Chapter 12

Chapter 12 The Design of the Tax System
TRUE/FALSE 1. The average American pays a higher percent of his income in taxes today than he would have in the late 18th century. ANS: T D !: 1 "#!: 1$%& NAT: Analytic '(): The role of government T(*: Tax +urden ,S): Applicative $. The -.S. tax +urden is high compared to many #uropean countries. +ut is low compared to many other nations in the world. ANS: ! D !: 1 "#!: 1$%1 NAT: Analytic '(): The role of government T(*: Tax +urden ,S): Applicative /. *oor countries such as ndia and *a0istan usually have low tax +urdens. ANS: T D !: 1 "#!: 1$%1 NAT: Analytic '(): The role of government T(*: Tax +urden ,S): Applicative 1. The -.S. federal government collects a+out one%half of the taxes in our economy. ANS: ! D !: 1 "#!: 1$%1 NAT: Analytic '(): The role of government T(*: Tax +urden ,S): Applicative 2. ndividual income taxes and social insurance taxes generate the highest tax revenue for the federal government. ANS: T D !: $ "#!: 1$%1 NAT: Analytic '(): The role of government T(*: Taxes ,S): Applicative 3. ANS: NAT: ,S): 5. ANS: NAT: ,S): ndividual income taxes generate rougly $24 of the tax revenue for the federal government. ! D !: $ "#!: 1$%1 Analytic '(): The role of government T(*: Taxes Applicative ncome taxes and property taxes generate the highest tax revenue for state and local governments. ! D !: $ "#!: 1$%1 Analytic '(): The role of government T(*: Taxes Applicative
8. Sales taxes generate nearly 2&4 of the tax revenue for state and local governments. ANS: ! D !: $ "#!: 1$%1 NAT: Analytic '(): The role of government T(*: Taxes ,S): Applicative 6. Some states do not have a state income tax. ANS: T D !: 1 "#!: 1$%1 NAT: Analytic '(): The role of government T(*: ,S): Applicative 1&. 7y law. all states must have a state income tax. ANS: ! D !: 1 "#!: 1$%1 NAT: Analytic '(): The role of government T(*: ,S): Applicative
ncome taxes
ncome taxes
1/
11
)hapter 1$ 8The Design of the Tax System
11. Social Security is an income support program. designed primarily to maintain the living standards of the poor. ANS: ! D !: $ "#!: 1$%1 NAT: Analytic '(): The role of government T(*: 9overnment spending ,S): Applicative 1$. A +udget surplus occurs when government receipts fall short of government spending. ANS: ! D !: 1 "#!: 1$%1 NAT: Analytic '(): The study of economics. and definitions of economics T(*: 7udget surpluses ,S): Definitional 1/. A +udget surplus occurs when government receipts exceed government spending. ANS: T D !: 1 "#!: 1$%1 NAT: Analytic '(): The study of economics. and definitions of economics T(*: 7udget surpluses ,S): Definitional 11. A +udget deficit occurs when government receipts exceed government spending. ANS: ! D !: 1 "#!: 1$%1 NAT: Analytic '(): The study of economics. and definitions of economics T(*: 7udget deficits ,S): Definitional 12. A +udget deficit occurs when government receipts fall short of government spending. ANS: T D !: 1 "#!: 1$%1 NAT: Analytic '(): The study of economics. and definitions of economics T(*: 7udget deficits ,S): Definitional 13. As of $&&2. the largest source of receipts for state and local governments was individual income taxes. ANS: ! D !: 1 "#!: 1$%1 NAT: Analytic '(): The role of government T(*: Taxes ,S): nterpretive 15. As of $&&2. the largest source of receipts for state and local governments was corporate income taxes. ANS: ! D !: 1 "#!: 1$%1 NAT: Analytic '(): The role of government T(*: Taxes ,S): nterpretive 18. n the -nited States. all families pay the same proportion of their income in taxes. D !: 1 "#!: 1$%1 '(): The role of government T(*: Taxes : ncome
ANS: ! NAT: Analytic ,S): nterpretive 16.
(ne reason for the pro;ected increase. over the next several decades. in government spending as a percentage of 9D* is the pro;ected increase in the si<e of the elderly population. ANS: T D !: 1 "#!: 1$%1 NAT: Analytic '(): The role of government T(*: 9overnment spending ,S): nterpretive $&. The administrative +urden of any tax system is part of the inefficiency it creates. ANS: T D !: 1 "#!: 1$%$ NAT: Analytic '(): #fficiency and e=uity T(*: Taxes ,S): nterpretive $1. (ne characteristic of an efficient tax system is that it minimi<es the costs associated with revenue collection. ANS: T D !: $ "#!: 1$%$ NAT: Analytic '(): #fficiency and e=uity T(*: Taxes ,S): nterpretive $$. The administrative +urden of complying with tax laws is a cost to the government +ut not to taxpayers. ANS: ! D !: $ "#!: 1$%$ NAT: Analytic '(): #fficiency and e=uity T(*: Taxes ,S): nterpretive
)hapter 1$ 8The Design of the Tax System $/. The e=uity of a tax system concerns whether the tax +urden is distri+uted e=ually among the population. ANS: ! D !: $ "#!: 1$%$ NAT: Analytic '(): #fficiency and e=uity T(*: Taxes ,S): nterpretive $1. An efficient tax system is one that imposes small deadweight losses and small administrative +urdens. ANS: T D !: $ "#!: 1$%$ NAT: Analytic '(): #fficiency and e=uity T(*: Taxes ,S): nterpretive $2. Deadweight losses arise +ecause a tax causes some individuals to change their +ehavior. ANS: T D !: $ "#!: 1$%$ NAT: Analytic '(): #fficiency and e=uity T(*: Deadweight losses ,S): nterpretive $3.
12
f a tax generates a reduction in surplus that is exactly offset +y the tax revenue collected +y the government. the tax does not have a deadweight loss. ANS: T D !: $ "#!: 1$%$ NAT: Analytic '(): #fficiency and e=uity T(*: Deadweight losses ,S): Analytical $5. "esources devoted to complying with the tax laws are a type of deadweight loss. ANS: T D !: $ "#!: 1$%$ NAT: Analytic '(): #fficiency and e=uity T(*: Deadweight losses ,S): Applicative $8. An advantage of a consumption tax is that it does not distort the incentive to save. ANS: T D !: $ "#!: 1$%$ NAT: Analytic '(): #fficiency and e=uity T(*: )onsumption taxes ,S): nterpretive $6. Tax evasion is legal. +ut tax avoidance is illegal. ANS: ! D !: 1 "#!: 1$%$ NAT: Analytic '(): The study of economics. and definitions of economics T(*: ncome taxes ,S): Applicative /&. Tax evasion is illegal. +ut tax avoidance is legal. ANS: T D !: 1 "#!: 1$%$ NAT: Analytic '(): The study of economics. and definitions of economics T(*: ncome taxes ,S): Applicative /1. n practice. the -.S. income tax system is filled with special provisions that alter a family>s tax +ased on its specific circumstances. ANS: T D !: 1 "#!: 1$%$ NAT: Analytic '(): The role of government T(*: ncome taxes ,S): Applicative /$. ANS: NAT: T(*: //. ANS: NAT: T(*: /1. ANS: NAT: T(*: f )hristopher earns ?8&.&&& in taxa+le income and pays ?$&.&&& in taxes. his average tax rate is $& percent. ! D !: $ "#!: 1$%$ Analytic '(): The study of economics. and definitions of economics Average tax rate ,S): Analytical f @ames earns ?8&.&&& in taxa+le income and pays ?$&.&&& in taxes. his average tax rate is $2 percent. T D !: $ "#!: 1$%$ Analytic '(): The study of economics. and definitions of economics Average tax rate ,S): Analytical f ,ary earns ?8&.&&& in taxa+le income and pays ?1&.&&& in taxes. her marginal tax rate must +e 2& percent. ! D !: $ "#!: 1$%$ Analytic '(): The study of economics. and definitions of economics ,arginal tax rate ,S): Analytical
13
/2. ,any people consider lump%sum taxes to +e unfair to low%income taxpayers. ANS: T D !: 1 "#!: 1$%$ NAT: Analytic '(): The role of government T(*: 'ump%sum taxes ,S): nterpretive /3. 'ump%sum taxes are e=uita+le +ut not efficient. ANS: ! D !: $ "#!: NAT: Analytic '(): #fficiency and e=uity ,S): nterpretive /5. A lump%sum tax minimi<es deadweight loss. ANS: T D !: $ "#!: NAT: Analytic '(): #fficiency and e=uity ,S): nterpretive /8. 1$%$ T(*: 'ump%sum taxes
1$%$ T(*: 'ump%sum taxes
Deadweight losses and administrative +urdens are 0ey factors considered when determining the efficiency of the tax system. ANS: T D !: 1 "#!: 1$%$ NAT: Analytic '(): #fficiency and e=uity T(*: #fficiency ,S): nterpretive /6. Ahen the total surplus lost as a result of a tax is less than the amount of tax revenue collected +y the government there is a deadweight loss. ANS: ! D !: $ "#!: 1$%$ NAT: Analytic '(): #fficiency and e=uity T(*: Deadweight losses ,S): nterpretive 1&. The marginal tax rate serves as a measure of the extent to which the tax system discourages people from wor0ing. ANS: T D !: $ "#!: 1$%$ NAT: Analytic '(): The role of government T(*: ,arginal tax rates ,S): nterpretive 11. ,ost economists +elieve that a corporate income tax affects the stoc0holders of a corporation +ut not its employees or customers. ANS: ! D !: $ "#!: 1$%$ NAT: Analytic '(): #fficiency and e=uity T(*: )orporate income tax ,S): nterpretive 1$. Antipoverty programs funded +y taxes on the wealthy are sometimes advocated on the +asis of the +enefits principle. ANS: T D !: 1 "#!: 1$%/ NAT: Analytic '(): #fficiency and e=uity T(*: 7enefits principle ,S): Applicative 1/. According to the +enefits principle. it is fair for people to pay taxes +ased on the +enefits they receive from the government. ANS: T D !: 1 "#!: 1$%/ NAT: Analytic '(): #fficiency and e=uity T(*: 7enefits principle ,S): Definitional 11. According to the +enefits principle. it is fair for people to pay taxes +ased on their a+ility to shoulder the tax +urden. ANS: ! D !: 1 "#!: 1$%/ NAT: Analytic '(): #fficiency and e=uity T(*: 7enefits principle ,S): Definitional
)hapter 1$ 8The Design of the Tax System 12.
15
According to the a+ility%to%pay principle. it is fair for people to pay taxes +ased on the amount of government services that they receive. ANS: ! D !: 1 "#!: 1$%/ NAT: Analytic '(): #fficiency and e=uity T(*: A+ility%to%pay principle ,S): Definitional 13. According to the a+ility%to%pay principle. it is fair for people to pay taxes +ased on their a+ility to handle the financial +urden. ANS: T D !: 1 "#!: 1$%/ NAT: Analytic '(): #fficiency and e=uity T(*: A+ility%to%pay principle ,S): Definitional 15. ANS: NAT: T(*: 18. ANS: NAT: T(*: 16. f all taxpayers pay the same percentage of income in taxes. the tax system is progressive. ! D !: 1 "#!: 1$%/ Analytic '(): The study of economics. and definitions of economics *rogressive taxes ,S): Definitional f all taxpayers pay the same percentage of income in taxes. the tax system is proportional. T D !: 1 "#!: 1$%/ Analytic '(): The study of economics. and definitions of economics *roportional taxes ,S): Definitional
Bertical e=uity refers to a tax system in which individuals with higher incomes pay more in taxes than individuals with lower incomes. ANS: T D !: 1 "#!: 1$%/ NAT: Analytic '(): #fficiency and e=uity T(*: Bertical e=uity ,S): Definitional 2&. Bertical e=uity refers to a tax system in which individuals with similar incomes pay similar taxes. ANS: ! D !: 1 "#!: 1$%/ NAT: Analytic '(): #fficiency and e=uity T(*: Bertical e=uity ,S): Definitional 21. Bertical e=uity is not consistent with a regressive tax structure. ANS: ! D !: $ "#!: 1$%/ NAT: Analytic '(): #fficiency and e=uity ,S): nterpretive 2$.
T(*:
Bertical e=uity
Cori<ontal e=uity refers to a tax system in which individuals with higher incomes pay more in taxes than individuals with lower incomes. ANS: ! D !: 1 "#!: 1$%/ NAT: Analytic '(): #fficiency and e=uity T(*: Cori<ontal e=uity ,S): Definitional 2/. Cori<ontal e=uity refers to a tax system in which individuals with similar incomes pay similar taxes. ANS: T D !: 1 "#!: 1$%/ NAT: Analytic '(): #fficiency and e=uity T(*: Cori<ontal e=uity ,S): Definitional 21. Cori<ontal and vertical e=uity are the two primary measures of efficiency of a tax system. ANS: ! D !: 1 "#!: 1$%/ NAT: Analytic '(): The study of economics. and definitions of economics T(*: #=uity ,S): Definitional 22. A tax system exhi+its vertical equity when taxpayers with similar a+ilities to pay contri+ute the same amount. ANS: ! D !: 1 "#!: 1$%/ NAT: Analytic '(): #fficiency and e=uity T(*: Tax e=uity ,S): Definitional
18
23.
To fully understand the progressivity of government policies. one should only loo0 at the proportion of total income that individuals pay in taxes each year. ANS: ! D !: 1 "#!: 1$%/ NAT: Analytic '(): #fficiency and e=uity T(*: Tax e=uity ,S): Definitional 25. n a regressive tax system. it is impossi+le for individuals with higher incomes to pay more in taxes than individuals with lower incomes. ANS: ! D !: 1 "#!: 1$%/ NAT: Analytic '(): #fficiency and e=uity T(*: Tax e=uity ,S): Definitional 28. ANS: NAT: ,S): 1. f the rich pay more in taxes than the poor. the tax system must +e progressive. ! D !: 1 "#!: 1$%/ Analytic '(): #fficiency and e=uity T(*: Tax e=uity Definitional
SHORT A S!ER 'ist the three most important expenditure programs of the federal government. Cow do they differ from the three most important expenditure programs of state and local governmentsD #xplain why it ma0es more sense for the federal government to purchase Enational defenseE rather than state governments.
ANS: The three most important expenditure programs of the federal government are Social Security. national defense. and ,edicare. The three most important expenditure programs of state and local government are education. pu+lic welfare. and highways. t ma0es sense for the federal government to purchase national defense +ecause national defense is a pu+lic goodF as such. the federal government can minimi<e the free%rider pro+lem among states. D !: $ ,S): nterpretive $. "#!: 1$%1 T(*: 9overnment spending
A recent increase in federal gasoline taxes was estimated to cause a ?12& million reduction in the total surplus Gconsumer plus producer surplusH in the gasoline mar0et. f tax revenues increased +y ?1&& million. what is the deadweight loss associated with the taxD As a result of the tax. 1&.&&& people sold their cars and started riding their +icycles to wor0. Cow much of the +urden of the deadweight loss is incurred +y the +icycle ridersD
ANS: The direct deadweight loss is ?2& million. t is impossi+le to determine how much of the loss is +orne +y +icycle riders without more information. !or example. some of the deadweight loss may +e attri+uta+le to wal0ers or people who switched to pu+lic transportation. D !: $ ,S): Analytical /. "#!: 1$%$ T(*: Deadweight losses
-se Ta+le A to complete Ta+le 7.
TA7'# A (n Taxa+le ncome -p to ?$5.&2& !rom ?$5.&21 to ?32.22& !rom ?32.221 to ?1/3.52& !rom ?1/3.521 to ?$65./2& (ver ?$65./2&
The Tax "ate s 12.&4 $5.24 /&.24 /2.24 /6.14
TA7'# 7 Taxpayer @ohn Todd 9len @a0e
ncome ?2$.5&& ?1/$.2&& ?$/5.&&& ?/12.$2&
Tax Amount
Average Tax "ate
)hapter 1$ 8The Design of the Tax System ANS: Taxpayer @ohn Todd 9len @a0e D !: / ,S): Analytical ncome ?2$.5&& ?1/$.2&& ?$/5.&&& ?/12.$2& "#!: 1$%$ Tax Amount ?11.111.$2 ?/2.&31.52 ?51.616.52 ?1&&./5$.6& T(*: Taxes Average Tax "ate $14 $34 /&4 /$4
16
Se"## $ The Design of the Tax System

%ULT&'LE CHO&CE 1. !rom the time of 7en;amin !ran0lin to the present. the percentage of the average AmericanIs income that goes to pay taxes a. has decreased from a+out $& percent to a+out 1& percent. +. has remained constant at a+out 1& percent. c. has risen from less than $ percent to a+out 11.1 percent. d. has risen from less than 2 percent to a+out //./ percent. D !: 1 "#!: 1$%& '(): The role of government T(*: Taxes
ANS: D NAT: Analytic ,S): Definitional $.
Today the typical American pays approximately what percent of income in taxes. including all federal. state. and local taxesD a. 2 percent +. 18 percent c. // percent d. 2& percent D !: 1 "#!: 1$%& '(): The role of government T(*: Taxes
ANS: ) NAT: Analytic ,S): Applicative /.
Ahich of the following statements is correctD a. #=uity is more important than efficiency as a goal of the tax system. +. #fficiency is more important than e=uity as a goal of the tax system. c. 7oth e=uity and efficiency are important goals of the tax system. d. Neither e=uity nor efficiency is an important goal of the tax system. D !: 1 "#!: '(): #fficiency and e=uity 1$%& T(*: Taxes
ANS: ) NAT: Analytic ,S): nterpretive 1.
Aho o+served that Ein this world nothing is certain +ut death and taxesED a. ,ar0 Twain +. *.T. 7arnum c. 7en !ran0lin d. "ichard Nixon D !: 1 "#!: 1$%& '(): The study of economics. and definitions of economics ,S): Applicative
ANS: ) NAT: Analytic T(*: Taxes 2.
n 1586. the average American paid approximately what percent of income in taxesD a. 24 +. 124 c. //4 d. 2&4
$&
)hapter 1$ 8The Design of the Tax System D !: 1 "#!: 1$%& '(): The role of government T(*: Tax +urden
ANS: A NAT: Analytic ,S): Applicative
Se"#1 $ The Design of the Tax System $ A Finan"ia( O)er)ie* of the US +o)ernment
%ULT&'LE CHO&CE 1. n $&&5. which category represented the largest source of receipts for the -.S. federal governmentD a. ,edicare +. Social Security c. )orporate income taxes d. ndividual income taxes D !: $ "#!: 1$%1 '(): The role of government T(*: Taxes
ANS: D NAT: Analytic ,S): nterpretive $.
n $&&5. approximately what percentage of federal government receipts came from individual income taxesD a. 124 +. /&4 c. 124 d. 3&4 D !: $ "#!: 1$%1 '(): The role of government T(*: Taxes
ANS: ) NAT: Analytic ,S): nterpretive /.
n $&&5. which category represented the largest category of spending for the -.S. federal governmentD a. ,edicare +. Social Security c. National defense d. Net interest D !: $ "#!: 1$%1 '(): The role of government T(*: 9overnment spending
ANS: 7 NAT: Analytic ,S): nterpretive 1.
n $&&5. approximately how much of federal government spending went to Social SecurityD a. 1&4 +. $&4 c. /&4 d. 1&4 D !: $ "#!: 1$%1 '(): The role of government T(*: 9overnment spending
Ahich of the following is not an important reason for the pro;ected increase in government spending as a percentage of 9D* over the next several decadesD a. The increase in life expectancy resulting from advances in healthcare +. A reduction in the average num+er of children per family. c. The increase in the num+er of ;o+s lost each year to foreign countries as a result of outsourcing d. The increase in the cost of healthcare D !: $ "#!: 1$%1 '(): The role of government T(*: 9overnment spending
The -.S. federal government collects a+out a. one%third of the taxes in our economy. +. one%half of the taxes in our economy. c. two%thirds of the taxes in our economy. d. three%fourths of the taxes in our economy.
)hapter 1$ 8The Design of the Tax System ANS: ) NAT: Analytic ,S): Definitional 5. D !: 1 "#!: 1$%1 '(): The role of government T(*: Taxes
$1
(f the following countries. which countryIs government collects the largest amount of tax revenue as a percentage of that countryIs total incomeD a. !rance +. -nited States c. )anada d. Sweden D !: 1 "#!: 1$%1 '(): The role of government T(*: Taxes : ncome
ANS: D NAT: Analytic ,S): Definitional 8.
The two taxes that together provide the -.S. federal government with approximately 8& percent of its revenue are a. individual income taxes and property taxes. +. individual income taxes and corporate income taxes. c. individual income taxes and payroll taxes. d. sales taxes and payroll taxes.
ANS: ) D !: $ "#!: 1$%1 NAT: Analytic '(): The role of government T(*: ndividual income taxes : *ayroll taxes ,S): 6.
Definitional
The revenue that the federal government collects from payroll taxes is earmar0ed to pay for a. National defense and income security GwelfareH programs +. National defense and ,edicare c. Social Security and pu+lic schools d. Social Security and ,edicare D !: 1 "#!: 1$%1 '(): The role of government T(*: *ayroll taxes
ANS: D NAT: Analytic ,S): Definitional 1&.
The federal taxes owed +y a taxpayer depend a. only upon the marginal tax rate on the taxpayerIs first ?$2.&&& of income. +. only upon the marginal tax rate on the taxpayerIs last ?1&.&&& of income. c. upon all the marginal tax rates up to the taxpayerIs overall level of income. d. upon all the marginal tax rates. including those for income levels that exceed the taxpayerIs overall level of income. D !: $ "#!: 1$%1 '(): The role of government T(*: ,arginal tax rates
Taxes on specific goods such as gasoline and alcoholic +everages are called a. excise taxes. +. payroll taxes. c. sales taxes. d. social insurance taxes. D !: 1 "#!: 1$%1 '(): The study of economics. and definitions of economics ,S): Definitional
ANS: A NAT: Analytic T(*: #xcise taxes 1$.
The concept of a Jwelfare programK is most closely associated with which particular federal government programD a. Spending on medical research +. Temporary Assistance for Needy !amilies GTAN!H c. ,edicare d. Social Security
$$
)hapter 1$ 8The Design of the Tax System D !: $ "#!: 1$%1 '(): The role of government T(*: Aelfare
ANS: 7 NAT: Analytic ,S): nterpretive 1/.
According to long%run pro;ections. under current law. a. federal government spending as a percentage of 9D* will rise gradually +ut su+stantially in the next several decades. +. federal taxes as a percentage of 9D* will rise gradually +ut su+stantially in the next several decades. c. the federal governmentIs +udget deficit will gradually +e eliminated in the next several decades. d. All of the a+ove are correct.
ANS: A D !: $ "#!: 1$%1 NAT: Analytic '(): The role of government T(*: 9overnment spending : Taxes : 7udget deficits ,S): 11.
nterpretive
The two types of taxes that are most important to state and local governments as sources of revenue are a. individual income taxes and corporate income taxes. +. sales taxes and individual income taxes. c. sales taxes and property taxes. d. social insurance taxes and property taxes. D !: $ "#!: 1$%1 '(): The role of government T(*: Sales taxes : *roperty taxes
ANS: ) NAT: Analytic ,S): Definitional 12.
7y far. the largest single expenditure item for state and local governments is for a. highways. +. police and fire protection. c. transfer payments to poor people. d. education. D !: 1 "#!: 1$%1 '(): The role of government T(*: State government
The largest source of income for the federal government is a. individual income taxes. +. corporate taxes. c. tariffs. d. JsinK taxes on alcohol and cigarettes. D !: 1 "#!: 1$%1 '(): The role of government T(*: Taxes
ANS: A NAT: Analytic ,S): Applicative 15.
The largest source of revenue for the federal government is the a. individual income tax. +. property tax. c. sales tax. d. corporate income tax. D !: 1 "#!: 1$%1 '(): The role of government T(*: Taxes
The -.S. federal government collects approximately what percentage of the taxes in the economyD a. 1&4 +. 1&4 c. 2&4 d. 354 D !: 1 "#!: 1$%1 '(): The role of government T(*: Taxes
ANS: D NAT: Analytic ,S): Applicative
)hapter 1$ 8The Design of the Tax System 16. n $&&5. the average American paid approximately how much to the federal government in taxesD a. ?1.6&& +. ?1.2&& c. ?3.1&& d. ?8.2&& D !: 1 "#!: 1$%1 '(): The role of government T(*: Taxes
$/
ANS: D NAT: Analytic ,S): Applicative $&.
Approximately what percentage of the -.S. federal government>s receipts come from individual income taxesD a. 84 +. 124 c. 124 d. 354 D !: 1 "#!: 1$%1 '(): The role of government T(*: Taxes
ANS: ) NAT: Analytic ,S): Applicative $1.
A person>s tax lia+ility refers to a. the percentage of income that a person must pay in taxes. +. the amount of tax a person owes to the government. c. the amount of tax the government is re=uired to refund to each person. d. deductions that can +e legally su+tracted from a person>s income each year. D !: 1 "#!: 1$%1 '(): The study of economics. and definitions of economics ,S): Applicative
ANS: 7 NAT: Analytic T(*: Taxes $$.
Ahich of the following is not a cost of taxes to taxpayersD a. The tax payment itself +. Deadweight losses c. Administrative +urdens d. 9oods and services provided +y the government D !: 1 "#!: 1$%1 '(): The role of government T(*: Taxes
ANS: D NAT: Analytic ,S): Applicative $/.
Ahich of the following is true a+out the percent of total income all levels of government in the -.S. ta0e as taxesD a. n 16&$ the government collected a+out 5 percent of total income. n recent years. it collected a+out /& percent of total income. +. n 16&$ the government collected a+out /& percent of total income. n recent years. it collected a+out 5 percent of total income. c. n 16&$ the government collected a+out 5 percent of total income. n recent years. it collected a+out 5 percent of total income. d. n 16&$ the government collected a+out /& percent of total income. n recent years. it collected a+out /& percent of total income. D !: $ "#!: 1$%1 '(): The role of government T(*: Taxes
ANS: A NAT: Analytic ,S): Applicative $1.
Ahich of the following statements is not correctD a. All states have state income taxes. +ut the percentages vary widely. +. Sales taxes and property taxes are important revenue sources for state and local governments. c. ,edicare spending has increased +ecause the percentage of the population that is elderly and the cost of health care have +oth increased. d. A +udget deficit occurs when government spending exceeds government receipts. D !: $ "#!: 1$%1 '(): The role of government T(*: Taxes
$1
$2.
)hapter 1$ 8The Design of the Tax System Ahich of the following statements a+out state income taxes is correctD a. Some states do not tax income at all. +. f states tax income. they must follow federal guidelines for designing the tax structure. c. States are not allowed to have a higher marginal tax rate than the federal marginal tax rate. d. All of the a+ove are correct. D !: 1 "#!: 1$%1 '(): The role of government T(*: Taxes
The -.S. federal government collects taxes in a num+er of ways. "an0 the following sources of revenue from the largest to the smallest. a. )orporate income taxes. individual income taxes. social insurance taxes +. Social insurance taxes. individual income taxes. corporate income taxes c. ndividual income taxes. social insurance taxes. corporate income taxes d. ndividual income taxes. corporate income taxes. social insurance taxes D !: $ "#!: 1$%1 '(): The role of government T(*: Taxes
ANS: ) NAT: Analytic ,S): Applicative $5.
,ost people agree that the tax system a. should +e +oth efficient and e=uita+le. +. cannot raise enough revenue to cover government expenditures. c. would raise more revenue if tax rates were lowered. d. should +e rewritten to re=uire everyone to pay the same percentage of income in taxes. D !: $ "#!: '(): #fficiency and e=uity 1$%1 T(*: Taxes
ANS: A NAT: Analytic ,S): nterpretive $8.
State and local governments a. are funded entirely +y their own tax +ase. +. receive the ma;ority of their tax revenues from corporate income taxes. c. are generally not responsi+le for collecting sales taxes. d. receive some of their funds from the federal government. D !: $ "#!: 1$%1 '(): The role of government T(*: Taxes
ANS: D NAT: Analytic ,S): Applicative $6.
The amount of income tax owed +y a family is a. not simply proportional to its total income. +. unaffected +y deductions. c. total income minus tax credits. d. a constant fraction of income. D !: $ "#!: 1$%1 '(): The role of government T(*: Taxes
ANS: A NAT: Analytic ,S): nterpretive /&.
State and local governments a. use a mix of taxes and fees to generate revenue. +. are re=uired +y federal mandate to levy income taxes. c. are re=uired to tax property at a standard rate set +y the federal government. d. cannot impose state excise taxes on products that are taxed +y the federal government. D !: $ "#!: 1$%1 '(): The role of government T(*: Taxes
ANS: A NAT: Analytic ,S): nterpretive
)hapter 1$ 8The Design of the Tax System /1. State and local governments generate revenue from all of the following sources except a. sales taxes. +. the federal government. c. corporate income taxes. d. customs duties. D !: $ "#!: 1$%1 '(): The role of government T(*: Taxes
$2
ANS: D NAT: Analytic ,S): Applicative /$.
Ahich of the following statements is correctD a. National defense and health care are the two largest spending categories for the federal government. +. Aelfare programs and highways are the two largest spending categories for state and local governments. c. Sales taxes and property taxes are the two most important revenue sources for state and local governments. d. )orporate income taxes are the largest source of revenue for the federal government. D !: / "#!: 1$%1 '(): The role of government T(*: Taxes
ANS: ) NAT: Analytic ,S): Applicative //.
As a nation gets richer. the government typically ta0es a. a constant share of income in taxes. +. a smaller share of income in taxes. c. a larger share of income in taxes. d. There is little evidence of a relationship +etween income and taxes for most countries. D !: 1 "#!: 1$%1 '(): The role of government T(*: Tax +urden
ANS: ) NAT: Analytic ,S): Applicative /1.
Ahich of the following countries has the largest tax +urdenD a. 7ra<il +. 9ermany c. -nited States d. Sweden D !: 1 "#!: 1$%1 '(): The role of government T(*: Tax +urden
ANS: D NAT: Analytic ,S): Applicative /2.
)ompared to most #uropean countries. the -.S. tax +urden is a. a+out the same as most #uropean countries. +. higher than most #uropean countries. c. lower than most #uropean countries. d. higher than all #uropean countries. D !: 1 "#!: 1$%1 '(): The role of government T(*: Tax +urden
Ahen compared to nonpoor countries. poor countries usually have a. very high tax +urdens. +. similar tax +urdens. c. relatively low tax +urdens. d. no taxes +ecause of high poverty levels. D !: $ "#!: 1$%1 '(): The role of government T(*: Tax +urden
ANS: ) NAT: Analytic ,S): Applicative
$3
/5.
)hapter 1$ 8The Design of the Tax System Ahich of the following statements is not correctD a. The -.S. tax +urden is high compared to many poor countries. +. As nations get richer. their governments typically collect a smaller share of income in taxes. c. The -.S. has a higher federal tax +urden than )hina and ndia. d. The -.S. tax +urden is low compared to many #uropean countries. D !: $ "#!: 1$%1 '(): The role of government T(*: Tax +urden
ANS: 7 NAT: Analytic ,S): nterpretive /8.
(ver the past 1&& years. as the -.S. economy>s income has grown. a. tax rates have decreased. while tax revenues have increased. +. tax rates have increased. while tax revenues have decreased. c. +oth tax rates and tax revenues have increased. d. +oth tax rates and tax revenues have decreased. D !: $ "#!: 1$%1 '(): The role of government T(*: Tax +urden
Ahich of the following statements is correctD a. The -.S. federal government collected a higher percentage of income in taxes in the early 16&&s than in the early $&&&s. +. The -.S. federal government collects a higher percentage of income in taxes than many #uropean countries. including !rance and 9ermany. c. The -.S. federal government collects a lower percentage of income in taxes than many developing countries. including ,exico and ndia. d. The -.S. federal government collects a similar percentage of income in taxes as 7ra<il and @apan. D !: $ "#!: 1$%1 '(): The role of government T(*: Tax rates
ANS: D NAT: Analytic ,S): Applicative 1&.
)orporate profits distri+uted as dividends are a. tax free. +. taxed once. c. taxed twice. d. taxed three times. D !: 1 "#!: 1$%1 '(): The role of government T(*: )orporate income tax
ANS: ) NAT: Analytic ,S): Applicative 11.
The government taxes corporate income on the +asis of a. profit. +. the amount the firm receives for the goods or services it sells. c. the num+er of employees. d. All of the a+ove are correct. D !: $ "#!: 1$%1 '(): The role of government T(*: )orporate income tax
ANS: A NAT: Analytic ,S): Definitional 1$.
)orporate profits are a. included in payroll taxes. +. exempt from taxes. c. taxed twice. once as profit and once as dividends. d. taxed to pay for ,edicare. D !: $ "#!: 1$%1 '(): The role of government T(*: )orporate income tax
)hapter 1$ 8The Design of the Tax System 1/. n the -nited States. the payroll tax is also called a a. dividend income tax. +. social insurance tax. c. value added tax. d. capital gains tax. D !: 1 "#!: 1$%1 '(): The study of economics. and definitions of economics ,S): Definitional
$5
ANS: 7 NAT: Analytic T(*: *ayroll taxes 11.
Ahich type of tax is used to finance the Social Security program in the -nited StatesD a. )onsumption tax +. ncome tax c. *ayroll tax d. *roperty tax D !: 1 "#!: 1$%1 '(): The role of government T(*: *ayroll taxes
A payroll tax is a tax on a. the wages that a firm pays its wor0ers. +. earned and unearned income. c. specific goods li0e gasoline and cigarettes. d. corporate profits. D !: 1 "#!: 1$%1 '(): The study of economics. and definitions of economics ,S): Definitional
ANS: A NAT: Analytic T(*: *ayroll taxes 13.
n $&&5. social insurance taxes represented approximately what percentage of total receipts for the federal governmentD a. 124 +. $24 c. /24 d. 124 D !: 1 "#!: 1$%1 '(): The role of government T(*: *ayroll taxes
The payroll tax differs from the individual income tax +ecause the payroll tax is primarily earmar0ed to pay for a. employer%provided pensions. +. Social Security and ,edicare. c. employer%provided health +enefits. d. ;o+ loss and training programs. D !: 1 "#!: 1$%1 '(): The role of government T(*: *ayroll taxes
ANS: 7 NAT: Analytic ,S): Definitional 18.
A tax on the wages that a firm pays its wor0ers is called a. an income tax. +. an excise tax. c. a consumption tax. d. a payroll tax. D !: 1 "#!: 1$%1 '(): The study of economics. and definitions of economics ,S): Definitional
ANS: D NAT: Analytic T(*: *ayroll taxes
$8
16.
)hapter 1$ 8The Design of the Tax System f Ne+ras0a imposed a tax on mil0 of 1& cents per gallon. it would a. +e an excise tax. +. +e an income tax. c. reduce tax revenue. d. cause the supply of mil0 to rise. D !: 1 "#!: 1$%1 '(): The role of government T(*: #xcise taxes
ANS: A NAT: Analytic ,S): Definitional 2&.
Taxes on specific goods such as cigarettes. gasoline. and alcoholic +everages are called a. sales taxes. +. excise taxes. c. social insurance taxes. d. consumption taxes. D !: 1 "#!: 1$%1 '(): The study of economics. and definitions of economics ,S): Definitional
ANS: 7 NAT: Analytic T(*: #xcise taxes 21.
A transfer payment is a government payment a. to companies that provide goods or services to government agencies. +. designed to transfer funds from one government agency to another. c. which transfers revenue from the federal government to state government. d. not made in exchange for a good or service.
ANS: D D !: 1 "#!: 1$%1 NAT: Analytic '(): The study of economics. and definitions of economics T(*: Transfer payments ,S): Definitional 2$. A +udget deficit a. occurs when government receipts are less than spending. +. occurs when government spending is less than receipts. c. occurs when government receipts are e=ual to spending. d. is the accumulation of years of government overspending.
ANS: A D !: 1 "#!: 1$%1 NAT: Analytic '(): The study of economics. and definitions of economics T(*: 7udget deficits ,S): Definitional 2/. The -.S. federal government finances +udget deficits +y a. selling stoc0. much li0e a corporation. +. printing additional currency. c. +orrowing from the pu+lic. d. raising property taxes. D !: 1 "#!: 1$%1 '(): The role of government T(*: 7udget deficits
Suppose that in $&12 the average citi<en>s federal tax +ill is ?1&.$55. and total federal spending is ?6.65/ per person. n $&12. the federal government will have a. a +udget surplus. +. a +udget deficit. c. hori<ontal e=uity. d. vertical e=uity. D !: $ "#!: 1$%1 '(): The role of government T(*: 7udget deficits
ANS: A NAT: Analytic ,S): Analytical
)hapter 1$ 8The Design of the Tax System 22. The government finances the +udget deficit +y a. +orrowing from the pu+lic. +. +orrowing solely from the !ederal "eserve 7an0. c. printing currency in the amount of the +udget deficit. d. re=uiring that +udget surpluses occur every other year to pay off the deficits. D !: $ "#!: 1$%1 '(): The role of government T(*: 7udget deficits
$6
Ahich of the following contri+utes to the pro;ected rise in government spending on Social Security and ,edicare as a percentage of 9D*D a. ncreasing life expectancies +. !alling fertility rates c. ncreasing health care costs d. All of the a+ove are correct.
ANS: D D !: $ "#!: 1$%1 NAT: Analytic '(): The study of economics. and definitions of economics T(*: 7udget deficits ,S): Applicative 25. !rom 162& to today. government spending on Social Security. ,edicare. and ,edicaid as a percentage of 9D* has a. decreased from a+out eight percent to less than one percent. +. increased from less than one percent to a+out eight percent. c. remained constant at less than one percent. d. remained constant at a+out eight percent. D !: $ "#!: 1$%1 '(): The role of government T(*: 7udget deficits
ANS: 7 NAT: Analytic ,S): Applicative 28.
,ost health care economists +elieve that it will +e very difficult to stem the rise in health care costs +ecause a. government intervention is unpopular with most citi<ens. especially the elderly. +. improvements in medical technology have not 0ept pace with technological improvements in other sectors of the economy. c. increased competition will increase rather than reduce costs. d. medical advances are providing +etter ways to extend and improve human lives +ut at high costs.
ANS: D D !: $ "#!: 1$%1 NAT: Analytic '(): The study of economics. and definitions of economics T(*: 7udget deficits ,S): Applicative 26. Ahen government receipts exceed total government spending during a fiscal year. the difference is a. a +udget surplus. +. a +udget deficit. c. the national de+t. d. automatically refunded.
ANS: A D !: 1 "#!: 1$%1 NAT: Analytic '(): The study of economics. and definitions of economics T(*: 7udget surpluses ,S): Definitional 3&. Suppose that in $&12 the average citi<en>s federal tax +ill is ?1$.15$. and total federal spending is ?1/.185 per person. n $&12. the federal government will have a. a +udget surplus. +. a +udget deficit. c. hori<ontal e=uity. d. vertical e=uity.
ANS: 7 D !: $ "#!: 1$%1 NAT: Analytic '(): The study of economics. and definitions of economics T(*: 7udget surpluses ,S): Analytical
/&
31.
)hapter 1$ 8The Design of the Tax System A family>s income tax lia+ility is a. a standard percentage of all income earned. +. determined +y wage income rather than dividend and interest income. c. +ased on total income. d. constant from year to year. D !: 1 "#!: 1$%1 '(): The role of government T(*: ncome taxes
ANS: ) NAT: Analytic ,S): Definitional Table 12-1
On Taxa,(e &n"ome ---p to ?5.&&& !rom ?5.&&& to ?/&.&&& !rom ?/&.&&& to ?53.&&& !rom ?53.&&& to ?138.&&& !rom ?138.&&& to ?/2$.&&& (ver ?/2$.&&& 3$.
The Tax Rate is --1&4 12 $2 $8 // /2
Refer to Ta,(e 12$1. f Andrea has ?82.&&& in taxa+le income. her tax lia+ility is a. ?1$.52&. +. ?18.15&. c. ?$1.$2&. d. ?$/.8&&. D !: / "#!: 1$%1 '(): The role of government T(*: ncome taxes
ANS: 7 NAT: Analytic ,S): Analytical 3/.
Refer to Ta,(e 12$1. f Andrea has ?82.&&& in taxa+le income. her average tax rate is a. 16.54. +. $&./4. c. $1.14. d. $$.34. D !: / "#!: 1$%1 '(): The role of government T(*: ncome taxes
ANS: ) NAT: Analytic ,S): Analytical 31.
Refer to Ta,(e 12$1. f Andrea has ?82.&&& in taxa+le income. her marginal tax rate is a. 124. +. $24. c. $84. d. //4. D !: / "#!: 1$%1 '(): The role of government T(*: ncome taxes
Refer to Ta,(e 12$1. f 7ar+ has ?1$3.&&& in taxa+le income. her tax lia+ility will +e a. ?$5.61&. +. ?$8.$5&. c. ?$6.32&. d. ?/2.$8&. D !: / "#!: 1$%1 '(): The role of government T(*: ncome taxes
ANS: ) NAT: Analytic ,S): Analytical
)hapter 1$ 8The Design of the Tax System 33. Refer to Ta,(e 12$1. f 7ar+ has ?1$3.&&& in taxa+le income. her average tax rate is a. $1.54. +. $$.$4. c. $$.64. d. $/.24. D !: / "#!: 1$%1 '(): The role of government T(*: ncome taxes
/1
ANS: D NAT: Analytic ,S): Analytical 35.
Refer to Ta,(e 12$1. f 7ar+ has ?1$3.&&& in taxa+le income. her marginal tax rate is a. $24. +. $84. c. //4. d. /24. D !: / "#!: 1$%1 '(): The role of government T(*: ncome taxes
ANS: 7 NAT: Analytic ,S): Analytical 38.
Refer to Ta,(e 12$1. f )eleste has ?15.&&& in taxa+le income. her tax lia+ility will +e a. ?3.6&&. +. ?5.3&&. c. ?8.1&&. d. ?11.52&. D !: / "#!: 1$%1 '(): The role of government T(*: ncome taxes
Refer to Ta,(e 12$1. f )eleste has ?15.&&& in taxa+le income. her average tax rate is a. 13.84. +. 15.64. c. 18./4. d. 16.14. D !: / "#!: 1$%1 '(): The role of government T(*: ncome taxes
ANS: 7 NAT: Analytic ,S): Analytical 5&.
Refer to Ta,(e 12$1. f )eleste has ?15.&&& in taxa+le income. her marginal tax rate is a. 1&4. +. 124. c. $24. d. $84. D !: / "#!: 1$%1 '(): The role of government T(*: ncome taxes
A tax levied on the total amount spent in retail stores is called a. a sales tax. +. an excise tax. c. a retail tax. d. an income tax. D !: 1 "#!: 1$%1 '(): The study of economics. and definitions of economics ,S): Applicative
ANS: A NAT: Analytic T(*: Sales taxes 5$.
The tax that generates the most revenue for state and local government is the a. corporate income tax. +. individual income tax. c. property tax. d. sales tax.
/$
)hapter 1$ 8The Design of the Tax System D !: 1 "#!: 1$%1 '(): The role of government T(*: Sales taxes
ANS: D NAT: Analytic ,S): Applicative 5/.
Ahen a state levies a sales tax. the tax a. is paid only +y the state>s residents. +. occasionally excludes items that are deemed to +e necessities. c. is commonly levied on la+or services. d. applies to wholesale purchases +ut not retail purchases. D !: 1 "#!: 1$%1 '(): The role of government T(*: Sales taxes
State and local governments receive the largest portion of their tax revenues from a. sales taxes and income taxes. +. income taxes and property taxes. c. payroll taxes and income taxes. d. property taxes and sales taxes. D !: $ "#!: 1$%1 '(): The role of government T(*: *roperty taxes : Sales taxes
ANS: D NAT: Analytic ,S): Applicative 52.
!or state and local governments. sales taxes and property taxes ma0e up approximately a. 15 percent of all receipts. +. $& percent of all receipts. c. /3 percent of all receipts. d. 25 percent of all receipts. D !: $ "#!: 1$%1 '(): The role of government T(*: Sales taxes : *roperty taxes
All of the following are transfer payments except a. ,edicaid. +. unemployment compensation. c. personal income taxes. d. !ood Stamps. D !: 1 "#!: 1$%1 '(): The role of government T(*: 9overnment spending
Temporary Assistance for Needy !amilies GTAN!H falls into which spending categoryD a. ,edicare +. ncome security c. 9uaranteed social eligi+ility d. Social Security D !: 1 "#!: 1$%1 '(): The role of government T(*: 9overnment spending
The single largest expenditure +y state and local governments is on a. highways. +. police. c. pu+lic welfare. d. education. D !: 1 "#!: 1$%1 '(): The role of government T(*: 9overnment spending
)hapter 1$ 8The Design of the Tax System 56. !or state and local governments. education accounts for approximately what percentage of spendingD a. $2 percent +. /1 percent c. 2& percent d. 52 percent D !: 1 "#!: 1$%1 '(): The role of government T(*: 9overnment spending
//
ANS: 7 NAT: Analytic ,S): Applicative 8&.
As the economy>s income has grown. the government has a. grown at a+out the same pace. +. grown at a faster pace. c. grown at a slower pace. d. shrun0. D !: 1 "#!: 1$%1 '(): The role of government T(*: 9overnment spending
,ost analysts expect the largest federal spending category to continue to grow in importance for many years into the future. Ahat category of spending is thisD a. National defense +. Social Security c. ncome security d. !arm support programs D !: 1 "#!: 1$%1 '(): The role of government T(*: 9overnment spending
ANS: 7 NAT: Analytic ,S): Applicative 8$.
The government>s health plan for the elderly is called a. ,edicaid. +. ,edicare. c. Social Security. d. TAN!.
ANS: 7 D !: 1 "#!: 1$%1 NAT: Analytic '(): The study of economics. and definitions of economics T(*: 9overnment spending ,S): Applicative 8/. ,edicare is the a. government>s health plan for the elderly. +. government>s health plan for the poor. c. another name for Social Security. d. 7oth a and c are correct.
ANS: A D !: 1 "#!: 1$%1 NAT: Analytic '(): The study of economics. and definitions of economics T(*: 9overnment spending ,S): Applicative 81. The federal healthcare spending program that specifically targets the poor is called a. ,edicaid. +. ,edicare. c. National nstitutes of Cealth. d. 7lue )ross87lue Shield.
ANS: A D !: 1 "#!: 1$%1 NAT: Analytic '(): The study of economics. and definitions of economics T(*: 9overnment spending ,S): Applicative
/1
82.
)hapter 1$ 8The Design of the Tax System ,edicaid is a. the government>s health plan for the elderly. +. the government>s health plan for the poor. c. another name for Social Security. d. 7oth a and c are correct.
ANS: 7 D !: 1 "#!: 1$%1 NAT: Analytic '(): The study of economics. and definitions of economics T(*: 9overnment spending ,S): Applicative 83. State and local government spending on pu+lic welfare includes a. trash removal. +. transfer payments to the poor. c. li+raries. d. road repairs. D !: 1 "#!: 1$%1 '(): The role of government T(*: 9overnment spending
*u+lic schools. which educate most students through high school. are paid for primarily +y a. state governments. +. local governments. c. the federal government. d. taxpayers directly. D !: 1 "#!: 1$%1 '(): The role of government T(*: 9overnment spending
The most common explanation for Social Security payments accounting for a larger share of federal government expenditures is a. increases in life expectancy. +. people +ecoming eligi+le for Social Security +enefits at an earlier age. c. increases in +irth rates among teenagers and the poor. d. falling payroll tax receipts. D !: $ "#!: 1$%1 '(): The role of government T(*: 9overnment spending
Ahich of the following is not true a+out government spending on national defenseD a. t is the second%largest spending category for the -.S. federal government. +. t includes salaries of military personnel. c. t fluctuates over time as the political climate changes. d. t is not financed with tax revenue. D !: $ "#!: 1$%1 '(): The role of government T(*: 9overnment spending
ANS: D NAT: Analytic ,S): Applicative 6&.
As government de+t increases. a. )ongress will reduce spending +y an e=ual proportion. +. the government must spend more revenue on interest payments. c. a trade%off with government deficits is inevita+le. d. tax rates must rise to cover the deficit. D !: $ "#!: 1$%1 '(): The role of government T(*: 9overnment spending
ANS: 7 NAT: Analytic ,S): nterpretive
)hapter 1$ 8The Design of the Tax System 61.
/2
The -.S. federal government spends its revenues in a num+er of ways. "an0 the following spending categories from largest to smallest. a. Social Security. national defense. income security. net interest +. Cealth care. national defense. net interest. income security c. Social Security. health care. national defense. ,edicare d. National defense. Social Security. net interest. income security D !: $ "#!: 1$%1 '(): The role of government T(*: 9overnment spending
ANS: A NAT: Analytic ,S): Applicative 6$.
The three largest categories of spending +y the !ederal government in order from first to third would +e a. Social Security. ,edicare. and national defense. +. National defense. net interest. and Social Security. c. Social Security. national defense. and ,edicare. d. ncome security. Social Security. and national defense. D !: $ "#!: 1$%1 '(): The role of government T(*: 9overnment spending
ANS: ) NAT: Analytic ,S): Applicative 6/.
Specific spending programs that are included under the general category of income security include a. health programs. +. ,edicare. c. Social Security. d. !ood Stamps. D !: $ "#!: 1$%1 '(): The role of government T(*: 9overnment spending
'i0e spending on Social Security. the share of federal government spending on ,edicare has risen su+stantially over time. This is most li0ely a result of a. a rising population of poor in the economy. +. the elderly population growing more rapidly than the overall population. c. an immigration policy that promotes an influx of migrant farm wor0ers. d. All of the a+ove are important factors. D !: $ "#!: 1$%1 '(): The role of government T(*: 9overnment spending
,edicare has +een the focus of many proposed reforms over the last several years +ecause a. health care costs have risen more rapidly than the cost of other goods and services produced in the economy. +. nationali<ed health care systems are more efficient than private health care systems. c. cures for many ma;or diseases are li0ely to +e found in the next few years. d. government health care research has found that limiting access to doctors will increase the general health of the population. D !: $ "#!: 1$%1 '(): The role of government T(*: 9overnment spending
ANS: A NAT: Analytic ,S): nterpretive 63.
"an0 the following state and local government expenditure categories from largest to smallest. a. #ducation. pu+lic welfare. highways +. #ducation. highways. pu+lic welfare c. Cighways. education. pu+lic welfare d. *u+lic welfare. education. highways D !: $ "#!: 1$%1 '(): The role of government T(*: 9overnment spending
/3
65.
)hapter 1$ 8The Design of the Tax System The pu+lic welfare spending category for state and local governments includes a. many programs that are initiated +y private foundations. +. contri+utions in support of pu+lic universities. c. some federal programs that are administered +y state and local governments. d. All of the a+ove are correct. D !: $ "#!: 1$%1 '(): The role of government T(*: 9overnment spending
Among the ma;or spending categories for state and local governments. which of the following statements is correctD a. The +iggest single expenditure is education. +. The pu+lic welfare category does not include the costs of administering some federal programs. c. As a general rule. spending on pu+lic schools and pu+lic universities exceeds that spent on all other services com+ined. d. 'ocal services such as li+raries. police. trash removal. fire protection. and par0 maintenance. are a very small share of expenditures overall. D !: $ "#!: 1$%1 '(): The role of government T(*: 9overnment spending
The largest category of federal government spending is growing +ecause a. the -.S. must spend more on national defense due to the war against terror. +. the elderly population is increasing due to rising life expectancies. c. expenditures on space exploration have increased dramatically. d. health care costs are rising faster than any other service in the -.S. D !: / "#!: 1$%1 '(): The role of government T(*: 9overnment spending
Table 12-2 )onsider the tax rates shown in the ta+le +elow. Tax Rate 84 114 $34 /14 /14 /34 &n"ome Range & % 1&.&&& 1&.&&& % /&.&&& /&.&&& % 5&.&&& 5&.&&& % 12&.&&& 12&.&&& % /1&.&&& over /1&.&&&
1&&. Refer to Ta,(e 12$2. f @ohn has taxa+le income of ?5$.&&&. his tax lia+ility is a. ?1/.5$&. +. ?11.3$&. c. ?$$./$&. d. ?$/.15&. ANS: 7 NAT: Analytic ,S): Analytical D !: $ "#!: 1$%1 '(): The role of government T(*: Taxes
1&1. Refer to Ta,(e 12$2. f @ohn has taxa+le income of ?5$.&&&. his average tax rate is a. $&./4. +. $&.64. c. $1.14. d. $$.$4. ANS: A NAT: Analytic ,S): Analytical D !: $ "#!: 1$%1 '(): The role of government T(*: Taxes
)hapter 1$ 8The Design of the Tax System 1&$. Refer to Ta,(e 12$2. f @ohn has taxa+le income of ?5$.&&&. his marginal tax rate is a. 114. +. $34. c. /14. d. /14. ANS: ) NAT: Analytic ,S): Analytical D !: $ "#!: 1$%1 '(): The role of government T(*: Taxes
/5
1&/. Refer to Ta,(e 12$2. f ,ax has taxa+le income of ?$$5.&&&. his tax lia+ility is a. ?25.$$&. +. ?3&.85&. c. ?31.68&. d. ?38.55&. ANS: ) NAT: Analytic ,S): Analytical D !: $ "#!: 1$%1 '(): The role of government T(*: Taxes
1&1. Refer to Ta,(e 12$2. f ,ax has taxa+le income of ?$$5.&&&. his average tax rate is a. 12.54. +. $3.84. c. $5.84. d. $8.34. ANS: D NAT: Analytic ,S): Analytical D !: $ "#!: 1$%1 '(): The role of government T(*: Taxes
1&2. Refer to Ta,(e 12$2. f ,ax has taxa+le income of ?$$5.&&&. his marginal tax rate is a. $34. +. /14. c. /14. d. /34. ANS: ) NAT: Analytic ,S): Analytical D !: $ "#!: 1$%1 '(): The role of government T(*: Taxes
Se"#2 $ The Design of the Tax System $ Taxes an. Effi"ien"y

%ULT&'LE CHO&CE 1. Suppose a country imposes a lump%sum income tax of ?2.&&& on each individual in the country. Ahat is the marginal income tax rate for an individual who earns ?1&.&&& during the yearD a. &4 +. 1&4 c. ,ore than 1&4 d. The marginal tax rate cannot +e determined without 0nowing the entire tax schedule. D !: $ "#!: 1$%$ '(): The role of government T(*: ,arginal tax rates
ANS: A NAT: Analytic ,S): Analytical $.
Suppose a country imposes a lump%sum income tax of ?2.&&& on each individual in the country. Ahat is the average income tax rate for an individual who earns ?1&.&&& during the yearD a. &4 +. 1&4 c. ,ore than 1&4 d. The average tax rate cannot +e determined without 0nowing the entire tax schedule. D !: $ "#!: 1$%$ '(): The role of government T(*: Average tax rates
/8
/.
)hapter 1$ 8The Design of the Tax System )ountry AIs tax system is more efficient than )ountry 7Is tax system if a. )ountry A collects less tax revenue than )ountry 7. and the cost to taxpayers is the same in +oth countries. +. )ountry A collects more tax revenue than )ountry 7. even though the cost to taxpayers is greater in )ountry A than in )ountry 7. c. the same amount of revenue is raised in +oth countries. +ut the cost to taxpayers is smaller in )ountry A than in )ountry 7. d. the same amount of revenue is raised in +oth countries. +ut the taxes are collected in a shorter amount of time in )ountry A than in )ountry 7. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: Taxes : #fficiency
7ecause taxes distort incentives. they typically result in a. deadweight losses. +. reductions in consumer surplus. c. reductions in producer surplus. d. All of the a+ove are correct. D !: $ "#!: 1$%$ '(): The role of government T(*: Taxes : Deadweight losses
ANS: D NAT: Analytic ,S): nterpretive 2.
,any economists +elieve that the -.S. tax system would +e made more efficient if the +asis of taxation were changed so that people paid taxes. more so than they do now. +ased on a. their saving rather than their income. +. their spending rather than their income. c. their income rather than their wealth. d. their wealth rather than their spending.
ANS: 7 D !: $ "#!: 1$%$ NAT: Analytic '(): #fficiency and e=uity T(*: )onsumption taxes : #fficiency ,S): nterpretive 3. ndividual "etirement Accounts and 1&1G0H plans ma0e the current -.S. tax system a. less li0e #uropean tax systems than it otherwise would +e. +. more li0e a payroll tax than it otherwise would +e. c. more li0e an income tax than it otherwise would +e. d. more li0e a consumption tax than it otherwise would +e. D !: $ "#!: 1$%$ '(): The role of government T(*: )onsumption taxes
n addition to tax payments. the two other primary costs that a tax system inevita+ly imposes on taxpayers are a. deadweight losses and administrative +urdens. +. deadweight losses and frustration with the political system. c. administrative +urdens and tax%preparation costs. d. administrative +urdens and the ris0 of punishment for failure to comply with tax laws. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: Taxes : #fficiency
The resources that a taxpayer devotes to complying with the tax laws are a type of a. consumption tax. +. value%added tax. c. deadweight loss. d. producer surplus. D !: 1 "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
ANS: ) NAT: Analytic ,S): nterpretive
)hapter 1$ 8The Design of the Tax System 6. A tax system with little deadweight loss and a small administrative +urden would +e descri+ed as a. e=uita+le. +. communistic. c. capitalistic. d. efficient. D !: 1 "#!: '(): #fficiency and e=uity 1$%$ T(*: Taxes
/6
ANS: D NAT: Analytic ,S): nterpretive 1&.
Ahich of the following is a characteristic of a more efficient tax systemD a. The system minimi<es deadweight loss. +. The system raises the same amount of revenue at a lower cost. c. The system minimi<es administrative +urdens. d. All of the a+ove are correct. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: Taxes
*art of the administrative +urden of a tax is a. the money people pay to the government in taxes. +. reducing the si<e of the mar0et +ecause of the tax. c. the hassle of filling out tax forms that is imposed on taxpayers who comply with the tax. d. the cost of administering programs that use tax revenue. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: Taxes
ANS: ) NAT: Analytic ,S): Applicative 1$.
n designing a tax system. policyma0ers have two o+;ectives that are often conflicting. They are a. maximi<ing revenue and minimi<ing costs to taxpayers. +. efficiency and minimi<ing costs to taxpayers. c. efficiency and e=uity. d. maximi<ing revenue and reducing the national de+t. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: Taxes
ANS: ) NAT: Analytic ,S): nterpretive 1/.
(ne tax system is less efficient than another if it a. places a lower tax +urden on lower%income families than on higher%income families. +. places a higher tax +urden on lower%income families than on higher%income families. c. raises the same amount of revenue at a higher cost to taxpayers. d. raises less revenue at a lower cost to taxpayers. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: Taxes
The deadweight loss of a tax is a. the reduction in economic welfare of taxpayers that exceeds the revenue raised +y the government. +. the improved efficiency created as people reallocate resources according to the tax incentive rather than the true costs and +enefits. c. the loss in tax revenues. d. 7oth a and + are correct. D !: 1 "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
ANS: A NAT: Analytic ,S): Definitional
1&
12.
)hapter 1$ 8The Design of the Tax System Taxes can create deadweight losses +ecause they a. allow the government to fund private goods. +. create administrative +urdens as people comply with tax laws. c. allow the government to fund pu+lic goods. d. 7oth + and c are correct. D !: 1 "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
Taxes create deadweight losses +ecause they a. reduce profits of firms. +. distort incentives. c. cause prices to rise. d. create revenue for the government. D !: 1 "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
An optimal tax is one that minimi<es the a. external +enefit. +. total deadweight loss from the tax. c. income taxes. d. hori<ontal e=uity. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
Deadweight losses occur in mar0ets in which a. firms decide to downsi<e. +. the government imposes a tax. c. profits fall +ecause of low consumer demand. d. e=uili+rium prices fall. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
An efficient tax system is one that imposes small a. deadweight losses and administrative +urdens. +. marginal rates and deadweight losses. c. administrative +urdens and transfers of money. d. marginal rates and transfers of money. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
ANS: A NAT: Analytic ,S): nterpretive $&.
Deadweight losses represent the a. inefficiency that taxes create. +. shift in +enefit from producers to consumers. c. part of consumer and producer surplus that is now revenue to the government. d. loss in profit to producers when =uantity demanded falls as a result of higher prices. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
(ne reason that deadweight losses are so difficult to avoid is that a. taxes affect the decisions that people ma0e. +. income taxes are not paid +y everyone. c. consumption taxes must +e universally applied to all commodities. d. the administrative +urden is hard to calculate.
)hapter 1$ 8The Design of the Tax System ANS: A NAT: Analytic ,S): Applicative $$. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
11
Deadweight losses are associated with a. taxes that distort the incentives that people face. +. taxes that target expenditures on survivor>s +enefits for Social Security. c. taxes that have no efficiency losses. d. lump%sum taxes. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
ANS: A NAT: Analytic ,S): nterpretive $/.
Ahen taxes are imposed on a commodity. a. there is never a deadweight loss. +. some consumers alter their consumption +y not purchasing the taxed commodity. c. tax revenue will rise +y the amount of the tax multiplied +y the +efore%tax level of consumption. d. the taxes do not distort incentives. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
ANS: 7 NAT: Analytic ,S): nterpretive $1.
n the a+sence of taxes. @anet would prefer to purchase a large sport utility vehicle GS-BH. The government has recently decided to place a ?1&.&&& nuisance tax on S-Bs. f @anet decides to purchase a small economy car as a result of the tax. which of the following statements is correctD a. (ther people who choose to purchase S-Bs will incur the cost of the deadweight loss of the tax. +. There are no deadweight losses as long as some people still choose to purchase S-Bs. c. n order to determine the magnitude of the deadweight loss. we must add the revenues from the tax to the loss in @anetIs consumer surplus. d. @anet is worse off. and her loss of welfare is part of the deadweight loss of the tax. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
ANS: D NAT: Analytic ,S): nterpretive $2.
Taxes create deadweight loss when they a. distort +ehavior. +. cause the price of the product to increase. c. don>t raise sufficient government revenue. d. cannot +e computed easily. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
Adam. 7ar+. and )arli each li0e to read novels. The current +estseller costs ?1&. Adam values it at ?12. 7ar+ at ?1/. and )arli at ?11. Suppose that if the government taxes +oo0s at ?$ each. the selling price will rise to ?1$. A conse=uence of the tax is that a. consumer surplus shrin0s +y ?1 and tax revenues increase +y ?3. so there is a deadweight loss of ?$. +. consumer surplus shrin0s +y ?3 and tax revenues increase +y ?3. so there is no deadweight loss. c. consumer surplus shrin0s +y ?2 and tax revenues increase +y ?3. so there is no deadweight loss. d. consumer surplus shrin0s +y ?2 and tax revenues increase +y ?1. so there is a deadweight loss of ?1. D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
ANS: D NAT: Analytic ,S): Analytical
1$
$5.
)hapter 1$ 8The Design of the Tax System ,ar0. Lerry. 9reg. and )arlos each li0e )hicago )u+s +ase+all games. The single%game tic0et price for an infield +ox seat is ?2&. ,ar0 values a tic0et at ?5&. Lerry at ?32. 9reg at ?3&. and )arlos at ?22. Suppose that if the government taxes tic0ets at ?2 each. the selling price will rise to ?22. A conse=uence of the tax is that a. consumer surplus shrin0s +y ?2& and tax revenues increase +y ?$&. so there is a deadweight loss of ?/&. +. consumer surplus shrin0s +y ?/& and tax revenues increase +y ?$&. so there is a deadweight loss of ?1&. c. consumer surplus shrin0s +y ?$& and tax revenues increase +y ?$&. so there is no deadweight loss. d. consumer surplus shrin0s +y ?2& and tax revenues increase +y ?$&. so there is no deadweight loss. D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
ANS: ) NAT: Analytic ,S): Analytical $8.
Stacy places a ?$& value on a +ottle of wine. and Andrea places a ?15 value on it. The e=uili+rium price for a +ottle of wine is ?12. Cow much total consumer surplus do Stacy and Andrea get when each purchases a +ottle of wineD a. ?1 +. ?$ c. ?2 d. ?5 D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
ANS: D NAT: Analytic ,S): Analytical $6.
Stacy places a ?$& value on a +ottle of wine. and Andrea places a ?15 value on it. The e=uili+rium price for a +ottle of wine is ?12. Suppose the government levies a tax of ?/ on each +ottle of wine. and the e=uili+rium price of a +ottle of wine increases to ?18. Cow much tax revenue is collectedD a. ?& +. ?$ c. ?/ d. ?3 D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
ANS: ) NAT: Analytic ,S): Analytical /&.
Stacy places a ?$& value on a +ottle of wine. and Andrea places a ?15 value on it. The e=uili+rium price for a +ottle of wine is ?12. Suppose the government levies a tax of ?/ on each +ottle of wine. and the e=uili+rium price of a +ottle of wine increases to ?18. Ahat is total consumer surplus after the tax is leviedD a. ?& +. ?$ c. ?2 d. ?3 D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
ANS: 7 NAT: Analytic ,S): Analytical /1.
Stacy places a ?$& value on a +ottle of wine. and Andrea places a ?15 value on it. The e=uili+rium price for a +ottle of wine is ?12. Suppose the government levies a tax of ?/ on each +ottle of wine. and the e=uili+rium price of a +ottle of wine increases to ?18. 7ecause total consumer surplus has a. fallen +y more than the tax revenue. the tax has a deadweight loss +. fallen +y less than the tax revenue. the tax has no dead weight loss. c. fallen +y exactly the amount of the tax revenue. the tax has no deadweight loss. d. increased +y less than the tax revenue. the tax has a deadweight loss. D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
)hapter 1$ 8The Design of the Tax System /$.
1/
Stacy places a ?$& value on a +ottle of wine. and Andrea places a ?15 value on it. The e=uili+rium price for a +ottle of wine is ?12. Suppose the government levies a tax of ?1 on each +ottle of wine. and the e=uili+rium price of a +ottle of wine increases to ?13. Cow much tax revenue is collectedD a. ?& +. ?1 c. ?$ d. ?1 D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
ANS: ) NAT: Analytic ,S): Analytical //.
Stacy places a ?$& value on a +ottle of wine. and Andrea places a ?15 value on it. The e=uili+rium price for a +ottle of wine is ?12. Suppose the government levies a tax of ?1 on each +ottle of wine. and the e=uili+rium price of a +ottle of wine increases to ?13. Ahat is total consumer surplus after the tax is leviedD a. ?$ +. ?/ c. ?1 d. ?2 D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
ANS: D NAT: Analytic ,S): Analytical /1.
Stacy places a ?$& value on a +ottle of wine. and Andrea places a ?15 value on it. The e=uili+rium price for a +ottle of wine is ?12. Suppose the government levies a tax of ?1 on each +ottle of wine. and the e=uili+rium price of a +ottle of wine increases to ?13. 7ecause total consumer surplus has a. fallen +y more than the tax revenue. the tax has a deadweight loss. +. fallen +y less than the tax revenue. the tax has no deadweight loss. c. fallen +y exactly the amount of the tax revenue. the tax has no deadweight loss. d. increased +y less than the tax revenue. the tax has a deadweight loss. D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
ANS: ) NAT: Analytic ,S): Analytical /2.
*art of the deadweight loss from taxing la+or earnings is that people a. will wor0 more. +. will +e reluctant to hire accountants to file their tax returns. c. with low tax lia+ilities will universally +e worse off than under some other tax policy. d. will wor0 less. D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
ANS: D NAT: Analytic ,S): nterpretive Table 12-3
Balue to Allyn Balue to *am Balue to 9reg Balue to Dana /3.
S/i !ee/en. Trip ?82 ?52 ?32 ?1&
Refer to Ta,(e 12$0. Assume that the price of a wee0end s0i pass is ?/8 and that the price reflects the actual unit cost of providing a wee0end of s0iing. Ahat is the value of the surplus that accrues to all four s0iers from their wee0end tripD a. ?1&2 +. ?11/ c. ?11& d. ?$32 D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
ANS: 7 NAT: Analytic ,S): Analytical
11
/5.
)hapter 1$ 8The Design of the Tax System Refer to Ta,(e 12$0. Assume that the price of a wee0end s0i pass is ?/8 and that the price reflects the actual unit cost of providing a wee0end of s0iing. Cow much consumer surplus accrues to Allyn and 9reg individuallyD a. ?/5 and ?15 respectively +. ?15 and ?$5 respectively c. ?16 and ?/2 respectively d. ?82 and ?32 respectively D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
ANS: 7 NAT: Analytic ,S): Analytical /8.
Refer to Ta,(e 12$0. Assume that the price of a wee0end s0i pass is ?/8 and that the price reflects the actual unit cost of providing a wee0end of s0iing. Suppose the government imposes a tax of ?12 on s0iing. which raises the price of a wee0end s0i pass to ?2/. The deadweight loss associated with the tax is a. ?$. +. ?/5. c. ?2$. d. ?65. D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
ANS: A NAT: Analytic ,S): Analytical Table 12-4
Hot F1.ge 2ro*nie De(ight Balue to 7rad ?8.&& Balue to @ennifer ?3.&& /6. Refer to Ta,(e 12$3. Suppose that the government imposes a ?$ tax on delights. causing the price to increase from ?2.&& to ?5.&&. Total consumer surplus a. falls +y less than the tax revenue generated. +. falls +y more than the tax revenue generated. c. falls +y the same amount as the tax revenue generated. d. will not fall since @ennifer will no longer +e in the mar0et. D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
Refer to Ta,(e 12$3. Suppose that the government imposes a ?$ tax on delights. causing the price to increase from ?2.&& to ?5.&&. Deadweight loss arises +ecause a. @ennifer will pay more tax as a percentage of her value of delights than 7rad. +. 7rad must pay the ?$.&& tax from his consumer surplus. c. 7rad will have to pay a higher price for delights. d. @ennifer will leave the mar0et. D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
Refer to Ta,(e 12$3. Suppose that the government imposes a ?$ tax on delights. causing the price to increase from ?2.&& to ?5.&&. Total consumer surplus will fall from a. ?1 to ?1. +. ?5 to ?1. c. ?/ to ?1. d. ?5 to ?/. D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
)hapter 1$ 8The Design of the Tax System 1$. The deadweight loss associated with a tax on a commodity is generated +y a. the consumers who still choose to consume the commodity +ut pay a higher price that reflects the tax. +. the consumers who choose to not consume the commodity that is taxed. c. all citi<ens who are a+le to use services provided +y government. d. the consumers who are una+le to avoid paying the tax. D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
12
Scenario 12-1 Suppose @im and @oan receive great satisfaction from their consumption of cheeseca0e. @oan would +e willing to purchase only one slice and would pay up to ?3 for it. @im would +e willing to pay ?6 for his first slice. ?5 for his second slice. and ?/ for his third slice. The current mar0et price is ?/ per slice. 1/. Refer to S"enario 12$1. Cow much consumer surplus does @oan receive from consuming her slice of cheeseca0eD a. ?/ +. ?3 c. ?6 d. ?1$ D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
ANS: A NAT: Analytic ,S): Analytical 11.
Refer to S"enario 12$1. Cow much total consumer surplus do @oan and @im collectively receive from consuming cheeseca0eD a. ?/ +. ?3 c. ?6 d. ?1/ D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
Refer to S"enario 12$1. Assume that the government places a ?1 tax on each slice of cheeseca0e and that the new e=uili+rium price is ?5. Ahat is @oan>s consumer surplus from cheeseca0eD a. <ero +. ?$ c. ?/ d. ?3 D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
Refer to S"enario 12$1. Assume that the government places a ?1 tax on each slice of cheeseca0e and that the new e=uili+rium price is ?5. Ahat is the deadweight loss of the taxD a. ?/ +. ?3 c. ?8 d. ?6 D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
13
15.
)hapter 1$ 8The Design of the Tax System Refer to S"enario 12$1. Assume that the government places a ?1 tax on each slice of cheeseca0e and that the new e=uili+rium price is ?5. Cow much tax revenue will +e generated from sales to @im and @oanD a. <ero +. ?1 c. ?8 d. ?1$ D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
Refer to S"enario 12$1. Assume that the government places a ?$ tax on each slice of cheeseca0e and that the new e=uili+rium price is ?2. Ahat is the deadweight loss of the taxD a. <ero +. ?/ c. ?3 d. ?8 D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
Refer to S"enario 12$1. Assume that the government places a ?1 tax on each slice of cheeseca0e and that the new e=uili+rium price is ?5. Ahich of the following statements is correctD a. @im will +ear the full +urden of the deadweight loss. +. @oan will +ear the full +urden of the deadweight loss. c. 7oth @oan and @im will share the +urden of the deadweight loss. d. There will +e no deadweight loss. D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Deadweight losses
ANS: 7 NAT: Analytic ,S): nterpretive Scenario 12-2
Suppose that 7o+ places a value of ?1& on a movie tic0et and that 'isa places a value of ?5 on a movie tic0et. n addition. suppose the price of a movie tic0et is ?2. 2&. Refer to S"enario 12$2- Ahat is total consumer surplus for 7o+ and 'isaD a. ?& +. ?$ c. ?2 d. ?5
ANS: D D !: $ "#!: 1$%$ NAT: Analytic '(): -nderstanding and applying economic models T(*: )onsumer surplus ,S): Applicative 21. Refer to S"enario 12$2- Suppose the government levies a tax of ?1 on each movie tic0et and that. as a result. the price of a movie tic0et increases to ?3.&&. f 7o+ and 'isa +oth purchase a movie tic0et. what is total consumer surplus for 7o+ and 'isaD a. ?&.&& +. ?&.2& c. ?2.&& d. ?3.&&
ANS: ) D !: $ "#!: 1$%$ NAT: Analytic '(): -nderstanding and applying economic models T(*: )onsumer surplus ,S): Applicative
)hapter 1$ 8The Design of the Tax System 2$.
15
Refer to S"enario 12$2- Suppose the government levies a tax of ?1 on a movie tic0et and that. as a result. the price of a movie tic0et increases to ?3. f 7o+ and 'isa +oth purchase a movie tic0et. what is the deadweight loss from the taxD a. ?& +. ?1 c. ?$ d. ?/
ANS: A D !: $ "#!: 1$%$ NAT: Analytic '(): -nderstanding and applying economic models T(*: Deadweight losses ,S): Applicative 2/. Refer to S"enario 12$2- Suppose the government levies a tax of ?/ on a movie tic0et and that. as a result. the price of a movie tic0et increases to ?8. Ahat is total consumer surplus after the tax is imposedD a. ?& +. ?1 c. ?$ d. ?/
ANS: ) D !: / "#!: 1$%$ NAT: Analytic '(): -nderstanding and applying economic models T(*: )onsumer surplus ,S): Applicative 21. Refer to S"enario 12$2- Suppose the government levies a tax of ?/ on a movie tic0et and that. as a result. the price of a movie tic0et increases to ?8. Ahat is the deadweight loss from the taxD a. ?& +. ?1 c. ?$ d. ?/
ANS: ) D !: / "#!: 1$%$ NAT: Analytic '(): -nderstanding and applying economic models T(*: Deadweight losses ,S): Applicative S"enario 12$0- A taxpayer faces the following tax rates on her income: $& percent of the first ?1&.&&& of her incomeF /& percent of all her income a+ove ?1&.&&&. 22. Refer to S"enario 12$0- The taxpayer faces a. a marginal tax rate of $& percent when her income rises from ?1&.&&& to ?1&.&&1. +. a marginal tax rate of $& percent when her income rises from ?/&.&&& to ?/&.&&1. c. a marginal tax rate of & percent when her income rises from ?/&.&&& to ?/&.&&1. d. a marginal tax rate of 1& percent when her income rises from ?1&.&&& to ?1&.&&1.
ANS: 7 D !: $ "#!: 1$%$ NAT: Analytic '(): The role of government T(*: Average tax rates : ,arginal tax rates ,S): 23.
Applicative
Refer to S"enario 12$0- The taxpayer faces a. an average tax rate of $$.2 percent when her income is ?/&.&&&. +. an average tax rate of $$.& percent when her income is ?2&.&&&. c. a marginal tax rate of 1& percent when her income rises from ?1&.&&& to ?1&.&&1. d. a marginal tax rate of 2& percent when her income rises from ?3&.&&& to ?3&.&&1.
ANS: 7 D !: $ "#!: 1$%$ NAT: Analytic '(): The role of government T(*: Average tax rates : ,arginal tax rates ,S): 25.
Applicative
Refer to S"enario 12$0- At what level of income would the taxpayerIs marginal tax rate +e /& percent and her average tax rate +e $2 percentD a. ?1$.&&& +. ?25.&&& c. ?3&.&&& d. ?8&.&&&
18
ANS: D D !: / "#!: 1$%$ NAT: Analytic '(): The role of government T(*: Average tax rates : ,arginal tax rates ,S): 28. The deadweight loss of an income tax is determined +y the a. amount of total tax revenue to the government. +. marginal tax rate. c. average tax rate. d. a+ility%to%pay principle. 1$%$ ,S):
Applicative
ANS: 7 D !: $ "#!: NAT: Analytic '(): #fficiency and e=uity T(*: Deadweight losses : ,arginal tax rates 26.
nterpretive
A person>s marginal tax rate e=uals a. her tax o+ligation divided +y her average tax rate. +. the increase in taxes she would pay as a percentage of the rise in her income. c. her tax o+ligation divided +y her income. d. the increase in taxes if her average tax rate were to rise +y 14. D !: 1 "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
ANS: 7 NAT: Analytic ,S): Definitional 3&.
n the -nited States. the marginal tax rate on individual federal income tax a. decreases as income increases. +. increases as income increases. c. is constant at all income levels. d. applies only to payroll taxes. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
7ecause the marginal tax rate rises as income rises. a. higher income families. in general. pay a larger percentage of their income in taxes. +. lower income families. in general. pay a larger percentage of their income in taxes. c. a disproportionately large share of the tax +urden falls upon the poor. d. higher income families pay the same percentage of their income in taxes as lower%income families. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
ANS: A NAT: Analytic ,S): Analytical 3$.
f your income is ?1&.&&& and your income tax lia+ility is ?2.&&&. your marginal tax rate is a. 8 percent. +. 1$.2 percent. c. $& percent. d. un0nown. Ae do not have enough information to answer this =uestion. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
ANS: D NAT: Analytic ,S): Analytical 3/.
Nancy paid a tax of ?&.2& on the last dollar she earned in 1666. Nancy>s marginal tax rate in 1666 was a. more than 2& percent. +. exactly 2& percent. c. higher than her average tax rate. d. lower than her average tax rate. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
ANS: 7 NAT: Analytic ,S): Definitional
)hapter 1$ 8The Design of the Tax System 31. f we want to gauge how much the income tax system distorts incentives. we should use the a. average tax rate. +. a+ility%to%pay principle. c. total tax revenue collected. d. marginal tax rate. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
16
Suppose the government imposes a tax of 1& percent on the first ?1&.&&& of income and $& percent on all income a+ove ?1&.&&&. Ahat are the tax lia+ility and the marginal tax rate for a person whose income is ?2&.&&&D a. 1$ percent and $& percent. respectively +. 1$ percent and ?2&.&&&. respectively c. ?3.&&& and 1$ percent. respectively d. ?3.&&& and $& percent. respectively D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
Suppose the government imposes a tax of 1& percent on the first ?1&.&&& of income and $& percent on all income a+ove ?1&.&&&. Ahat are the tax lia+ility and the marginal tax rate for a person whose income is ?/&.&&&D a. +oth are 1& percent +. 1& percent and ?$.&&&. respectively c. ?/.&&& and 1& percent. respectively d. ?/.&&& and $& percent. respectively D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
Tim earns income of ?3&.&&& per year and pays ?$1.&&& per year in taxes. Tim paid $& percent in taxes on the first ?/&.&&& he earned. Ahat was the marginal tax rate on the second ?/&.&&& he earnedD a. $& percent +. /& percent c. 2& percent d. 5& percent D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
Sue earns income of ?8&.&&& per year. Cer average tax rate is /& percent. Sue paid $& percent in taxes on the first ?/&.&&& she earned. Ahat was the marginal tax rate on the rest of her incomeD a. $& percent +. $1 percent c. /& percent d. /3 percent D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
Sue earns income of ?8&.&&& per year. Cer average tax rate is 1& percent. Sue paid ?1.2&& in taxes on the first ?/&.&&& she earned. Ahat was the marginal tax rate on the rest of her incomeD a. 12 percent +. /$ percent c. 1& percent d. 22 percent
2&
)hapter 1$ 8The Design of the Tax System D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
ANS: D NAT: Analytic ,S): Analytical 5&.
Sue earns income of ?8&.&&& per year. Cer average tax rate is 2& percent. Sue paid ?2.&&& in taxes on the first ?/&.&&& she earned. Ahat was the marginal tax rate on the first ?/&.&&& she earned. and what was the marginal tax rate on the remaining ?2&.&&&D a. 3.$2 percent and 2&.&& percent. respectively +. 1&.&& percent and 5&.&& percent. respectively c. 13.35 percent and 3&.&& percent. respectively d. 13.35 percent and 5&.&& percent. respectively D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
A person>s tax o+ligation divided +y her income is called her a. marginal social tax rate. +. marginal private tax rate. c. marginal tax rate. d. average tax rate. D !: 1 "#!: '(): #fficiency and e=uity 1$%$ T(*: Average tax rates
ANS: D NAT: Analytic ,S): Definitional 5$.
A person>s average tax rate e=uals her a. tax o+ligation divided +y her marginal tax rate. +. increase in taxes if her income were to rise +y ?1. c. tax o+ligation divided +y her income. d. increase in taxes if her marginal tax rate were to rise 14. D !: 1 "#!: '(): #fficiency and e=uity 1$%$ T(*: Average tax rates
ANS: ) NAT: Analytic ,S): Definitional 5/.
Total taxes paid divided +y total income is called the a. lump%sum tax lia+ility. +. marginal tax rate. c. average tax rate. d. average consumption tax lia+ility. D !: 1 "#!: '(): #fficiency and e=uity 1$%$ T(*: Average tax rates
f your income is ?1&.&&& and your income tax lia+ility is ?2.&&&. your a. marginal tax rate is 8 percent. +. average tax rate is 8 percent. c. marginal tax rate is 1$.2 percent. d. average tax rate is 1$.2 percent. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: Average tax rates
f your income is ?2&.&&&. your income tax lia+ility is ?1&.&&&. and you paid ?&.$2 in taxes on the last dollar you earned. your a. marginal tax rate is $& percent. +. average tax rate is 2 percent. c. marginal tax rate is $2 percent. d. average tax rate is $2 percent.
)hapter 1$ 8The Design of the Tax System ANS: ) NAT: Analytic ,S): Analytical 53. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
21
f we want to gauge the sacrifice made +y a taxpayer. we should use the a. average tax rate. +. marginal tax rate. c. lump%sum tax rate. d. sales tax rate. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: Average tax rates
The average tax rate measures the a. fraction of spending paid in taxes. +. fraction of income paid in taxes. c. incremental rate of tax on income. d. average deadweight loss from all taxes. D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: Average tax rates
Suppose the government imposes a tax of 1& percent on the first ?1&.&&& of income and $& percent on all income a+ove ?1&.&&&. Ahat is the average tax rate when income is ?2&.&&&D a. $& percent +. 12 percent c. 1$ percent d. 1& percent D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Average tax rates
Suppose the government imposes a tax of $& percent on the first ?2&.&&& of income and /& percent on all income a+ove ?2&.&&&. Ahat is the average tax rate when income is ?3&.&&&D a. $1.5 percent +. $2.& percent c. 13.5 percent d. 2&.& percent D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Average tax rates
ANS: A NAT: Analytic ,S): Analytical 8&.
Suppose the government imposes a tax of $& percent on the first ?2&.&&& of income and /& percent on all income a+ove ?2&.&&&. Ahat is the marginal tax rate when income is ?3&.&&&D a. 1& percent +. $& percent c. /& percent d. 2& percent D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
'arry faces a progressive tax structure that has the following marginal tax rates: & percent on the first ?1&.&&&. 1& percent on the next ?1&.&&&. 12 percent on the next ?1&.&&&. $2 percent on the next ?1&.&&&. and 2& percent on all additional income. f 'arry earns ?52.&&&. what is his average tax rateD a. $& percent +. $2 percent c. /& percent d. /3.35 percent
2$
)hapter 1$ 8The Design of the Tax System D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Average tax rates
ANS: ) NAT: Analytic ,S): Analytical 8$.
,arcus faces a progressive federal income tax structure that has the following marginal tax rates: & percent on the first ?1&.&&&. 1& percent on the next ?1&.&&&. 12 percent on the next ?1&.&&&. $2 percent on the next ?1&.&&&. and 2& percent on all additional income. n addition. he must pay 2 percent of his income in state income tax and 12./ percent of his la+or income in federal payroll taxes. ,arcus earns ?3&.&&& per year in salary and another ?1&.&&& per year in non%la+or income. Ahat is his average tax rateD a. 15.16 percent +. 13.36 percent c. 18.85 percent d. 23.&1 percent D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Average tax rates
ANS: 7 NAT: Analytic ,S): Analytical 8/.
Ahich of the following statements is correctD a. The average tax rate gauges the sacrifice made +y a taxpayer. whereas the marginal tax rate gauges the distortion of taxes on consumer decisions. +. The marginal tax rate gauges the sacrifice made +y a taxpayer. whereas the average tax rate gauges the distortion of taxes on consumer decisions. c. The average tax rate measures how much the tax system discourages people from wor0ing. d. The marginal tax rate measures total taxes paid divided +y total income. 1$%$ ,S): Analytical
ANS: A D !: $ "#!: NAT: Analytic '(): #fficiency and e=uity T(*: ,arginal tax rates : Average tax rates 81.
Suppose that the government taxes income in the following fashion: /& percent of the first ?$&.&&&. 2& percent of the next ?/&.&&&. and 3& percent of all income over ?2&.&&&. 9eorge earns ?1&.&&&. and #laine earns ?3&.&&&. Ahich of the following statements is correctD a. 9eorge>s marginal tax rate is 3& percent. and his average tax rate is 2& percent. +. 9eorge>s marginal tax rate is 2& percent. and his average tax rate is 1& percent. c. #laine>s marginal tax rate is 2& percent. and her average tax rate is 12 percent. d. #laine>s marginal tax rate is 3& percent. and her average tax rate is 1& percent. 1$%$ ,S): Analytical
ANS: 7 D !: / "#!: NAT: Analytic '(): #fficiency and e=uity T(*: ,arginal tax rates : Average tax rates 82.
Suppose that the government taxes income in the following fashion: $& percent of the first ?2&.&&&. 1& percent of the next ?2&.&&&. and 3& percent of all income over ?1&&.&&&. @ohn earns ?$&&.&&&. and Theresa earns ?3&&.&&&. Ahich of the following statements is correctD a. @ohn>s marginal tax rate is higher than Theresa>s marginal tax rate. +. @ohn>s average tax rate is higher than his marginal tax rate. c. Theresa>s average tax rate is higher than her marginal tax rate. d. Theresa>s average tax rate is higher than @ohn>s average tax rate. 1$%$ ,S): Analytical
ANS: D D !: / "#!: NAT: Analytic '(): #fficiency and e=uity T(*: ,arginal tax rates : Average tax rates 83.
*at calculates that for every extra dollar she earns. she owes the government // cents. Cer total income now is ?/2.&&&. on which she pays taxes of ?5.&&&. Determine her average tax rate and her marginal tax rate. a. Cer average tax rate is //4 and her marginal tax rate is $&4. +. Cer average tax rate is $&4 and her marginal tax rate is //4. c. Cer average tax rate is $&4 and her marginal tax rate is $&4. d. Cer average tax rate is //4 and her marginal tax rate is //4. 1$%$ ,S): Analytical
ANS: 7 D !: / "#!: NAT: Analytic '(): #fficiency and e=uity T(*: Average tax rates : ,arginal tax rates
)hapter 1$ 8The Design of the Tax System 85. -nder a progressive tax system. the marginal tax rate could +e e=ual to the average tax rate only when a taxpayer a. has a very high income. +. has a very low income. c. is self%employed. d. invests in a retirement plan. 1$%$ ,S): Analytical
2/
ANS: 7 D !: / "#!: NAT: Analytic '(): #fficiency and e=uity T(*: ,arginal tax rates : Average tax rates 88.
-nder a regressive tax system. a. the marginal tax rate for high income taxpayers is higher than the marginal tax rate for low income taxpayers. +. the marginal tax rate for high income taxpayers is the same as the marginal tax rate for low income taxpayers. c. the marginal tax rate for high income taxpayers is lower than the marginal tax rate for low income taxpayers. d. Any of the a+ove could +e true under a regressive tax system. D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
Aith a lump%sum tax. a. the average tax rate for high income taxpayers will +e the same as the average tax rate for low income taxpayers. +. the average tax rate for high income taxpayers will +e lower than the average tax rate for low income taxpayers. c. the average tax rate for high income taxpayers will +e higher than the average tax rate for high income taxpayers. d. Any of the a+ove could +e true under a regressive tax system. D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Average tax rates
,artavius faces a progressive federal income tax structure that has the following marginal tax rates: & percent on the first ?1&.&&&. 1& percent on the next ?1&.&&&. 12 percent on the next ?1&.&&&. $2 percent on the next ?1&.&&&. and 2& percent on all additional income. n addition. he must pay 2 percent of his income in state income tax and 12./ percent of his la+or income in federal payroll taxes. ,arcus earns ?5&.&&& per year in salary and another ?$&.&&& per year in non%la+or income. Ahat is his average tax rate. and what is his marginal tax rate on his salaryD a. Cis average tax rate is 15.16 percent. and the marginal tax rate on his salary is 22 percent. +. Cis average tax rate is 2&.$/ percent. and the marginal tax rate on his salary is 5&./ percent. c. Cis average tax rate is 2/.3/ percent. and the marginal tax rate on his salary is 5&./ percent. d. Cis average tax rate is 22.56 percent. and the marginal tax rate on his salary is 5&./ percent. 1$%$ ,S): Tax rate $&4 2&4 Analytical
ANS: 7 D !: / "#!: NAT: Analytic '(): #fficiency and e=uity T(*: Average tax rates : ,arginal tax rates Table 12-5 &n"ome ?& to ?1&.&&& (ver ?1&.&&& 61.
Refer to Ta,(e 12$4. Ahat is the marginal tax rate for a person who ma0es ?/2.&&&D a. $&4 +. /&4 c. 1&4 d. 2&4
21
)hapter 1$ 8The Design of the Tax System D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
ANS: A NAT: Analytic ,S): Analytical 6$.
Refer to Ta,(e 12$4. Ahat is the marginal tax rate for a person who ma0es ?3&.&&&D a. $&4 +. /&4 c. 1&4 d. 2&4 D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
ANS: D NAT: Analytic ,S): Analytical 6/.
Refer to Ta,(e 12$4. Ahat is the average tax rate for a person who ma0es ?3&.&&&D a. $&4 +. /&4 c. 1&4 d. 2&4 D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Average tax rates
ANS: 7 NAT: Analytic ,S): Analytical Table 12-6
&n"ome ?& to ?1&.&&& ?1&.&&& to ?1&&.&&& (ver ?1&&.&&& 61.
Tax rate $24 1&4 3&4
Refer to Ta,(e 12$5. Ahat is the marginal tax rate for a person who ma0es ?/2.&&&D a. $24 +. /&4 c. 1&4 d. 3&4 D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
Refer to Ta,(e 12$5. Ahat is the marginal tax rate for a person who ma0es ?2&.&&&D a. $24 +. $84 c. 1&4 d. 3&4 D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
Refer to Ta,(e 12$5. Ahat is the marginal tax rate for a person who ma0es ?1/&.&&&D a. /&4 +. 1&4 c. 2&4 d. 3&4 D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
Refer to Ta,(e 12$5. Ahat is the average tax rate for a person who ma0es ?1/&.&&&D a. /&4 +. 1&4 c. 2&4 d. 3&4
)hapter 1$ 8The Design of the Tax System ANS: 7 NAT: Analytic ,S): Analytical Table 12-7 &n"ome ?& to ?2&.&&& ?2&.&&1 to ?1&&.&&& (ver ?1&&.&&& 68. Tax rate $&4 1&4 3&4 D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Average tax rates
22
Refer to Ta,(e 12$6. Ahat is the marginal tax rate for a person who ma0es ?/5.&&&D a. 6.$24 +. $&4 c. $24 d. 1&4 D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
Refer to Ta,(e 12$6. Ahat is the marginal tax rate for a person who ma0es ?3&.&&&D a. $&4 +. $/4 c. 1&4 d. 124 D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
1&&. Refer to Ta,(e 12$6. Ahat is the marginal tax rate for a person who ma0es ?1$&.&&&D a. $24 +. /24 c. 124 d. 3&4 ANS: D NAT: Analytic ,S): Analytical D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
1&1. Refer to Ta,(e 12$6. Ahat is the average tax rate for a person who ma0es ?1$&.&&&D a. $24 +. /24 c. 124 d. 3&4 ANS: 7 NAT: Analytic ,S): Analytical D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: Average tax rates
1&$. Ahy do some policyma0ers support a consumption tax rather than an earnings taxD a. 7ecause the average tax rate would +e lower under a consumption tax. +. 7ecause a consumption tax would encourage people to save earned income. c. 7ecause a consumption tax would raise more revenues than an income tax. d. 7ecause the marginal tax rate would +e higher under an earnings tax. ANS: 7 NAT: Analytic ,S): nterpretive D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: )onsumption tax
1&/. #uropean countries tend to rely on which type of tax more so than the -nited States doesD a. An income tax +. A lump%sum tax c. A value%added tax d. A corrective tax
23
)hapter 1$ 8The Design of the Tax System D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: )onsumption tax
1&1. A value%added tax or BAT is a tax on a. retail purchases only. +. wholesale purchases only. c. pollution. d. all stages of production of a good. ANS: D NAT: Analytic ,S): Definitional D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: )onsumption tax
1&2. #conomist Alan 9reenspan discussed the advantages of which 0ind of tax system. Jparticularly if one were designing a tax system from scratchKD a. A progressive tax system +. A regressive tax system c. A consumption tax d. A lump%sum tax ANS: ) NAT: Analytic ,S): Applicative D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: )onsumption tax
1&3. Ahen the government taxes la+or earnings we can expect people to a. wor0 more so they can 0eep the same standard of living. +. wor0 less and en;oy more leisure. c. =uit their present ;o+ and find one that pays +etter. d. stop wor0ing altogether and go on welfare. ANS: 7 D !: $ "#!: 1$%1 : 1$%$ NAT: Analytic '(): #fficiency and e=uity T(*: ncome taxes : Deadweight losses ,S): nterpretive 1&5. The -.S. income tax a. discourages saving. +. encourages saving. c. has no effect on saving. d. will reduce the administrative +urden of taxation. ANS: A NAT: Analytic ,S): Applicative D !: 1 "#!: '(): #fficiency and e=uity 1$%$ T(*: ncome taxes
1&8. Ahen interest income from savings is taxed. a. people will save more to ma0e up for what is lost in taxes. +. people will save the same amount as they would have without the tax. c. people will save less than they would without the tax. d. None of the a+ove is correct since the government would not tax interest on savings. ANS: ) NAT: Analytic ,S): Applicative D !: 1 "#!: '(): #fficiency and e=uity 1$%$ T(*: ncome taxes
1&6. A consumption tax is a tax on a. goods +ut not on services. +. the amount of income that people spend. c. the amount of income that people earn. d. the amount of income that people save. ANS: 7 NAT: Analytic ,S): Applicative D !: 1 "#!: '(): #fficiency and e=uity 1$%$ T(*: ncome taxes
)hapter 1$ 8The Design of the Tax System 11&. Tax evasion is a. facilitated +y legal deductions to taxa+le income. +. the same as tax avoidance. c. recommended +y the American Accounting Association. d. illegal. ANS: D NAT: Analytic ,S): Applicative D !: 1 "#!: '(): #fficiency and e=uity 1$%$ T(*: ncome taxes
25
111. Ahich of the following descri+es a situation where tax laws give preferential treatment to specific types of +ehaviorD a. Tax evasion +. A political payoff c. A tax loophole d. )ompensation for the +enefit of society ANS: ) NAT: Analytic ,S): Applicative D !: 1 "#!: '(): #fficiency and e=uity 1$%$ T(*: ncome taxes
11$. The -.S. tax code gives preferential treatment to investors in municipal +onds. This is an example of a. a tax loophole. +. tax evasion. c. an administrative +urden. d. tax enforcement. ANS: A NAT: Analytic ,S): Applicative D !: 1 "#!: '(): #fficiency and e=uity 1$%$ T(*: ncome taxes
11/. Cigh marginal income tax rates a. distort incentives to wor0. +. are used to encourage saving +ehavior. c. will invaria+ly lead to lower average tax rates. d. are not associated with deadweight losses. ANS: A NAT: Analytic ,S): Applicative D !: 1 "#!: '(): #fficiency and e=uity 1$%$ T(*: ncome taxes
111. Tax systems that impose record 0eeping re=uirements on taxpayers are said to have a. an auditing +urden. +. a lower incidence of compliance. c. an administrative +urden. d. a certification re=uirement. ANS: ) NAT: Analytic ,S): Definitional D !: 1 "#!: '(): #fficiency and e=uity 1$%$ T(*: ncome taxes
112. ncentives to wor0 and save are reduced when a. income taxes are higher. +. consumption taxes replace income taxes. c. corrective taxes are implemented. d. All of the a+ove are correct. ANS: A NAT: Analytic ,S): Applicative D !: 1 "#!: '(): #fficiency and e=uity 1$%$ T(*: ncome taxes
28
113. An advantage of a consumption tax over the present tax system is that a consumption tax a. raises more revenues. +. would save the government millions in administrative costs. c. places more of the tax +urden on the wealthy. d. does not discourage saving. ANS: D NAT: Analytic ,S): nterpretive D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ncome taxes
115. Ahich of the following statements is correctD a. 7oth tax avoidance and tax evasion are legal. +. 7oth tax avoidance and tax evasion are illegal. c. Tax avoidance is legal. whereas tax evasion is illegal. d. Tax avoidance is illegal. whereas tax evasion is legal. ANS: ) NAT: Analytic ,S): Applicative D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ncome taxes
118. n many cases. tax loopholes are designed +y )ongress to a. give special treatment to specific types of +ehavior. +. reduce the overall administrative +urden of the tax system. c. raise revenues for special pro;ects. d. All of the a+ove are correct. ANS: A NAT: Analytic ,S): nterpretive D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ncome taxes
116. A mortgage interest deduction would +e considered a. tax evasion. +. a su+sidy to the poor. c. a deduction that +enefits all mem+ers of society e=ually. d. a tax loophole. ANS: D NAT: Analytic ,S): Applicative D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ncome taxes
1$&. As tax laws +ecome more complex. a. the administrative +urden of taxes will increase. +. compliance costs are li0ely to decrease. c. the government will collect more in tax revenue. d. the amount of tax revenue lost to tax evasion will decrease. ANS: A NAT: Analytic ,S): Applicative D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ncome taxes
1$1. Ahich of the following is not an administrative +urden of our tax systemD a. 9overnment resources used to enforce tax laws +. Leeping tax records throughout the year c. *aying the taxes owed d. Time spent in April filling out forms ANS: ) NAT: Analytic ,S): Applicative D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ncome taxes
1$$. A tax on all forms of income will a. lower the effective rate of interest on savings. +. have no effect on savings. c. enhance social welfare +ecause the +enefits will outweigh the costs. d. enhance the incentives to save.
)hapter 1$ 8The Design of the Tax System ANS: A NAT: Analytic ,S): nterpretive D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ncome taxes
26
1$/. )hanging the +asis of taxation from income earned to amount spent will a. necessarily reduce tax revenues. +. lower effective interest rates on savings. c. distort incentives to earn income. d. eliminate disincentives to save. ANS: D NAT: Analytic ,S): nterpretive D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ncome taxes
1$1. f the government imposes a tax of ?/.&&& on everyone. the tax would +e a. an income tax. +. a consumption tax. c. a lump%sum tax. d. a marginal tax. ANS: ) NAT: Analytic ,S): Definitional D !: 1 "#!: '(): #fficiency and e=uity 1$%$ T(*: 'ump%sum taxes
1$2. The most efficient tax possi+le is a a. marginal income tax. +. lump%sum tax. c. consumption tax. d. corporate profit tax. ANS: 7 NAT: Analytic ,S): Applicative D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: 'ump%sum taxes
1$3. A lump%sum tax a. is most fre=uently used to tax real property. +. does not distort incentives. c. distorts incentives more than any other type of tax. d. is the most fair tax. ANS: 7 NAT: Analytic ,S): Applicative D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: 'ump%sum taxes
1$5. The marginal tax rate for a lump%sum tax a. is always positive. +. is always negative. c. is <ero. d. can ta0e on any value +ut must +e greater than the average tax rate. ANS: ) NAT: Analytic ,S): nterpretive D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: 'ump%sum taxes
1$8. Ahich of the following in not a reason that a lump%sum tax imposes a minimal administrative +urden on taxpayersD a. #veryone can easily compute the amount of tax owed. +. There is no +enefit to hiring an accountant to do your taxes. c. #veryone owes the same amount of tax. regardless of earnings. d. The government can easily forecast tax revenues. ANS: D NAT: Analytic ,S): nterpretive D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: 'ump%sum taxes
3&
1$6. f the government were to impose a tax that assigned everyone the same tax lia+ility. it would +e a. a lump%sum tax. +. an e=uita+le tax. c. supported +y the poor. d. a progressive tax. ANS: A NAT: Analytic ,S): Definitional D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: 'ump%sum taxes
1/&. (ne advantage of a lump%sum tax over other taxes is that it a. is +oth e=uita+le and efficient. +. doesn>t cause deadweight loss. c. would place a larger tax +urden on the rich. d. would raise more revenues. ANS: 7 NAT: Analytic ,S): nterpretive D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: 'ump%sum taxes
1/1. Ahich of the following is not an advantage of a lump%sum tax in comparison to other types of taxesD a. t would not cause deadweight loss. +. t imposes a minimal administrative +urden on taxpayers. c. t is more e=uita+le. d. t is more efficient. ANS: ) NAT: Analytic ,S): nterpretive D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: 'ump%sum taxes
1/$. 'ump%sum taxes are rarely used in the real world +ecause a. while lump%sum taxes have low administrative +urdens. they have high deadweight losses. +. while lump%sum taxes have low deadweight losses. they have high administrative +urdens. c. lump%sum taxes are often viewed as unfair +ecause they ta0e the same amount of money from +oth poor and rich. d. lump%sum taxes are very inefficient. ANS: ) NAT: Analytic ,S): nterpretive D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: 'ump%sum taxes
1//. Aith a lump%sum tax. the a. marginal tax rate is always less than the average tax rate. +. average tax rate is always less than the marginal tax rate. c. marginal tax rate falls as income rises. d. marginal tax rate rises as income rises. ANS: A NAT: Analytic ,S): Analytical Table 12-8 Taxpayer ,arcia )harles &n"ome ?1&.&&& ?/&.&&& D !: / "#!: '(): #fficiency and e=uity 1$%$ T(*: 'ump%sum taxes
1/1. Refer to Ta,(e 12$7. f the government imposes a ?$.&&& lump%sum tax. the average tax rate for ,arcia and )harles would +e a. 2 percent and 3.5 percent. respectively. +. 8 percent and 3 percent. respectively. c. 1$ percent and 6 percent. respectively. d. 1/ percent and 1& percent. respectively.
)hapter 1$ 8The Design of the Tax System ANS: A D !: / "#!: NAT: Analytic '(): #fficiency and e=uity T(*: Average tax rates : 'ump%sum taxes 1$%$ ,S): Analytical
31
1/2. Refer to Ta,(e 12$7. f the government imposes a ?/.&&& lump%sum tax. the marginal tax rate for )harles would +e a. & percent. +. 2 percent. c. 3.5 percent. d. 1& percent. ANS: A D !: $ "#!: NAT: Analytic '(): #fficiency and e=uity T(*: ,arginal tax rates : 'ump%sum taxes Table 12-9 The ta+le +elow shows the marginal tax rates for an unmarried taxpayer for various levels of taxa+le income. On Taxa,(e &n"ome--?& to ?1&.&&& ?1&.&&& to ?/&.&&& ?/&.&&& to ?3&.&&& ?3&.&&& to ?11&.&&& ?11&.&&& to ?18&.&&& (ver ?18&.&&& The Tax Rate is--1&4 $24 /24 1&4 1/4 124 1$%$ ,S): Analytical
1/3. Refer to Ta,(e 12$8- !or this tax schedule. what is the marginal tax rate for an individual with taxa+le income of ?16.&&&D a. &4 +. 1&4 c. $24 d. /24 ANS: D NAT: Analytic ,S): Analytical D !: $ "#!: 1$%$ '(): The role of government T(*: ,arginal tax rates
1/5. Refer to Ta,(e 12$8- !or this tax schedule. what is the marginal tax rate for an invidvidual with ?$1$.&&& in taxa+le incomeD a. &4 +. 14 c. $4 d. 124 ANS: D NAT: Analytic ,S): Analytical D !: $ "#!: 1$%$ '(): The role of government T(*: ,arginal tax rates
1/8. Refer to Ta,(e 12$8- !or this tax schedule. what is the average tax rate for an individual with ?16.&&& in taxa+le incomeD a. $2.84 +. $5.24. c. 1&.&4 d. 1/.54 ANS: A NAT: Analytic ,S): Applicative D !: $ "#!: 1$%$ '(): The role of government T(*: Average tax rates
3$
1/6. Refer to Ta,(e 12$8- !or this tax schedule. what is the average tax rate for an individual with ?$8&.&&& in taxa+le incomeD a. /6.64 +. 1&.$4 c. 1$.54 d. 11.84 ANS: A NAT: Analytic ,S): Applicative D !: $ "#!: 1$%$ '(): The role of government T(*: Average tax rates
11&. Refer to Ta,(e 12$8- !or this tax schedule. what is the total income tax due for an individual with ?16.&&& in taxa+le incomeD a. ?1$.32& +. ?11./5& c. ?12.63& d. ?13.$$& ANS: A NAT: Analytic ,S): Applicative D !: $ "#!: 1$%$ '(): The role of government T(*: Tax lia+ility
111. Refer to Ta,(e 12$8- !or this tax schedule. what is the total tax lia+ility for an individual with ?$8&.&&& in taxa+le incomeD a. ?1&2.5&& +. ?1&8.6&& c. ?111.3&& d. ?115./&& ANS: ) NAT: Analytic ,S): Applicative Table 12-10 The following ta+le shows the marginal tax rates for unmarried individuals for two years. 2##4 On Taxable Income... ?& to ?12.&&& ?12.&&& to ?1&.&&& ?1&.&&& to ?52.&&& ?52.&&& to ?1$&.&&& (ver ?1$&.&&& The Tax Rate is... 1&4 124 $&4 $24 /&4 On Taxable Income... (ver ?& 2##5 The Tax Rate is... $&4 D !: $ "#!: 1$%$ '(): The role of government T(*: Tax lia+ility
11$. Refer to Ta,(e 12$1#- !or an individual who earned ?8&.&&& in +oth years. which of the following statements is true regarding the individualIs marginal tax rateD a. The marginal tax rate is higher in $&&3 than in $&&2. +. The marginal tax rate is the same in $&&3 as it was in $&&2. c. The marginal tax rate is lower in $&&3 than in $&&2. d. Aith a proportional tax. as in $&&3. it is not possi+le to determine the individualIs marginal tax rate so it is not possi+le to compare the marginal tax rates in the two years. ANS: ) NAT: Analytic ,S): Analytical D !: $ "#!: 1$%$ '(): The role of government T(*: ,arginal tax rates
11/. Refer to Ta,(e 12$1#- !or an individual who earned ?8&.&&& of taxa+le income in $&&2. what was the individualIs average tax rate in $&&2D a. 1$.54 +. 12.&4 c. 13.14 d. 13.64
)hapter 1$ 8The Design of the Tax System ANS: D NAT: Analytic ,S): Applicative D !: $ "#!: 1$%$ '(): The role of government T(*: Average tax rates
3/
111. Refer to Ta,(e 12$1#- !or an individual who earned ?/2.&&& in taxa+le income in +oth years. which of the following descri+es the change in the individualIs marginal tax rate +etween the two yearsD a. The marginal tax rate increased from $&&2 to $&&3. +. The marginal tax rate decreased from $&&2 to $&&3. c. The marginal tax rate remained constant from $&&2 to $&&3. d. The change in the marginal tax rate cannot +e determined for the two tax schedules shown. ANS: A NAT: Analytic ,S): Analytical D !: $ "#!: 1$%$ '(): The role of government T(*: ,arginal tax rates
112. Refer to Ta,(e 12$1#- !or an individual who earned ?/2.&&& in taxa+le income in +oth years. which of the following descri+es the change in the individualIs average tax rate +etween the two yearsD a. The average tax rate increased from $&&2 to $&&3. +. The average tax rate decreased from $&&2 to $&&3. c. The average tax rate remained constant from $&&2 to $&&3. d. The change in the average tax rate cannot +e determined for the two tax schedules shown. ANS: A NAT: Analytic ,S): Analytical Table 12-11 The following ta+le presents the total tax lia+ility for an unmarried taxpayer under four different tax schedules for the income levels shown. Amo1nt of Tax D1e Tax Schedule B Tax Schedule C ?$&.&&& ?15.2&& ?/&.&&& ?$2.&&& ?1&.&&& ?/&.&&& D !: $ "#!: 1$%$ '(): The role of government T(*: Average tax rates
Income ?2&.&&& ?1&&.&&& ?$&&.&&&
Tax Schedule A ?1&.&&& ?/&.&&& ?8&.&&&
Tax Schedule D ?12.&&& ?/&.&&& ?3&.&&&
113. Refer to Ta,(e 12$11- !or an individual with ?$&&.&&& in taxa+le income. which tax schedule has the lowest marginal tax rateD a. Tax Schedule 7 +. Tax Schedule ) c. Tax Schedule D d. t is impossi+le to determine which tax schedule has the lowest marginal tax rate from the given information. ANS: D NAT: Analytic ,S): Analytical D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: ,arginal tax rates
115. Refer to Ta,(e 12$11- !or an individual with ?$&&.&&& in taxa+le income. which tax schedule has the highest average tax rateD a. Tax Schedule A +. Tax Schedule 7 c. Tax Schedule ) d. Tax Schedule D ANS: A NAT: Analytic ,S): Analytical D !: $ "#!: '(): #fficiency and e=uity 1$%$ T(*: Average tax rates
31
Table 12-12 -nited States ncome Tax "ates for a Single ndividual. $&&$ and $&&/. 2##2 Tax Rates 124 $84 /14 /34 /6.34 &n"ome Ranges ?& M ?$5.&2& ?$5.&21 M ?32.22& ?32.221 M ?1/3.52& ?1/3.521 M ?$65./2& ?$65./2& and a+ove 2##0 Tax Rates 1&4 124 $54 /&4 /24 /8.34 &n"ome Ranges ?& M ?3.&&& ?3.&&1 M ?$8.1&& ?$8.1&1 M ?38.8&& ?38.8&1 M ?11/.2&& ?11/.2&1 M ?/11.62& ?/11.621 and a+ove
118. Refer to Ta,(e 12$12. )harles is a single person whose taxa+le income is ?/2.&&& a year. Ahat is his average tax rate in $&&$D a. 184 +. $&.24 c. $14 d. $84 ANS: A NAT: Analytic ,S): Analytical D !: / "#!: 1$%$ '(): The role of government T(*: Average tax rates
116. Refer to Ta,(e 12$12. )harles is a single person whose taxa+le income is ?/2.&&& a year. Ahat is his average tax rate in $&&/D a. 13.14 +. 16.34 c. $1./4 d. $54 ANS: A NAT: Analytic ,S): Analytical D !: / "#!: 1$%$ '(): The role of government T(*: Average tax rates
12&. Refer to Ta,(e 12$12. )harles is a single person whose taxa+le income is ?/2.&&& a year. Ahat happened to his average tax rate +etween $&&$ and $&&/D a. t increased. +. t decreased. c. t did not change. d. Ae do not have enough information to answer this =uestion. ANS: 7 NAT: Analytic ,S): Analytical D !: / "#!: 1$%$ '(): The role of government T(*: Average tax rates
121. Refer to Ta,(e 12$12. Samantha is a single person whose taxa+le income is ?1&&.&&& a year. Ahat is her average tax rate in $&&$D a. $$./4 +. $2.24 c. $5.84 d. $8.14 ANS: 7 NAT: Analytic ,S): Analytical D !: / "#!: 1$%$ '(): The role of government T(*: Average tax rates
12$. Refer to Ta,(e 12$12. Samantha is a single person whose taxa+le income is ?1&&.&&& a year. Ahat is her average tax rate in $&&/D a. $1.$4 +. $3.14 c. $5.84 d. /&4
)hapter 1$ 8The Design of the Tax System ANS: A NAT: Analytic ,S): Analytical D !: / "#!: 1$%$ '(): The role of government T(*: Average tax rates
32
12/. Refer to Ta,(e 12$12. Samantha is a single person whose taxa+le income is ?1&&.&&& a year. Ahat happened to her average tax rate +etween $&&$ and $&&/D a. t increased. +. t decreased. c. t did not change. d. Ae do not have enough information to answer this =uestion. ANS: 7 NAT: Analytic ,S): Analytical D !: / "#!: 1$%$ '(): The role of government T(*: Average tax rates
121. Refer to Ta,(e 12$12. )harles is a single person whose taxa+le income is ?/2.&&& a year. Ahat is his marginal tax rate in $&&$D a. 124 +. $84 c. /14 d. /34 ANS: 7 NAT: Analytic ,S): Analytical D !: $ "#!: 1$%$ '(): The role of government T(*: ,arginal tax rates
122. Refer to Ta,(e 12$12. )harles is a single person whose taxa+le income is ?/2.&&& a year. Ahat is his marginal tax rate in $&&/D a. 1&4 +. 124 c. $54 d. /&4 ANS: ) NAT: Analytic ,S): Analytical D !: $ "#!: 1$%$ '(): The role of government T(*: ,arginal tax rates
123. Refer to Ta,(e 12$12. )harles is a single person whose taxa+le income is ?/2.&&& a year. Ahat happened to his marginal tax rate +etween $&&$ and $&&/D a. t increased. +. t decreased. c. t did not change. d. Ae do not have enough information to answer this =uestion. ANS: 7 NAT: Analytic ,S): Analytical D !: $ "#!: 1$%$ '(): The role of government T(*: ,arginal tax rates
125. Refer to Ta,(e 12$12. Samantha is a single person whose taxa+le income is ?1&&.&&& a year. Ahat is her marginal tax rate in $&&$D a. 124 +. $84 c. /14 d. /34 ANS: ) NAT: Analytic ,S): Analytical D !: $ "#!: 1$%$ '(): The role of government T(*: ,arginal tax rates
33
128. Refer to Ta,(e 12$12. Samantha is a single person whose taxa+le income is ?1&&.&&& a year. Ahat is her marginal tax rate in $&&/D a. 124 +. $54 c. /&4 d. /24 ANS: ) NAT: Analytic ,S): Analytical D !: $ "#!: 1$%$ '(): The role of government T(*: ,arginal tax rates
126. Refer to Ta,(e 12$12. Samantha is a single person whose taxa+le income is ?1&&.&&& a year. Ahat happened to her marginal tax rate +etween $&&$ and $&&/D a. t increased. +. t decreased. c. t did not change. d. Ae do not have enough information to answer this =uestion. ANS: 7 NAT: Analytic ,S): Analytical D !: $ "#!: 1$%$ '(): The role of government T(*: ,arginal tax rates
Se"#0 $ The Design of the Tax System $ Taxes an. E91ity

%ULT&'LE CHO&CE Table 12-13 The following ta+le shows the marginal tax rates for unmarried individuals for two years. 2##4 On Taxable Income... ?& to ?12.&&& ?12.&&1 to ?1&.&&& ?1&.&&1 to ?52.&&& ?52.&&1 to ?1$&.&&& (ver ?1$&.&&& 1. The Tax Rate is... 1&4 124 $&4 $24 On Taxable Income... (ver ?& 2##5 The Tax Rate is... $&4
Refer to Ta,(e 12$10- Suppose one goal of the tax system was to achieve vertical e=uity. Ahile people may disagree a+out what is Je=uita+le.K +ased on the marginal tax rates given for the two years. which of the following statements is trueD a. Bertical e=uity is possi+le in +oth years. +. Bertical e=uity is possi+le in $&&2 +ut not in $&&3. c. Bertical e=uity is not possi+le in $&&2 +ut is possi+le in $&&3. d. Bertical e=uity is not possi+le in either year. D !: / "#!: '(): #fficiency and e=uity 1$%/ T(*: Bertical e=uity
ANS: A NAT: Analytic ,S): Analytical $.
Refer to Ta,(e 12$10- Ahich of the following +est descri+es the tax schedule in $&&2D a. *roportional tax +. *rogressive tax c. "egressive tax d. Bertical tax
ANS: 7 D !: $ "#!: 1$%/ NAT: Analytic '(): The study of economics. and definitions of economics T(*: *rogressive taxes ,S): nterpretive
)hapter 1$ 8The Design of the Tax System Table 12-14 The following ta+le presents the total tax lia+ility for an unmarried taxpayer under four different tax schedules for the income levels shown. Amo1nt of Tax D1e Tax Schedule B Tax Schedule C ?$&.&&& ?15.2&& ?/&.&&& ?$2.&&& ?1&.&&& ?/&.&&&
35
Income ?2&.&&& ?1&&.&&& ?$&&.&&& /.
Tax Schedule A ?1&.&&& ?/&.&&& ?8&.&&&
Tax Schedule D ?12.&&& ?/&.&&& ?3&.&&&
Refer to Ta,(e 12$13- Ahich tax schedules are progressiveD a. Tax Schedule A only +. Tax Schedule A and Tax Schedule 7 c. Tax Schedule A. Tax Schedule 7. and Tax Schedule ) d. All four Tax Schedules are progressive. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: *rogressive taxes
Refer to Ta,(e 12$13- Ahich tax schedules are regressiveD a. Tax Schedule A and Tax Schedule 7 +. Tax Schedule 7 and Tax Schedule ) c. Tax Schedule ) and Tax Schedule D d. None of the Tax Schedules are regressive. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: "egressive taxes
Refer to Ta,(e 12$13- Ahich tax schedules are proportionalD a. Tax Schedule 7 only +. Tax Schedule 7 and Tax Schedule ) c. Tax Schedule D only d. Tax Schedule A and Tax Schedule 7 D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: *roportional taxes
Refer to Ta,(e 12$13- Ahich tax schedule could +e considered a lump%sum taxD a. Tax Schedule 7 only +. Tax Schedule 7 and Tax Schedule ) c. Tax Schedule D only d. None of the tax schedules could +e considered a lump%sum tax. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: *roportional taxes
The notion that similar taxpayers should pay similar amounts of taxes is 0nown as a. vertical e=uity. +. the +enefits principle. c. hori<ontal e=uity. d. taxpayer efficiency.
ANS: ) D !: 1 "#!: 1$%/ NAT: Analytic '(): The study of economics. and definitions of economics T(*: Cori<ontal e=uity ,S): Definitional
38
Table 12-15 The dollar amounts in the last three columns are the taxes owed under the three different tax systems. &n"ome ? 2&.&&& 1&&.&&& $&&.&&& 8. Tax System A ?1&.&&& $2.&&& 8&.&&& Tax System 2 ?$2.&&& /&.&&& 1&.&&& Tax System C ?1&.&&& $&.&&& 1&.&&&
Refer to Ta,(e 12$14- Ahich of the three tax systems is proportionalD a. Tax System A +. Tax System 7 c. Tax System ) d. None of the systems are proportional. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: *roportional taxes
Refer to Ta,(e 12$14- Ahich of the three tax systems is re ressiveD a. Tax System A +. Tax System 7 c. Tax System ) d. None of the systems are regressive. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: "egressive taxes
ANS: 7 NAT: Analytic ,S): Applicative 1&.
Refer to Ta,(e 12$14- Ahich of the three tax systems is pro ressiveD a. Tax System A +. Tax System 7 c. Tax System ) d. All of the tax systems are progressive. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: *rogressive taxes
Suppose an excise tax is imposed on luxury +oats and yachts. #conomists argue that such a tax a. is sure to +e vertically e=uita+le. since +uyers of luxury +oats and yachts are wealthy. +. entails no deadweight loss as long as +uyers of +oats and yachts can easily su+stitute one luxury good for another. c. violates the +enefits principle of taxation. d. may +urden wor0ers in the luxury%+oat%and%yacht industry more than it +urdens the +uyers of luxury +oats and yachts. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: Tax e=uity
ANS: D NAT: Analytic ,S): nterpretive 1$.
A lump!sum tax a. is also a proportional tax. +. entails larger deadweight losses than other types of taxes. c. is the most efficient tax possi+le. d. is the most e=uita+le tax possi+le. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: 'ump%sum taxes
)hapter 1$ 8The Design of the Tax System Table 12-16 -nited States ncome Tax "ates for a Single ndividual. $&&$ and $&&/. 2##2 Tax Rates 124 $84 /14 /34 /6.34 1/. &n"ome Ranges ?& M ?$5.&2& ?$5.&21 M ?32.22& ?32.221 M ?1/3.52& ?1/3.521 M ?$65./2& ?$65./2& and a+ove 2##0 Tax Rates 1&4 124 $54 /&4 /24 /8.34 &n"ome Ranges ?& M ?3.&&& ?3.&&1 M ?$8.1&& ?$8.1&1 M ?38.8&& ?38.8&1 M ?11/.2&& ?11/.2&1 M ?/11.62& ?/11.621 and a+ove
36
Refer to Ta,(e 12$15. Ahat type of tax structure did the -nited States have in $&&$ for single individualsD a. A proportional tax structure +. A regressive tax structure c. A progressive tax structure d. A lump%sum tax structure D !: / "#!: '(): #fficiency and e=uity 1$%/ T(*: *rogressive taxes
Refer to Ta,(e 12$15. Ahat type of tax structure does the -nited States have in $&&/ for single individualsD a. A proportional tax structure +. A regressive tax structure c. A progressive tax structure d. A lump%sum tax structure D !: / "#!: '(): #fficiency and e=uity 1$%/ T(*: *rogressive taxes
The concept that people should pay taxes +ased on the +enefits they receive from government services is called a. the a+ility%to%pay principle. +. the +enefits principle. c. hori<ontal e=uity. d. vertical e=uity. D !: 1 "#!: '(): #fficiency and e=uity 1$%/ T(*: 7enefits principle
The principle that people should pay taxes +ased on the +enefits they receive from government services is called the a. pay principle. +. tax%+enefit principle. c. government services principle. d. +enefits principle. D !: 1 "#!: '(): #fficiency and e=uity 1$%/ T(*: 7enefits principle
The +enefits principle is used to ;ustify a. property taxes. +. gasoline taxes. c. JsinK taxes on cigarettes and alcoholic +everages. d. personal income taxes. D !: 1 "#!: '(): #fficiency and e=uity 1$%/ T(*: 7enefits principle
ANS: 7 NAT: Analytic ,S): Applicative
5&
18.
)hapter 1$ 8The Design of the Tax System f revenue from a gasoline tax is used to +uild and maintain pu+lic roads. the gasoline tax may +e ;ustified on the +asis of a. the +enefits principle. +. the a+ility%to%pay principle. c. vertical e=uity. d. hori<ontal e=uity. D !: 1 "#!: '(): #fficiency and e=uity 1$%/ T(*: 7enefits principle
The theory that the wealthy should contri+ute more to police protection than the poor +ecause they have more to protect is +ased on a. the a+ility%to%pay principle. +. a consumption tax plan. c. the +enefits principle. d. property tax assessments. D !: 1 "#!: '(): #fficiency and e=uity 1$%/ T(*: 7enefits principle
ANS: ) NAT: Analytic ,S): Applicative $&.
Ahen a tax is ;ustified on the +asis that the taxpayers who pay the tax receive specific government services from payment of the tax. the tax a. is considered hori<ontally e=uita+le. +. +urden is minimi<ed. c. satisfies the +enefits principle. d. is considered vertically e=uita+le. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: 7enefits principle
ANS: ) NAT: Analytic ,S): Definitional $1.
f a poor family has three children in pu+lic school and a rich family has two children in private school. the +enefits principle would suggest that a. the poor family should pay more in taxes to pay for pu+lic education than the rich family. +. the rich family should pay more in taxes to pay for pu+lic education than the poor family. c. the +enefits of private school exceed those of pu+lic school. d. pu+lic schools should +e financed +y property taxes. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: 7enefits principle
ANS: A NAT: Analytic ,S): nterpretive $$.
The +enefits principle of taxation can +e used to argue that wealthy citi<ens should pay higher taxes than poorer ones on the +asis that a. police services are more fre=uently used in poor neigh+orhoods. +. the wealthy +enefit more from services provided +y government than the poor. c. the poor are more active in political processes. d. the poor receive welfare payments. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: 7enefits principle
ANS: 7 NAT: Analytic ,S): nterpretive $/.
Bertical e=uity states that taxpayers with a greater a+ility to pay taxes should a. contri+ute a decreasing proportion of each increment in income to taxes. +. contri+ute a larger amount than those with a lesser a+ility to pay. c. +e less su+;ect to administrative +urdens of a tax. d. +e less su+;ect to tax distortions that lead to deadweight losses. D !: 1 "#!: '(): #fficiency and e=uity 1$%/ T(*: A+ility%to%pay principle
ANS: 7 NAT: Analytic ,S): Definitional
)hapter 1$ 8The Design of the Tax System $1.
51
The argument that each person should pay taxes according to how well the individual can shoulder the +urden is called a. the a+ility%to%pay principle. +. the e=uity principle. c. the +enefits principle. d. regressive. D !: 1 "#!: '(): #fficiency and e=uity 1$%/ T(*: A+ility%to%pay principle
ANS: A NAT: Analytic ,S): Definitional $2.
EA ?1.&&& tax paid +y a poor person may +e a larger sacrifice than a ?1&.&&& tax paid +y a wealthy personE is an argument in favor of a. the hori<ontal e=uity principle. +. the +enefits principle. c. a regressive tax argument. d. the a+ility%to%pay principle. D !: 1 "#!: '(): #fficiency and e=uity 1$%/ T(*: A+ility%to%pay principle
ANS: D NAT: Analytic ,S): nterpretive $3.
Bertical e=uity and hori<ontal e=uity are associated with a. the +enefits principle of taxation. +. the a+ility%to%pay principle of taxation. c. taxes that have no deadweight losses. d. falling marginal tax rates. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: A+ility%to%pay principle
ANS: 7 NAT: Analytic ,S): Applicative $5.
The claim that all citi<ens should ma0e an Ee=ual sacrificeE to support government programs is usually associated with a. the a+ility%to%pay principle. +. the +enefits principle. c. efficiency arguments. d. regressive tax arguments. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: A+ility%to%pay principle
A tax system +ased on the a+ility%to%pay principle claims that all citi<ens should a. pay taxes +ased on the +enefits they receive from government services. +. pay the same amount in taxes. c. pay taxes +ased on consumption rather than income. d. ma0e an e=ual sacrifice. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: A+ility%to%pay principle
ANS: D NAT: Analytic ,S): Applicative $6.
Bertical e=uity in taxation refers to the idea that people a. in une=ual conditions should +e treated differently. +. in e=ual conditions should pay e=ual taxes. c. should pay taxes +ased on the +enefits they receive from the government. d. should pay a proportional tax rather than a progressive tax. D !: 1 "#!: '(): #fficiency and e=uity 1$%/ T(*: Bertical e=uity
ANS: A NAT: Analytic ,S): Definitional
5$
/&.
)hapter 1$ 8The Design of the Tax System n the 168&s. *resident "onald "eagan argued that high tax rates distorted economic incentives to wor0 and save. n the 166&s. *resident 7ill )linton argued that the rich were not paying their fair share of taxes. Ahich of the following statements +est summari<es the economic theories +ehind the differing philosophiesD a. *resident "eagan was concerned a+out vertical e=uity. whereas *resident )linton was concerned a+out hori<ontal e=uity. +. *resident "eagan was concerned a+out average tax rates. whereas *resident )linton was concerned a+out hori<ontal e=uity. c. *resident "eagan was concerned a+out marginal tax rates. whereas *resident )linton was concerned a+out vertical e=uity. d. None of the a+ove is correct.
ANS: ) D !: $ "#!: 1$%/ NAT: Analytic '(): #fficiency and e=uity T(*: ,arginal tax rates : Bertical e=uity ,S): nterpretive /1. Ahich of the following tax systems could not +e structured to satisfy conditions of vertical e=uityD a. A proportional tax +. A regressive tax c. A progressive tax d. A lump%sum tax D !: / "#!: '(): #fficiency and e=uity 1$%/ T(*: Bertical e=uity
ANS: D NAT: Analytic ,S): nterpretive /$.
Cori<ontal e=uity in taxation refers to the idea that people a. in une=ual conditions should +e treated differently. +. in e=ual conditions should pay e=ual taxes. c. should +e taxed according to their a+ility to pay. d. should receive government +enefits according to how much they have +een taxed. D !: 1 "#!: '(): #fficiency and e=uity 1$%/ T(*: Cori<ontal e=uity
ANS: 7 NAT: Analytic ,S): Definitional //.
The idea that people in e=ual conditions should pay e=ual taxes is referred to as a. hori<ontal e=uity. +. vertical e=uity. c. the a+ility%to%pay principle. d. the marriage tax. D !: 1 "#!: '(): #fficiency and e=uity 1$%/ T(*: Cori<ontal e=uity
ANS: A NAT: Analytic ,S): Definitional /1.
Two families who live in *lains. 9A have identical incomes. The Smiths deduct ?2.&&& from their taxa+le income for mortgage interest paid during the year. The @ones family lives in an apartment and is not eligi+le for a mortgage%interest deduction. This situation exemplifies a. an application of the +enefits principle of taxation. +. a violation of hori<ontal e=uity. c. a violation of vertical e=uity. d. an application of egalitarian tax rules. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: Cori<ontal e=uity
ANS: 7 NAT: Analytic ,S): Applicative /2.
A tax that is higher for men than for women violates the criterion of a. hori<ontal e=uity. +. vertical e=uity. c. the a+ility%to%pay principle. d. the marriage tax.
)hapter 1$ 8The Design of the Tax System ANS: A NAT: Analytic ,S): Analytical /3. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: Cori<ontal e=uity
5/
(ne of the most difficult issues associated with trying to structure a tax policy to satisfy hori<ontal e=uity is determining a. whether or not a taxpayer falls within the highest income =uintile. +. the level of transfer payments made to low%income groups. c. the source of income for taxpayers. d. what differences are relevant to a family>s a+ility to pay. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: Cori<ontal e=uity
ANS: D NAT: Analytic ,S): nterpretive /5.
Ahich of the following statements is not correctD a. A gasoline tax can +e an example of a +enefits tax. +. A progressive tax attempts to achieve vertical e=uity. c. A progressive tax can +e an example of the a+ility%to%pay principle. d. A regressive tax attempts to achieve hori<ontal e=uity. D !: / "#!: '(): #fficiency and e=uity 1$%/ T(*: Cori<ontal e=uity
ANS: D NAT: Analytic ,S): nterpretive /8.
Tax incidence refers to a. what product or service the tax is levied on. +. who +ears the tax +urden. c. what sector of the economy is most affected +y the tax. d. the dollar value of the tax revenues. D !: 1 "#!: '(): #fficiency and e=uity 1$%/ T(*: Tax +urden
ANS: 7 NAT: Analytic ,S): Definitional /6.
n order to determine tax incidence. one must a. consider issues of e=uity. +. also determine the legal lia+ility of the tax. c. evaluate where the tax +urden eventually falls. d. use the Eflypaper theoryE of taxation. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: Tax +urden
ANS: ) NAT: Analytic ,S): Applicative 1&.
n order to construct a more complete picture of the economic +urden of government across income classes. economists usually a. include tax payments as well as transfer payments received. +. focus only on the tax payments of wealthy tax payers. c. limit their analysis to taxes +ased on the a+ility%to%pay principle. d. focus their analysis on issues of tax efficiency. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: Tax +urden
f transfer payments are included when evaluating tax +urdens. then the average tax rate of the poorest =uintile of taxpayers would +e approximately a. negative /& percent. +. negative 1& percent. c. positive 1 percent. d. positive 8 percent.
51
ANS: A D !: $ "#!: 1$%/ NAT: Analytic '(): #fficiency and e=uity T(*: Tax +urden : Transfer payments ,S): Applicative 1$. Ahich tax system re=uires all taxpayers to pay the same percentage of their income in taxesD a. A regressive tax +. A proportional tax c. A progressive tax d. A hori<ontal e=uity tax D !: 1 "#!: '(): #fficiency and e=uity 1$%/ T(*: *roportional taxes
ANS: 7 NAT: Analytic ,S): Definitional 1/.
f a tax ta0es a constant fraction of income as income rises. it is a. regressive. +. proportional. c. progressive. d. +ased on the a+ility%to%pay principle. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: *roportional taxes
An income tax in which the average tax rate is the same for all taxpayers would +e considered a a. progressive tax. +. regressive tax. c. distortion%free tax. d. proportional tax. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: *roportional taxes
Ahich of the following statements is correctD a. Bertical e=uity is the idea that taxpayers with similar a+ilities to pay taxes should pay the same amount. +. Cori<ontal e=uity is the idea that taxes should +e levied on a person according to how well that person can shoulder the +urden. c. A regressive tax would mean that high%income tax payers pay a larger fraction of their income in taxes than would low%income taxpayers. d. A proportional tax would mean that high%income and low%income taxpayers pay the same fraction of income in taxes. D !: / "#!: '(): #fficiency and e=uity 1$%/ T(*: *roportional taxes
Ahen the marginal tax rate e=uals the average tax rate. the tax is a. proportional. +. progressive. c. regressive. d. egalitarian. D !: / "#!: '(): #fficiency and e=uity 1$%/ T(*: *roportional taxes
Ahich tax system re=uires higher%income taxpayers to have lower tax rates. even though they pay a larger amount of tax when compared to lower%income taxpayersD a. A proportional tax +. A progressive tax c. A regressive tax d. A lump%sum tax
)hapter 1$ 8The Design of the Tax System ANS: ) NAT: Analytic ,S): Definitional 18. D !: 1 "#!: '(): #fficiency and e=uity 1$%/ T(*: "egressive taxes
52
f a tax ta0es a smaller fraction of income as income rises. it is a. proportional. +. regressive. c. progressive. d. +ased on the a+ility%to%pay principle. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: "egressive taxes
Ahich of the following statements is correctD a. A general sales tax on food is regressive when low%income taxpayers spend a larger proportion of their income on food than high%income taxpayers. +. A general sales tax on food is regressive when middle income taxpayers spend a smaller proportion of their income on food than high%income taxpayers. c. A general sales tax on food is regressive when high%income taxpayers spend a larger proportion of their income on food than middle income taxpayers. d. A general sales tax on food is regressive when high%income taxpayers spend a larger proportion of their income on food than low%income taxpayers. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: "egressive taxes
ANS: A NAT: Analytic ,S): Analytical 2&.
Ahich tax system re=uires higher%income taxpayers to pay a higher percentage of their income in taxesD a. A progressive tax +. A proportional tax c. A regressive tax d. A lump%sum tax D !: 1 "#!: '(): #fficiency and e=uity 1$%/ T(*: *rogressive taxes
ANS: A NAT: Analytic ,S): Definitional 21.
Nou are trying to design a tax system that will simultaneously achieve +oth of the following goals: 1H two people with the same total income would pay taxes of the same amount. and $H a high%income person would pay a higher fraction of income in taxes than a low%income person. Ahich of the following tax systems could achieve +oth goalsD a. A lump%sum tax +. A regressive tax c. A progressive tax d. A proportional tax D !: / "#!: '(): #fficiency and e=uity 1$%/ T(*: *rogressive taxes
ANS: ) NAT: Analytic ,S): Analytical 2$.
Nou are trying to design a tax system that will simultaneously achieve +oth of the following goals: 1H a person with no income would pay no taxes. and $H a high%income person would pay a higher fraction of income in taxes than a low%income person. Ahich of the following statements is correctD a. A lump%sum tax would achieve the second goal +ut not the first. +. A regressive tax would achieve the second goal +ut not the first. c. A progressive tax could achieve +oth goals. d. A proportional tax could achieve the second goal +ut not the first. D !: / "#!: '(): #fficiency and e=uity 1$%/ T(*: *rogressive taxes
53
2/.
)hapter 1$ 8The Design of the Tax System Ahen the marginal tax rate exceeds the average tax rate. the tax is a. proportional. +. regressive. c. non%egalitarian. d. progressive. D !: / "#!: '(): #fficiency and e=uity 1$%/ T(*: *rogressive taxes
Suppose that the government collected taxes in the following fashion: people who earn less than ?2&.&&& pay $2 percent in taxes. people who earn +etween ?2&.&&& and ?1&&.&&& pay /2 percent in taxes. people who earn +etween ?1&&.&&& and ?$&&.&&& pay /& percent in taxes. and people who earn more than ?$&&.&&& pay $8 percent in taxes. Ahich of the following statements is correctD a. The tax system is proportional for income levels less than ?2&.&&& and regressive for income levels a+ove ?2&.&&&. +. The tax system is regressive for income levels less than ?1&&.&&& and progressive for income levels a+ove ?1&&.&&&. c. The tax system is progressive for income levels less than ?1&&.&&& and regressive for income levels a+ove ?1&&.&&&. d. The tax system is progressive for income levels less than ?2&.&&& and proportional for income levels a+ove ?1&&.&&&.
ANS: ) D !: $ "#!: 1$%/ NAT: Analytic '(): #fficiency and e=uity T(*: *rogressive taxes : *roportional taxes : "egressive taxes Table 12-17 TA: A
I"CO#$ A#O%"T O& TA'
,S): Analytical TA: C TA: D

A#O%"T O& TA'
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?1$.2&& G$24H ?$2.&&& G$24H ?2&.&&& G$24H
?12.&&& G/&4H ?$2.&&& G$24H ?1&.&&& G$&4H
?1&.&&& G$&4H ?$2.&&& G$24H ?3&.&&& G/&4H
?12.&&& G/&4H ?12.&&& G124H ?12.&&& G5.24H
Refer to Ta,(e 12$16. A regressive tax is illustrated +y tax a. A only. +. 7 or D. c. ) only. d. A or D. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: "egressive taxes
Refer to Ta,(e 12$16. A proportional tax is illustrated +y tax a. A. +. 7. c. ). d. D. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: *roportional taxes
Refer to Ta,(e 12$16. A lump%sum tax is illustrated +y tax a. A. +. 7. c. ). d. D. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: 'ump%sum taxes
ANS: D NAT: Analytic ,S): Analytical
)hapter 1$ 8The Design of the Tax System 28. Refer to Ta,(e 12$16. A progressive tax is illustrated +y tax a. A. +. 7. c. ). d. D. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: *rogressive taxes
55
The flypaper theory of tax incidence a. ignores the indirect effects of taxes. +. assumes that most taxes should +e Estuc0 on E the rich. c. says that once a tax has +een imposed. there is little chance of it changing. so in essence people are stuc0 with it. d. suggests that taxes are li0e flies +ecause they are everywhere and will never go away.
ANS: A D !: $ "#!: 1$%/ NAT: Analytic '(): #fficiency and e=uity T(*: !lypaper theory of tax incidence ,S): nterpretive 3&. Aho pays a corporate income taxD a. (wners of the corporation +. )ustomers of the corporation c. Aor0ers of the corporation d. All of the a+ove are correct. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: )orporate income tax
Ahen the government levies a tax on a corporation. a. all the +urden of the tax ultimately falls on the corporationIs owners. +. the corporation is more li0e a tax collector than a taxpayer. c. output must increase to compensate for reduced profits. d. less deadweight loss will occur since corporations are entities and not people who respond to incentives. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: )orporate income tax
ANS: 7 NAT: Analytic ,S): Applicative 3$.
,any economists +elieve that a. the corporate income tax satisfies the goal of hori<ontal e=uity. +. the corporate income tax does not distort the incentives of customers. c. the corporate income tax is more efficient than the personal income tax. d. wor0ers and customers +ear much of the +urden of the corporate income tax. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: )orporate income tax
ANS: D NAT: Analytic ,S): Applicative 3/.
Ahich of the following is not a way that a corporate tax on the income of -.S. car companies will affect mar0etsD a. The price of cars will rise. +. The wages of auto wor0ers will fall. c. (wners of car companies Gstoc0holdersH will receive less profit. d. 'ess deadweight loss will occur since corporations are entities and not people who respond to incentives. D !: $ "#!: '(): #fficiency and e=uity 1$%/ T(*: )orporate income tax
58
Se"#3 $ The Design of the Tax System $ Con"(1sion$The Tra.e$Off 2et*een E91ity an. Effi"ien"y
%ULT&'LE CHO&CE 1. 9oals of efficiency and e=uity in tax policy are a. complementary in most countries. +. necessary for application of the a+ility%to%pay principle. c. often in conflict with each other. d. easier to achieve when tax codes are complex. D !: 1 "#!: '(): #fficiency and e=uity 1$%/ : 1$%1 T(*: Taxes
ANS: ) NAT: Analytic ,S): Applicative $.
n choosing the form of a tax. there is often a tradeoff +etween a. allocative and productive efficiency. +. profits and revenues. c. efficiency and fairness. d. fairness and profits. D !: $ "#!: '(): #fficiency and e=uity 1$%/ : 1$%1 T(*: Taxes
ANS: ) NAT: Analytic ,S): nterpretive /.
Ahich of the following tax systems is the most fairD a. proportional taxes +. regressive taxes c. progressive taxes d. There is no o+;ective way to assess fairness among the three systems. D !: $ "#!: '(): #fficiency and e=uity 1$%/ : 1$%1 T(*: Taxes
#conomists play an important role in the complex de+ates over tax policy +y a. identifying efficiency as the most important goal of tax policy. +. identifying e=uity as the most important goal of tax policy. c. shedding light on the tradeoff +etween efficiency and e=uity in tax policy. d. None of the a+ove is correct. D !: $ "#!: '(): #fficiency and e=uity 1$%/ : 1$%1 T(*: Taxes

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Chapter 12

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Chapter 12 The Design of the Tax System

)hapter 1$ 8The Design of the Tax System

ANS: ! NAT: Analytic ,S): nterpretive 16.

)hapter 1$ 8The Design of the Tax System

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ANS: ) NAT: Analytic ,S): nterpretive 11.

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ANS: ) NAT: Analytic ,S): Definitional 12.

ANS: D NAT: Analytic ,S): Definitional 13.

ANS: A NAT: Analytic ,S): Applicative 15.

ANS: A NAT: Analytic ,S): Applicative 18.

ANS: D NAT: Analytic ,S): Applicative

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ANS: A NAT: Analytic ,S): nterpretive $8.

ANS: D NAT: Analytic ,S): Applicative $6.

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ANS: 7 NAT: Analytic T(*: *ayroll taxes 11.

ANS: ) NAT: Analytic ,S): Definitional 12.

ANS: A NAT: Analytic T(*: *ayroll taxes 13.

ANS: ) NAT: Analytic ,S): Applicative 15.

ANS: 7 NAT: Analytic ,S): Definitional 18.

ANS: D NAT: Analytic T(*: *ayroll taxes

ANS: 7 NAT: Analytic T(: ayroll taxes 11.

ANS: A NAT: Analytic T(: ayroll taxes 13.

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