Chapter 12 The Design of the Tax System

Test A
1

In designing a tax system, policymakers have two objectives: a. equity and revenue. b. revenue and debt reduction. c. equity and efficiency. d. revenue and expenditure. !"#$%: c. equity and efficiency. &'($: ) *$'1: + "$+&I,!: - ,./$+&I0$: -, 1 % !2,): '
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&he most common explanation for "ocial "ecurity payments accounting for a larger share of federal government expenditures is a. falling payroll tax receipts. b. increases in life expectancy. c. increases in birth rates among teenagers and the poor. d. people becoming eligible for "ocial "ecurity benefits at an earlier age. !"#$%: b. increases in life expectancy. &'($: ) *$'1: + "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '
1

In general, the two most important taxes for state and local governments are a. sales taxes and property taxes. b. sin taxes and gasoline taxes. c. income taxes and estate taxes. d. excise taxes and corporate taxes. !"#$%: a. sales taxes and property taxes. &'($: ) *$'1: 2 "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '
3

&he biggest single expenditure for state and local governments is a. "ocial "ecurity. b. education. c. transportation. d. unemployment compensation. !"#$%: b. education. &'($: ) *$'1: 2 "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '
4

&he largest source of revenue for the federal government is the a. property tax. b. corporate income tax. c. individual income tax. d. import and export tax. !"#$%: c. individual income tax. &'($: ) *$'1: 2 "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '

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s government debt increases, a. a trade9off with government deficits is inevitable. b. government must spend a larger share of its revenue on interest payments. c. evidence suggests that spending on social insurance programs will be reduced. d. all of the above !"#$%: b. government must spend a larger share of its revenue on interest payments. &'($: ) *$'1: + "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '
:

tax on the wages that a firm pays its workers is called a;n< a. payroll tax. b. excise tax. c. income tax. d. consumption tax. !"#$%: a. payroll tax. &'($: ) *$'1: + "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '
=

#hen government receipts exceed total government spending during a fiscal year the difference a. is a budget deficit. b. is a budget surplus. c. is the national debt. d. becomes federal tax refunds. !"#$%: b. is a budget surplus. &'($: ) *$'1: 2 "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '
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#hen taxes are imposed on a commodity, a. there is never a deadweight loss. b. these taxes are considered nondistortionary. c. tax revenue will rise by the amount of the tax multiplied by the before9tax level of consumption. d. some consumers alter their consumption by not purchasing the taxed commodity. !"#$%: d. some consumers alter their consumption by not purchasing the taxed commodity. &'($: ) *$'1: + "$+&I,!: - ,./$+&I0$: - % !2,): '
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&he @.". income tax a. encourages saving. b. has no effect on saving. c. discourages saving. d. will reduce the administrative burden of taxation. !"#$%: c. discourages saving. &'($: ) *$'1: 2 "$+&I,!: - ,./$+&I0$: - % !2,): '
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#hen a taxpayer attempts to legally reduce her tax liability, she is engaging in a. tax evasion. b. tax avoidance. c. a tax return compensation plan. d. activities outside the intent of tax law. !"#$%: b. tax avoidance. &'($: ) *$'1: 2 "$+&I,!: - ,./$+&I0$: - % !2,): '
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#hen tax laws give preferential treatment to specific types of behavior it is called a. a political payoff. b. tax evasion. c. a tax loophole. d. compensation for the benefit of society. !"#$%: c. a tax loophole. &'($: ) *$'1: 2 "$+&I,!: - ,./$+&I0$: - % !2,): '

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+hapter 1-7&he 2esign of the &ax "ystem 111

11

s tax laws become more complex, a. compliance costs are most likely to decrease. b. the administrative burden of taxes is increased. c. the government always collects more in tax revenue. d. the amount of tax revenue lost to tax evasion always decreases. !"#$%: b. the administrative burden of taxes is increased. &'($: ) *$'1: + "$+&I,!: - ,./$+&I0$: - % !2,): '
13

If marginal tax rates increase, the a. average tax rate will be falling. b. deadweight loss from taxes will rise. c. deadweight loss from taxes is unaffected. d. deadweight loss from taxes will be reduced. !"#$%: b. deadweight loss from taxes will rise. &'($: ) *$'1: + "$+&I,!: - ,./$+&I0$: - % !2,): '
14

&he extra taxes paid on an additional dollar of taxable income is called the a. average tax liability. b. average tax rate. c. marginal tax liability. d. marginal tax rate. !"#$%: d. marginal tax rate. &'($: ) *$'1: 2 "$+&I,!: - ,./$+&I0$: 1 % !2,): '
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If the government were to impose a tax that assigned everyone the same tax liability, it would be a. an equitable tax. b. a lump9sum tax. c. supported by the poor. d. all of the above. !"#$%: b. a lump9sum tax. &'($: ) *$'1: + "$+&I,!: - ,./$+&I0$: - % !2,): '
1:

&he benefits principle of taxation can be used to argue that the wealthy should pay higher taxes than the poor on the basis that a. the poor are more active in political processes. b. police services are more frequently used in poor neighborhoods. c. there is more crime in rich neighborhoods than poor neighborhoods. d. the wealthy benefit more from services provided by government than the poor. !"#$%: d. the wealthy benefit more from services provided by government than the poor. &'($: ) *$'1: + "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '
1=

#hen the marginal tax rate exceeds the average tax rate, the tax is a. progressive. b. regressive. c. proportional. d. non9egalitarian. !"#$%: a. progressive. &'($: ) *$'1: 2 "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '

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113 +hapter 1-7&he 2esign of the &ax "ystem

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&he Aflypaper theoryB of taxation suggests that a. taxes are never paid by the most wealthy citiCens. b. the benefits principle of taxation is not a viable option for policymakers. c. the individual or corporation who actually pays the tax cannot share the burden of the tax. d. the individual or corporation who actually pays the tax is able to shift the burden of the tax to others !"#$%: c. the individual or corporation who actually pays the tax cannot share the burden of the tax. &'($: ) *$'1: 2 "$+&I,!: 1 ,./$+&I0$: 3 % !2,): '
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A D1,??? tax paid by a poor person may be a larger sacrifice than a D1?,??? tax paid by a wealthy personB is an argument based on the a. regressive tax argument. b. horiContal equity principle. c. ability9to9pay principle. d. benefits principle. !"#$%: c. ability9to9pay principle. &'($: ) *$'1: + "$+&I,!: 1 ,./$+&I0$: 3 % !2,): '
-1

0ertical equity states that taxpayers with a greater ability to pay taxes should a. contribute a larger amount. b. be less subject to administrative burdens of a tax. c. be less subject to tax distortions that lead to deadweight losses. d. contribute a decreasing proportion of each increment in income to taxes. !"#$%: a. contribute a larger amount. &'($: ) *$'1: + "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '
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#hich of the following is a tax system in which all taxpayers pay the same percentage of their income in taxesE a. regressive b. progressive c. proportional d. horiContal equity !"#$%: c. proportional &'($: ) *$'1: 2 "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '
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#hen the government levies a tax on a corporation, a. all the burden of the tax ultimately falls on owners. b. there are very few distortions to individual incentives. c. it is meeting all of the requirements for vertical equity. d. the corporation is more like a tax collector than a taxpayer. !"#$%: d. the corporation is more like a tax collector than a taxpayer. &'($: ) *$'1: 2 "$+&I,!: 1 ,./$+&I0$: 3 % !2,): '
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&he essence of most proposals for a flat tax are captured in a. a single, low tax rate applied to all income above a certain level. b. an initial low flat tax rate that increases as a taxpayerFs income increases. c. a single tax rate with many exemptions that provide incentives to people who save. d. a lump9sum tax that all taxpayers must pay, and then a fixed low tax rate for all income above a certain level. !"#$%: a. a single, low tax rate applied to all income above a certain level. &'($: ) *$'1: + "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '

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+hapter 1-7&he 2esign of the &ax "ystem 114

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Incentives to work and save are reduced when a. income taxes are higher. b. (igovian taxes are implemented. c. consumption taxes replace income taxes. d. all of the above !"#$%: a. income taxes are higher. &'($: ) *$'1: + "$+&I,!: - ,./$+&I0$: 3 % !2,): '

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!"#$%: c. equity and efficiency. &'($: ) *$'1: + "$+&I,!: - ,./$+&I0$: -, 1 % !2,): '
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!"#$%: b. increases in life expectancy. &'($: ) *$'1: + "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '
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!"#$%: a. sales taxes and property taxes. &'($: ) *$'1: 2 "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '
3

!"#$%: b. education. &'($: ) *$'1: 2 "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '

4

!"#$%: c. individual income tax. &'($: ) *$'1: 2 "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '
8

!"#$%: b. government must spend a larger share of its revenue on interest payments. &'($: ) *$'1: + "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '
:

!"#$%: a. payroll tax. &'($: ) *$'1: + "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '

=

!"#$%: b. is a budget surplus. &'($: ) *$'1: 2 "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '

>

!"#$%: d. some consumers alter their consumption by not purchasing the taxed commodity. &'($: ) *$'1: + "$+&I,!: - ,./$+&I0$: - % !2,): '
1?

!"#$%: c. discourages saving. &'($: ) *$'1: 2 "$+&I,!: - ,./$+&I0$: - % !2,): '

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!"#$%: b. tax avoidance. &'($: ) *$'1: 2 "$+&I,!: - ,./$+&I0$: - % !2,): '

1-

!"#$%: c. a tax loophole. &'($: ) *$'1: 2 "$+&I,!: - ,./$+&I0$: - % !2,): '

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&'($: )
13

!"#$%: b. the administrative burden of taxes is increased. *$'1: + "$+&I,!: - ,./$+&I0$: - % !2,): '

!"#$%: b. deadweight loss from taxes will rise. &'($: ) *$'1: + "$+&I,!: - ,./$+&I0$: - % !2,): '
14

!"#$%: d. marginal tax rate.

&'($: ) *$'1: 2 "$+&I,!: - ,./$+&I0$: 1 % !2,): '

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!"#$%: b. a lump9sum tax. &'($: ) *$'1: + "$+&I,!: - ,./$+&I0$: - % !2,): '

1:

!"#$%: d. the wealthy benefit more from services provided by government than the poor. &'($: ) *$'1: + "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '
1=

!"#$%: a. progressive. &'($: ) *$'1: 2 "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '

1>

!"#$%: c. the individual or corporation who actually pays the tax cannot share the burden of the tax. &'($: ) *$'1: 2 "$+&I,!: 1 ,./$+&I0$: 3 % !2,): '
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!"#$%: c. ability9to9pay principle. &'($: ) *$'1: + "$+&I,!: 1 ,./$+&I0$: 3 % !2,): '

-1

!"#$%: a. contribute a larger amount. &'($: ) *$'1: + "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '
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!"#$%: c. proportional &'($: ) *$'1: 2 "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '

-1

!"#$%: d. the corporation is more like a tax collector than a taxpayer. &'($: ) *$'1: 2 "$+&I,!: 1 ,./$+&I0$: 3 % !2,): '
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!"#$%: a. a single, low tax rate applied to all income above a certain level. &'($: ) *$'1: + "$+&I,!: 1 ,./$+&I0$: 1 % !2,): '
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!"#$%: a. income taxes are higher. &'($: ) *$'1: + "$+&I,!: - ,./$+&I0$: 3 % !2,): '