Question 1

Explain the concepts of vertical and horizontal equity as goals for tax systems.Which of the concepts is easier to measure in practice? Explain.

Accepted Answer

Vertical equity is the principle that groups with more resources (higher income,higher wealth,higher profits)should pay higher taxes than groups with fewer resources.There are standard measures of vertical equity,including the extent to which tax systems are progressive,which means that the effective average tax rate rises with income.In contrast,horizontal equity is the principle that people who are similar but make different economic choices should be treated similarly by the tax system.In practice,however,horizontal equity is difficult to measure because it is unambiguous only when taxes differ for reasons independent of choice.Under most tax systems,however,people of identical underlying resources who make different choices will pay different amounts of tax.

Question 2

Compare and contrast tax deductions and tax credits in terms of both efficiency and vertical equity.

Accepted Answer

The trade-off that the government faces is between a system that subsidizes all giving partially (the deduction),versus one that subsidizes some giving fully and some not at all (the credit).Which policy is more efficient is dictated by two considerations.The first is the nature of the demand for the subsidized good.For some goods,individual demand may be very elastic in response to large reductions in the price,but not very elastic in response to small reductions in price; in such cases,credits may cause a larger increase in one behavior than deductions,since credits lead to larger reductions in price.Second,policy makers must decide how important it is to achieve some minimal level of the behavior.With some behaviors,however,the government may want to subsidize some minimal level of provision but not subsidize a particularly generous provision.

Question 3

The Haig-Simons comprehensive income definition defines taxable resources as:

Accepted Answer

A)  income earned from participating in the labor market. 
B)  the increase in an individual's wealth. 
C)  an individual's actual consumption for the year. 
D)  an individual's potential annual consumption. 
A)  income earned from participating in the labor market. 
B)  the increase in an individual's wealth. 
C)  an individual's actual consumption for the year. 
D)  an individual's potential annual consumption. D

Question 4

What is the alternative minimum tax (AMT)? Why was it established? How will its application change over time,and why?

Accepted Answer

It was established to ensure that all we

Question 5

Which fixed amount can a taxpayer subtract from adjusted gross income for each dependent member of the household,as well as for the taxpayer and his or her spouse?

Accepted Answer

A)  an itemized deduction 
B)  a standard deduction 
C)  a tax credit 
D)  an exemption 
A)  an itemized deduction 
B)  a standard deduction 
C)  a tax credit 
D)  an exemption

Question 6

Which statement about the subsidy for home ownership is TRUE?

Accepted Answer

A)  The subsidy mechanism is a tax credit for those who have purchased their home. 
B)  The subsidy is consistent with the Haig-Simons definition of income. 
C)  Empirical research shows that the subsidy causes more people to buy homes. 
D)  The current U.S.tax system does not include the rental value of one's home in taxable income. 
A)  The subsidy mechanism is a tax credit for those who have purchased their home. 
B)  The subsidy is consistent with the Haig-Simons definition of income. 
C)  Empirical research shows that the subsidy causes more people to buy homes. 
D)  The current U.S.tax system does not include the rental value of one's home in taxable income.

Question 7

(a)What is the rationale behind allowing people to deduct charitable giving from their taxable income?
(b)What are the two reasons given in the text that the government does not simply provide the charitable good itself? Explain.

Accepted Answer

(a)The rationale behind making charitabl

Question 8

According to a 2012 report on tax-paying couples,_____ of couples pay a marriage penalty,_____ of couples receive a marriage subsidy,and _____ of couples have neither a penalty nor a subsidy.

Accepted Answer

A)  48%; 15%; 38% 
B)  38%; 15%; 48% 
C)  48%; 38%; 15% 
D)  15%; 38%; 48% 
A)  48%; 15%; 38% 
B)  38%; 15%; 48% 
C)  48%; 38%; 15% 
D)  15%; 38%; 48%

Question 9

Which statement about the subsidy for home ownership is TRUE?

Accepted Answer

A)  The rationale behind the subsidy is that homeowners donate more to charitable causes. 
B)  Empirical research suggests that the tax subsidy does not change homeownership rates but rather induces homeowners to spend more on houses. 
C)  The rationale behind the subsidy is that there is a positive externality associated with people buying larger,more expensive houses. 
D)  Empirical research suggests that the home mortgage interest deduction is justified by large positive externalities associated with homeownership. 
A)  The rationale behind the subsidy is that homeowners donate more to charitable causes. 
B)  Empirical research suggests that the tax subsidy does not change homeownership rates but rather induces homeowners to spend more on houses. 
C)  The rationale behind the subsidy is that there is a positive externality associated with people buying larger,more expensive houses. 
D)  Empirical research suggests that the home mortgage interest deduction is justified by large positive externalities associated with homeownership.

Question 10

Which statement about taxation in the United States is TRUE?

Accepted Answer

A)  Subnational governments rely more on consumption taxes than does the federal government. 
B)  Subnational governments rely more on individual income taxes than does the federal government. 
C)  Subnational governments rely less on wealth taxes than does the federal government. 
D)  Subnational governments rely less on property taxes than does the federal government. 
A)  Subnational governments rely more on consumption taxes than does the federal government. 
B)  Subnational governments rely more on individual income taxes than does the federal government. 
C)  Subnational governments rely less on wealth taxes than does the federal government. 
D)  Subnational governments rely less on property taxes than does the federal government.

Question 11

Which is a fixed amount that a taxpayer can deduct from taxable income?

Accepted Answer

A)  an itemized deduction 
B)  a standard deduction 
C)  a tax credit 
D)  an exemption 
A)  an itemized deduction 
B)  a standard deduction 
C)  a tax credit 
D)  an exemption

Question 12

There is a 50% income tax in a society with only two individuals.Both individuals have pre-tax incomes of $50,000.In period 1,there is no tax deduction,and Harry gives $5,000 to charity while Sally gives $8,000 to charity.In period 2,the government makes charitable donations tax deductible and Harry gives $6,000 and Sally gives $12,000.The marginal impact of the tax break was ________; the inframarginal impact of the tax break was _________.

Accepted Answer

A)  $2,500; $13,000 
B)  $2,500; $6,500 
C)  $5,000; $13,000 
D)  $5,000; $6,500 
A)  $2,500; $13,000 
B)  $2,500; $6,500 
C)  $5,000; $13,000 
D)  $5,000; $6,500

Question 13

Suppose there is a 20% tax on the first $15,000 of taxable income,a 30% tax on taxable income above $15,000 until $30,000,and a 40% tax on all taxable income above $30,000.There is a $3,000 exemption per person.What is the marginal tax rate for a single mother making $35,000 who has one child?

Accepted Answer

A)  20% 
B)  30% 
C)  31.7% 
D)  40% 
A)  20% 
B)  30% 
C)  31.7% 
D)  40%

Question 14

The deduction of which item is hardest to justify on ability-to-pay grounds?

Accepted Answer

A)  high medical expenditures 
B)  property and casualty losses 
C)  state and local tax payments 
D)  child care expenses 
A)  high medical expenditures 
B)  property and casualty losses 
C)  state and local tax payments 
D)  child care expenses

Question 15

Suppose that you owe $4,000 in income taxes but manage to reduce that amount by $2,000 because you paid college tuition that year.The subtraction of $2,000 is a(n):

Accepted Answer

A)  tax credit. 
B)  standard deduction. 
C)  exemption. 
D)  withholding. 
A)  tax credit. 
B)  standard deduction. 
C)  exemption. 
D)  withholding.

Question 16

Which tax is an example of a tax on consumption?

Accepted Answer

A)  capital gains tax 
B)  individual income tax 
C)  property tax 
D)  excise tax 
A)  capital gains tax 
B)  individual income tax 
C)  property tax 
D)  excise tax

Question 17

Which tax is paid on individual income from sales of assets?

Accepted Answer

A)  excise tax 
B)  estate tax 
C)  sales tax 
D)  capital gains tax 
A)  excise tax 
B)  estate tax 
C)  sales tax 
D)  capital gains tax

Question 18

There is a 20% tax on the first $15,000 of income,a 30% tax on income above $15,000 until $30,000,and a 40% tax on all income above $30,000.What is the average tax rate for someone making $35,000?

Accepted Answer

A)  14.29% 
B)  20% 
C)  27.1% 
D)  31.7% 
A)  14.29% 
B)  20% 
C)  27.1% 
D)  31.7%

Question 19

Which tax is paid on individual or household purchases of goods (and sometimes services)?

Accepted Answer

A)  sales tax 
B)  consumption tax 
C)  individual income tax 
D)  capital gains tax 
A)  sales tax 
B)  consumption tax 
C)  individual income tax 
D)  capital gains tax

Question 20

Which tax is paid on earnings from selling assets such as stocks,paintings,and houses?

Accepted Answer

A)  sales tax 
B)  consumption tax 
C)  individual income tax 
D)  capital gains tax 
A)  sales tax 
B)  consumption tax 
C)  individual income tax 
D)  capital gains tax

Exam 18: Taxation- How It Works and What It Means

Explain the concepts of vertical and horizontal equity as goals for tax systems.Which of the concepts is easier to measure in practice? Explain.

Compare and contrast tax deductions and tax credits in terms of both efficiency and vertical equity.

The Haig-Simons comprehensive income definition defines taxable resources as:

What is the alternative minimum tax (AMT)? Why was it established? How will its application change over time,and why?

Which fixed amount can a taxpayer subtract from adjusted gross income for each dependent member of the household,as well as for the taxpayer and his or her spouse?

Which statement about the subsidy for home ownership is TRUE?

(a)What is the rationale behind allowing people to deduct charitable giving from their taxable income? (b)What are the two reasons given in the text that the government does not simply provide the charitable good itself? Explain.

According to a 2012 report on tax-paying couples,_____ of couples pay a marriage penalty,_____ of couples receive a marriage subsidy,and _____ of couples have neither a penalty nor a subsidy.

Which statement about the subsidy for home ownership is TRUE?

Which statement about taxation in the United States is TRUE?

Which is a fixed amount that a taxpayer can deduct from taxable income?

Suppose there is a 20% tax on the first $15,000 of taxable income,a 30% tax on taxable income above $15,000 until $30,000,and a 40% tax on all taxable income above $30,000.There is a $3,000 exemption per person.What is the marginal tax rate for a single mother making $35,000 who has one child?

The deduction of which item is hardest to justify on ability-to-pay grounds?

Suppose that you owe $4,000 in income taxes but manage to reduce that amount by $2,000 because you paid college tuition that year.The subtraction of $2,000 is a(n):

Which tax is an example of a tax on consumption?

Which tax is paid on individual income from sales of assets?

There is a 20% tax on the first $15,000 of income,a 30% tax on income above $15,000 until $30,000,and a 40% tax on all income above $30,000.What is the average tax rate for someone making $35,000?

Which tax is paid on individual or household purchases of goods (and sometimes services)?

Which tax is paid on earnings from selling assets such as stocks,paintings,and houses?

Why Study Public Finance

Theoretical Tools of Public Finance

Empirical Tools of Public Finance

Budget Analysis and Deficit Financing

Externalities- Problems and Solutions

Externalities in Action- Environmental and Health Externalities

Public Goods

Cost-Benefit Analysis

Political Economy

State and Local Government Expenditures

Education

Social Insurance- the New Function of Government

Social Security

Unemployment Insurance, disability Insurance, and Workers Compensation

Health Insurance I- Health Economics and Private Health Insurance

Health Insurance Ii- Medicare, medicaid, and Health Care Reform

Income Distribution and Welfare Programs

The Equity Implications of Taxation- Tax Incidence

Taxes on Labor Supply

Taxes on Savings

Taxes on Risk Taking and Wealth

Taxation of Business Income

Fundamental Tax Reform and Consumption Tax

Filters

According to a 2012 report on tax-paying couples,___ of couples pay a marriage penalty,_ of couples receive a marriage subsidy,and ___ of couples have neither a penalty nor a subsidy.