Deck 18: Taxation and Public Expenditure

Question 1

FIGURE 18-1
Refer to Figure 18-1. A progressive tax is illustrated by curves)

A) A and B.
B) B and C.
C) C and D.
D) A only.
E) C only.

Answer 1

D

Question 2

The sometimes proposed ʺflat tax,ʺ such as one that takes 15% of income at all levels of income, is an example of an)

A) proportional tax.
B) regressive tax.
C) progressive tax.
D) excise tax.
E) value-added tax.

Answer 2

A

Question 3

FIGURE 18-1
Refer to Figure 18-1. A proportional tax is illustrated by curves)

A) A and B.
B) B and C.
C) C and D.
D) B only.
E) D only.

Answer 3

D

Question 4

Some important taxes are regressive, such as provincial sales taxes. In an effort to achieve proportionality in the overall tax system it is therefore necessary to impose

A) substantial progressivity in income taxes.
B) a negative income tax.
C) a flat-rate tax.
D) consumption taxation.
E) efficiency in the tax system.

Question 5

Which of the following statements suggests that property taxes might be progressive?

A) The proportion of income spent on housing tends to decline as income rises.
B) Higher-income people live in more expensive houses than do low-income people.
C) A large part of the property tax is shifted to renters, who typically have lower incomes than owners.
D) Inner city neighbourhoods often have higher property taxes than do the more affluent suburbs.
E) Elderly pensioners often live in their family homes after children have left.

Question 6

An income tax is progressive if, as income increases,

A) its average tax rate is increasing.
B) its marginal tax rate is falling.
C) its average tax rate is falling, but total taxes are increasing.
D) its average tax rate and marginal tax rate are constant while income is increasing.
E) its average tax rate is falling, but the marginal tax rate is increasing.

Question 7

Suppose taxes are levied in the following way. All individuals pay a tax equal to $2000 no matter what income they earn. In addition, all individuals pay 20% of all their earned income in taxes. This income -tax system is

A) regressive.
B) progressive.
C) indexed.
D) proportional.
E) an accurate description of the Canadian system.

Question 8

Consider an income-tax system that requires all individuals to pay exactly 3% of their income. This income -tax system is

A) proportional.
B) progressive, because the higher the individualʹs income, the greater the amount of tax paid.
C) regressive, since 3% is harder to pay for a low-income taxpayer.
D) fair, since everyone pays the same amount.
E) a lump-sum system, sometimes called a poll tax.

Question 9

A tax that takes a higher percentage of income as income rises is called an)

A) proportional tax.
B) regressive tax.
C) progressive tax.
D) excise tax.
E) value-added tax.

Question 10

FIGURE 18-1
Refer to Figure 18-1. A regressive tax is illustrated by curves)

A) A and B.
B) B and C.
C) C and D.
D) A only.
E) C only.

Question 11

Which of the following is required to achieve progressivity for a particular tax?

A) a marginal tax rate equal to the average tax rate implying that the average tax rate is rising with income)
B) a marginal tax rate equal to the average tax rate implying that the average tax rate is falling with income)
C) an average tax rate above the marginal tax rate implying that the average tax rate is falling with income)
D) a marginal tax rate above the average tax rate implying that the average tax rate is rising with income)
E) a constant tax rate for all incomes

Question 12

A tax that takes a smaller percentage of income as the income increases is called

A) a regressive tax.
B) a progressive tax.
C) a proportional tax.
D) an efficient tax.
E) an excise tax.

Question 13

A mandatory health-insurance premium of a given amount payable by all residents is an example of an)

A) proportional tax.
B) regressive tax.
C) progressive tax.
D) value-added tax.
E) invisible tax.

Question 14

Suppose an income tax is levied in the following way: All individuals pay 10% of their income up to an income of $30 000. On all income above $30 000, individuals pay 20% of their income. Such a tax is

A) regressive.
B) progressive.
C) indexed.
D) proportional.
E) unrealistic.

Question 15

FIGURE 18-1
Refer to Figure 18-1. A lump-sum tax is illustrated by curves)

A) A and B.
B) B and C.
C) C and D.
D) B only.
E) D only.

Question 16

If a tax system contains some important taxes that are regressive, substantial progressivity in other taxes would be required in order to achieve

A) proportionality in the overall tax system.
B) a negative income tax.
C) a flat-rate tax.
D) equity in the overall tax system.
E) efficiency in the overall tax system.

Question 17

Suppose taxes are levied in the following way. No individual pays any taxes on the first $10 000 of their income. And for every dollar earned above this amount, all individuals pay 20% in taxes. This income -tax system is

A) regressive.
B) progressive.
C) indexed.
D) proportional.
E) an accurate description of the Canadian system.

Question 18

A marginal tax rate of 47% on taxable income over $150 000 implies that

A) an individual with this taxable income would pay $70 000 in income tax.
B) the average tax rate is also 47%.
C) the income tax payable on any dollar earned above $150 000 is 47 cents.
D) the tax system is progressive.
E) the tax system is horizontally equitable.

Question 19

An example of a regressive tax in Canada is

A) any one of the provincial sales taxes.
B) the federal income tax.
C) the corporate income tax.
D) the provincial income taxes.
E) the typical property taxes in Canadian cities and towns.

Question 20

Tax and other revenues collected by all levels of government amounted to approximately what proportion of Canadaʹs Gross Domestic Product GDP) in 2014?

A) 8%
B) 18%
C) 28%
D) 38%
E) 48%

Question 21

The table below shows 2015 federal income-tax rates in Canada. TABLE 18-1
Refer to Table 18-1. If an individual had a taxable income of $120 000, how much federal tax would be due from the earnings taxed at the rate of 26%?

A) $497
B) $5639
C) $8960
D) $7955
E) $31 200

Question 22

The most important source of revenue for the Canadian federal government is taxes; the most important source of revenue for Canadian municipal governments is taxes.

A) income; excise
B) property; payroll
C) corporate; sales
D) sales; property
E) income; property

Question 23

The table below shows 2015 federal income-tax rates in Canada. TABLE 18-1
Refer to Table 18-1. If an individual had a taxable income of $138 586, how much total federal tax would be due?

A) $497
B) $5639
C) $24 794
D) $29 327
E) $36 032

Question 24

In Canada, taxes are levied and collected by

A) the federal government only.
B) the provincial governments only.
C) local governments only.
D) federal and provincial governments only.
E) all levels of government.

Question 25

The Canadian federal income tax is progressive because it has

A) marginal and average rates that rise and are equal at most levels of income.
B) marginal rates that are higher than average rates at most levels of income.
C) average rates that rise but marginal rates that are constant at most levels of income.
D) marginal rates that are lower than average rates at most levels of income.
E) average and marginal rates that are constant at most levels of income.

Question 26

Suppose a firm buys $3000 worth of inputs from other firms, hires $2000 worth of labour services, and has sales revenue of $7500. The firmʹs resulting profit is $2500. If the GST a value-added tax) rate is 5%, this firm will pay in GST.

A) $0
B) $125
C) $225
D) $375
E) $2500

Question 27

The table below shows 2015 federal income-tax rates in Canada. TABLE 18-1
Refer to Table 18-1. If an individual had a taxable income of $120 000, how much total federal tax would be due?

A) $6109
B) $8959
C) $31 200
D) $24 494
E) $28 020

Question 28

In 2015, the federal income-tax rate was graduated in steps, with the top rate applying to incomes above approximately .

A) eight; $40 000
B) eight; $120 000
C) three; $81 000
D) three; $100 000
E) four; $138 000

Question 29

The tax that generates the greatest proportion of government revenue in Canada is

A) the income tax.
B) the goods and services tax.
C) the property tax.
D) the provincial sales tax.
E) the payroll tax.

Question 30

The table below shows 2015 federal income-tax rates in Canada. TABLE 18-1
Refer to Table 18-1. If an individual had a taxable income of $70 000, how much federal tax would be due?

A) $6004
B) $6406
C) $10 500
D) $12 271
E) $15 400

Question 31

The table below shows 2015 federal income-tax rates in Canada. TABLE 18-1
Refer to Table 18-1. If an individual had a taxable income of $120 000, how much federal tax would be due from the earnings taxed at the rate of 22%?

A) $1629
B) $17 004
C) $9834
D) $26 400
E) $28 020

Question 32

In Canada, the corporate income tax is integrated with the , so that are not taxed twice on the firmʹs earnings.

A) sales tax; consumers
B) property tax; corporations
C) personal income tax; corporations
D) sales tax; shareholders
E) income tax; shareholders

Question 33

Suppose a firm buys $1000 worth of inputs from other firms, hires $1000 worth of labour services, and has sales revenue of $2500. The firmʹs resulting profit is $500. According to a value-added tax such as the GST, this firm would pay taxes on

A) $500.
B) $1000.
C) $1500.
D) $2500.
E) $4500.

Question 34

The federal corporate income tax in Canada is

A) a proportional tax on profits.
B) a progressive tax on revenues.
C) a proportional tax on revenues.
D) a flat tax on revenues.
E) a progressive tax on profits.

Question 35

The table below shows 2015 federal income-tax rates in Canada. TABLE 18-1
Refer to Table 18-1. If an individual had a taxable income of $120 000, how much federal tax would be due from the portion of earnings taxed at the maximum rate of 29%?

A) $0
B) $1817
C) $8003
D) $23 621
E) $34 800

Question 36

As a proportion of Gross Domestic Product GDP), Canadian governmentsʹ tax revenues, as compared to other industrialized countries, are

A) the very lowest.
B) among the lowest.
C) roughly in the middle of the group.
D) among the highest.
E) the very highest.

Question 37

The various provincial sales taxes are mildly regressive because

A) richer households spend more in total and therefore pay more sales tax.
B) poorer households tend to spend a larger proportion of their incomes than richer households.
C) they are indirect taxes.
D) they are value added taxes.
E) richer households can avoid paying sales taxes while poorer households cannot.

Question 38

From the perspective of individuals, the goods and services tax GST) applies to

A) additional income earned.
B) expenditure rather than income.
C) profits for self-employed individuals.
D) saving rather than expenditure.
E) total taxable income.

Question 39

The goods and services tax GST) in Canada is an example of an)

A) proportional tax.
B) invisible tax.
C) progressive tax.
D) excise tax.
E) value-added tax.

Question 40

The table below shows 2015 federal income-tax rates in Canada. TABLE 18-1
Refer to Table 18-1. If an individual had a taxable income of $120 000, how much federal tax would be due from the earnings taxed at the minimum rate of 15%?

A) $0
B) $6705
C) $8003
D) $18 000
E) $34 800

Question 41

Suppose a Canadian Member of Parliament suggests that people with the same total income and ability to pay should pay the same taxes, no matter the source of their income. This refers to the concept of

A) equality of outcomes.
B) horizontal equity.
C) vertical equity.
D) proportionality.
E) the benefit principle.

Question 42

The figure below show a simplified version of the current 2015) Canadian federal income-tax system. The marginal income-tax rates for the four ranges of income are 15%, 22%, 26%, and 29%, respectively.
FIGURE 18-2
Refer to Figure 18-2. What must be true of the four marginal income-tax rates in order for the tax to be considered a ʺflatʺ tax?

A) they need to be zero
B) they need to be the same
C) they need to be constant
D) they need to gradually level out
E) they need to be smaller

Question 43

The figure below show a simplified version of the current 2015) Canadian federal income-tax system. The marginal income-tax rates for the four ranges of income are 15%, 22%, 26%, and 29%, respectively.
FIGURE 18-2
If there were ʺhorizontal equityʺ between all households in Canada, then

A) households of the same size would share the same tax burden.
B) individuals in the same age group would share the same tax burden.
C) households with identical abilities to pay would bear the same tax burden.
D) there would be equity between different income classes.
E) all households would pay the same percentage of income as tax.

Question 44

An important objective in designing a tax system is to

A) design a system that minimizes inefficiency for a given amount of revenue raised.
B) design a system that raises the revenue required for the governmentʹs debt-service obligations.
C) raise the maximum possible revenue.
D) not intervene in the market economy because this only causes inefficiencies.
E) eliminate all deadweight loss.

Question 45

The two main competing goals in the design of a tax system are

A) efficiency and productivity.
B) efficiency and equity.
C) efficiency and the elimination of distortions.
D) applying the direct and excess burden of taxes evenly.
E) growth and productivity.

Question 46

The figure below show a simplified version of the current 2015) Canadian federal income-tax system. The marginal income-tax rates for the four ranges of income are 15%, 22%, 26%, and 29%, respectively.
FIGURE 18-2
Refer to Figure 18-2. An individual with a taxable income of $98 125 will pay $ in income taxes.

A) 15 209
B) 18 807
C) 22 513
D) 25 513
E) 28 456

Question 47

The Goods and Service Tax GST) taxes

A) the retail value of all goods.
B) the value of a firmʹs inputs in its production process.
C) each firmʹs contribution to the value of final output.
D) the total value of a firmʹs output.
E) the total value of a good at each step of the production process.

Question 48

If one was concerned only with satisfying the ʺbenefit principle,ʺ the ideal tax would be an)

A) income tax.
B) surcharge tax.
C) sales tax.
D) user charge.
E) proportional income tax.

Question 49

Which of the following is an example of a tax that is designed according to the ʺbenefit principleʺ?

A) a metered water tax
B) school tax based on property value)
C) a provincial sales tax
D) value-added tax
E) federal income tax

Question 50

The excess burden of a tax

A) is the incidence of a tax.
B) is the deadweight loss created by the tax.
C) increases economic efficiency by eliminating distortions in the economy.
D) is always progressive.
E) is always regressive.

Question 51

The direct burden of a tax is

A) directly proportional to average income.
B) always progressive.
C) always regressive.
D) a tax-deductible expense for the person who pays the tax.
E) the total revenue collected by the tax.

Question 52

Suppose a Canadian Member of Parliament suggests that people with higher incomes should pay more in taxes. This refers to the concept of

A) equality of outcomes.
B) horizontal equity.
C) vertical equity.
D) proportionality.
E) the benefit principle.

Question 53

The figure below show a simplified version of the current 2015) Canadian federal income-tax system. The marginal income-tax rates for the four ranges of income are 15%, 22%, 26%, and 29%, respectively.
FIGURE 18-2
Consider the concept of equity in taxation. What is the ʺbenefit principleʺ?

A) the main principle on which all tax systems are based
B) the main principle on which the Canadian tax system is based
C) the principle that users of public goods are taxed in proportion to their use of them
D) the principle that users of public goods are taxed in proportion to their ability to pay
E) the main principle on which horizontal equity is based

Question 54

The figure below show a simplified version of the current 2015) Canadian federal income-tax system. The marginal income-tax rates for the four ranges of income are 15%, 22%, 26%, and 29%, respectively.
FIGURE 18-2
Refer to Figure 18-2. What needs to be true about the four marginal income -tax rates in order for this tax system to be considered regressive?

A) they need to be smaller than they are now
B) they need to be larger than they are now
C) they need to be constant
D) they need to decrease as income increases
E) they need to increase as income increases

Question 55

The figure below show a simplified version of the current 2015) Canadian federal income-tax system. The marginal income-tax rates for the four ranges of income are 15%, 22%, 26%, and 29%, respectively.
FIGURE 18-2
Refer to Figure 18-2. An individual with a taxable income of $39 500 will pay in income taxes.

A) $0
B) $6122
C) $5925
D) $6109
E) $8690

Question 56

The figure below show a simplified version of the current 2015) Canadian federal income-tax system. The marginal income-tax rates for the four ranges of income are 15%, 22%, 26%, and 29%, respectively.
FIGURE 18-2
Refer to Figure 18-2. This income-tax system can be characterized as

A) cumbersome.
B) fair.
C) progressive.
D) regressive.
E) proportional.

Question 57

Interest earnings from accumulated savings are subject to personal income tax in Canada. As a result,

A) total national saving is higher than it otherwise would be.
B) there will be more capital accumulated for the economy.
C) the interest paid on savings accounts increases.
D) individuals have a reduced incentive to save.
E) taxes applied to this income are regressive.

Question 58

Consider two families, each of whom earn total income of $80 000, but that are different in many other respects, such as the number of individuals to support. If each family is assessed income tax payable of $14 749, then it is very likely that the principle of is being violated.

A) progressivity
B) horizontal equity
C) vertical equity
D) ability to pay
E) proportionality

Question 59

The figure below show a simplified version of the current 2015) Canadian federal income-tax system. The marginal income-tax rates for the four ranges of income are 15%, 22%, 26%, and 29%, respectively.
FIGURE 18-2
The concept of vertical equity is derived from

A) the benefit principle.
B) the ability-to-pay principle.
C) fiscal federalism.
D) the proportionality of the income-tax system.
E) the understanding that taxes generate distortions in the economy.

Question 60

The figure below show a simplified version of the current 2015) Canadian federal income-tax system. The marginal income-tax rates for the four ranges of income are 15%, 22%, 26%, and 29%, respectively.
FIGURE 18-2
When assessing a tax system, ʺvertical equityʺ refers to

A) equity within a given income group.
B) equity across income groups.
C) equity between corporate entities.
D) unequal treatment of persons with unequal incomes.
E) equity across different periods of time.

Question 61

FIGURE 18-3
Refer to Figure 18-3. Suppose that supply is perfectly elastic and the price of this good is initially P1. If an excise tax raises the price from P1 to P2, the excess burden of the tax is area

A) P3AP4.
B) P2BP3.
C) P1CBP2.
D) BFC.
E) P1FBP2.

Question 62

The diagram below shows supply and demand diagrams S and D) for some product. The government then imposes an excise tax. The new supply curve is ST.
FIGURE 18-4
Refer to Figure 18-4. What is the producersʹ net revenue after the imposition of the tax?

A) $450
B) $500
C) $540
D) $600
E) $630

Question 63

The diagram below shows supply and demand diagrams S and D) for some product. The government then imposes an excise tax. The new supply curve is ST.
FIGURE 18-4
Refer to Figure 18-4. What is the dollar value of the direct burden of this tax?

A) -$30
B) $30
C) $90
D) $180
E) $450

Question 64

Suppose there is only one movie theatre in a town and the equilibrium price and quantity for movie admissions is $9 and 850 visits per week. Now suppose the government imposes a tax such that the new equilibrium price and quantity are $10.50 and 780 visits per week. What is the direct burden of this tax?

A) $0
B) $105
C) $1170
D) $1275
E) There is not enough information to know.

Question 65

The excess burden of a tax reflects a reduction of

A) allocative inefficiency.
B) total tax revenues.
C) total economic surplus.
D) both equilibrium price and quantity.
E) economic profits generated in the economy.

Question 66

Possible implications of corporate income taxes being levied on accounting profits include
1) underinvestment in new machinery and equipment;
2) a lower rate of adoption of the latest technologies;
3) faster productivity growth.

A) 1 only
B) 2 only
C) 3 only
D) 1 and 2
E) 1 and 3

Question 67

Consider a monopolist that is earning profits in the long run. If the government imposes a lump -sum tax on this monopolist that is less than its profits), then

A) output would decrease and price to consumers would increase.
B) neither output nor price would change.
C) the output would remain the same while price increased.
D) the monopolist would cease production.
E) new firms would enter the industry.

Question 68

FIGURE 18-3
Refer to Figure 18-3. Suppose that supply is perfectly elastic and the price of this good is initially P1. If an excise tax raises the price from P1 to P4, the excess burden of the tax is

A) the area P3AP4.
B) the area P1Cq10.
C) the area P1CP4.
D) the area BFC.
E) impossible to calculate from the given information.

Question 69

FIGURE 18-3
Refer to Figure 18-3. Suppose that supply is perfectly elastic and the price of this good is initially P3. If an excise tax raises the price from P3 to P4, the direct burden of the tax is

A) the area P3AP4.
B) the area P2BP3.
C) the area P1CP4.
D) the area BFC.
E) zero.

Question 70

In an otherwise efficient market, an excise tax causes because it distorts the relationship between
)

A) allocative inefficiency; prices and marginal costs
B) allocative inefficiency; pre-tax price and the tax price
C) productive inefficiency; costs and output
D) market inefficiencies; prices of similar goods
E) voter resentment; income and ability to pay

Question 71

Which of the following best describes the policy implications of a Laffer curve?

A) Policymakers should eliminate tax deductions and maximize revenue at any given tax rate.
B) Policymakers should eliminate tax loopholes and maximize revenue at any given tax rate.
C) Policymakers should carefully consider whether a given increase in tax rates would increase or decrease tax revenues.
D) Policymakers should avoid imposing taxes on income as they decrease the work incentive.
E) Policymakers should set the tax rate as low as possible to maximize tax revenue.

Question 72

The diagram below shows supply and demand diagrams S and D) for some product. The government then imposes an excise tax. The new supply curve is ST.
FIGURE 18-4
Refer to Figure 18-4. What is the dollar value of the excess burden of this tax?

A) $1
B) $2
C) $5
D) $10
E) $40

Question 73

FIGURE 18-3
Refer to Figure 18-3. Suppose that supply is perfectly elastic and the price of this good is initially P1. If an excise tax raises the price from P1 to P2, the direct burden of the tax is

A) the area DEFB.
B) the area P1FBP2.
C) the area P1CBP4.
D) the area BFC.
E) zero.

Question 74

The excess burden of an excise tax

A) is the price the consumer must pay above the free-market price.
B) reflects the allocative efficiency of the tax.
C) is the deadweight loss created by the tax.
D) is the administrative cost of collecting the tax.
E) is the total cost imposed on the producer by the tax.

Question 75

The diagram below shows supply and demand diagrams S and D) for some product. The government then imposes an excise tax. The new supply curve is ST.
FIGURE 18-4
Refer to Figure 18-4. What is the producersʹ revenue before the imposition of the tax?

A) $450
B) $500
C) $540
D) $600
E) $630

Question 76

A Laffer curve

A) relates the marginal tax rate to the average tax rate.
B) relates the governmentʹs total income-tax revenue to the average rate across all taxes.
C) relates the governmentʹs sales-tax yield to the marginal tax rate.
D) shows that, for any tax, tax revenues reach a maximum at some tax rate below 100%.
E) shows that tax revenues reach a maximum when the marginal tax rate is zero.

Question 77

The diagram below shows supply and demand diagrams S and D) for some product. The government then imposes an excise tax. The new supply curve is ST.
FIGURE 18-4
Refer to Figure 18-4. What is the value of the tax imposed on this product, in dollars per unit?

A) $1
B) $2
C) $3
D) $4
E) $5

Question 78

FIGURE 18-3
Refer to Figure 18-3. Suppose that supply is perfectly elastic and the price of this good is initially P3. If an excise tax raises the price from P3 to P4, the excess burden of the tax is

A) the area P3AP4.
B) the area P2BP3.
C) the area P1CP4.
D) the area BFC.
E) zero.

Question 79

Since corporate income taxes are levied on accounting profits and not economic profits, they tend to

A) favour the accounting profession as it boosts demand of their services.
B) introduce double taxation as individual shareholders also pay income tax on dividend income.
C) be efficient since economic profits are hard to assess.
D) be inefficient since they will affect the allocation of resources.
E) be inefficient since they fail to contribute substantially to federal revenues.

Question 80

The direct burden of a tax is . The excess burden reflects the .

A) the deadweight loss of the tax; the inefficiency of the tax
B) the amount paid by taxpayers; the amount paid by taxpayers in excess of the free -market price.
C) the costs of administering the tax; the amount paid by taxpayers
D) the costs of administering the tax; amount paid by taxpayers in excess of the free -market price.
E) the amount paid by taxpayers; allocative inefficiency of the tax