A Guide to Basic Financial Concepts

Regressive Tax

A regressive tax is a tax that takes a larger percentage of income from low-income earners than from high-income earners. It is the opposite of a progressive tax, which takes a larger percentage from high-income earners. A regressive tax is applied uniformly to all situations, regardless of who is paying.

Regressive Tax vs. Progressive Tax

A progressive tax is a tax whose rate increases as the payer's income increases. The higher the income, the higher the proportion of their income is taxable. A regressive tax is the opposite. Its rate increases as the payer's income decreases. The progressive tax affects high-income earners, while the regressive tax affects the low-income class.

Zero-Based Budget

A zero-based budget is a method of budgeting in which all expenses must be justified for each new period. The budget starts at a zero base, and every function within the organization is being analyzed for its needs and costs. Therefore, budgets are built based on what is needed for the upcoming period, regardless of the size of the budget.

Outcome Budgeting

Outcome-focused budgeting is the practice of linking the allocation of resources to the production of outcomes. The objective is to allocate government's resources to those service providers or programs that use them most effectively.

Taxes

Taxes are compulsory contributions to state revenue. It is mandatory to pay taxes, and they are levied by the government on workers' income and business profits or added to the cost of goods, services, or transactions. Taxes raise money for government services that are later used for the well-being of society.

Carbon Taxes

A carbon tax is a tax based on carbon dioxide and other greenhouse emissions generated from burning fossil fuels. It is used to reduce carbon dioxide emissions. The burden of this type of taxation falls mainly on energy-intensive industries and lower-income households. The money generated from this type of taxation can be used to reduce the budget deficit, invest in clean energy and climate adaptation, reduce corporate taxes, etc.

Fiscal Year

The fiscal year is from October through September of the next year. In February, the president proposes a budget. The budget committee reaches a budget resolution. It is approved by the House & Senate and distributed again throughout committees that figure out the distribution of the money. Then, a conference committee is held where the House & Senate reach a reconciled final version. The president either approves or vetoes it.

What Entities Use a Budget?

Almost every entity uses a budget. For-profit entities are more strict and concerned about the budget. Governments are responsible for assessing how to spend or save the revenue they bring in. Some laws force governments to spend a certain amount of money they have.

Private Entities vs. Nonprofit Entities

Accounting Differences

Private entities are more concerned about staying afloat and making a profit, and the budget is usually much larger and weaker. Nonprofit entities are concerned with maintaining the infrastructure and providing security and welfare to the community.

Central Limit Theorem

The central limit theorem is a statistical theory that states that given a sufficiently large sample size from a population with a finite level of variance, the mean of all samples from the same population will be approximately equal to the mean of the population. Furthermore, all of the samples will follow an approximate normal distribution pattern, with all variances being approximately equal to the variance of the population divided by each sample's size.

Survivorship Bias

Survivorship bias or survival bias is the logical error of concentrating on the people or things that made it past some selection process and overlooking those that did not, typically because of their lack of visibility. This can lead to false conclusions in several different ways. It is a form of selection bias. It occurs when observations are lost or discarded before the analysis is conducted, thereby skewing the remaining sample.

Simple Random Sample

A simple random sample is a drawing from a population in such a way that any individual observation in the population has an equal probability of being included in the sample. An example of a simple random sample would be the names of 25 employees being chosen out of a hat from a company of 250 employees.

Stratified Sampling vs. Cluster Sampling

A cluster sample is created by dividing the population of interest into many similar or identical clusters, such as rural counties or high-income zip codes, and then drawing observations from one or several randomly chosen clusters. Stratified sampling randomly chooses observations from within a set of defined subpopulations, or strata, to ensure that observations from each stratum are represented in the sample in proportion to their share of the overall population.

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