taxation is based on two ideas. First, those who benefit from government services should be the ones to pay for them. Second, people should pay taxes in proportion to the amount of services or benefits they receive.

The Ability-to-Pay Principle of taxation says that people should be taxed according to their ability to pay, no matter what benefits or services they receive. This principle is based on three things. First it is not possible to measure benefits, derived from government spending. Second, people with higher incomes suffer less discomfort than people with lower incomes even if they pay higher taxes. Finally, the only means most people have of paying taxes is the income they earn. Since the benefits of government services to individuals are hard to measure, the other basis for distributing taxes is income.