Deck 16: Efficient and Equitable Taxation

Question 1

When the minimum marginal penalty for tax evasion is greater than the maximum marginal tax rate, theory suggests that tax evasion will be

A)100.
B)20.
C)greater than 1.
D)0.

Answer 1

0.

Question 2

Average cost pricing is

A)when AC = MC.
B)where AC intersects demand.
C)when P = MC.
D)when supply equals demand.

Answer 2

where AC intersects demand.

Question 3

A horizontal income tax schedule is known as

A)a Corlett-Hague rule.
B)a user fee.
C)a flat income tax.
D)a regressive tax.

Answer 3

a flat income tax.

Question 4

Natural monopolies occur when a single firm can take advantage of economies of scale and supply the entire industry output.

A)True
B)False
C)Uncertain

Question 5

A time endowment is

A)the largest amount of time that can be spent at leisure.
B)the maximum number of hours in a period that a person can work.
C)the number of hours in a day.
D)all of these answer options are correct.

Question 6

A situation in which the government cannot implement an optimal tax policy because the policy is inconsistent with the government's incentives over time is known as

A)government tax problem.
B)Arrow's impossibility theorem.
C)the double dividend effect.
D)time inconsistency of optimal policy.

Question 7

"To minimize total excess burden, tax rates should be set so that the percentage reduction in the quantity demanded of each commodity is the same." This is the definition of

A)the Corlett-Hague rule.
B)the inverse elasticity rule.
C)the benefits-received principle.
D)the Ramsey Rule.

Question 8

Choosing optimal user fees for government produced services is similar to choosing optimal taxes.

A)True
B)False
C)Uncertain

Question 9

The idea of two individuals being equally well off in the absence and the presence of taxation is

A)the benefits-received principle.
B)utility definition of horizontal equity.
C)time consistency of optimal taxation.
D)flat tax income schedule.

Question 10

Optimal commodity taxation would

A)eliminate tax evasion in Canada.
B)put a tax on leisure time, which is currently untaxed.
C)optimize tax rates on the wealthiest Canadians.
D)have the smallest amount of excess burden possible for a given amount of tax revenue.

Question 11

A natural monopoly has

A)one buyer of output.
B)a single firm providing the entire industry output.
C)many producers of the same product.
D)easy access to the market.

Question 12

Working fewer hours to reduce your tax burden is tax evasion.

A)True
B)False
C)Uncertain

Question 13

Horizontal equity incorporates the notion that

A)there should be no excess burden created by a tax.
B)those earning equal incomes should pay the same in taxes.
C)taxes paid should be unassociated with income levels.
D)those earning higher incomes should pay more in taxes.

Question 14

"For goods that are unrelated in consumption, efficiency requires that tax rates be inversely proportional to elasticities." This is the definition of

A)the Ramsey Rule.
B)the benefits-received principle.
C)the inverse elasticity rule.
D)the Corlett-Hague rule.

Question 15

Deciding to engage in tax evasion requires consideration of all of the following, except the

A)probability of being caught.
B)probability of winning extra money.
C)costs of defending oneself.
D)probability of conviction if caught.

Question 16

The Ramsey Rule requires that goods be in consumption.

A)moderate
B)opposite
C)equal
D)unrelated

Question 17

Refer to the figure below. When the MCz line crosses the Dz line, profits for the firm are

A)10.
B)greater than 1.
C)less than 0.
D)0.

Question 18

If a tax is efficient, it will necessarily be equitable.

A)True
B)False
C)Uncertain

Question 19

Tax evasion is

A)an important issue in Canada.
B)failing to pay legally due taxes.
C)an illegal act.
D)all of these answer are correct.

Question 20

Natural monopolies have U-shaped average cost curves.

A)True
B)False
C)Uncertain

Question 21

"With two commodities, efficient taxation requires taxing the commodity that is complementary to leisure at a relatively higher rate." This is the definition of

A)the inverse elasticity rule.
B)the Corlett-Hague rule.
C)the Ramsey Rule.
D)the benefits-received principle.

Question 22

Refer to the figure below. If the equation of the MC of unreported income is MC = 4 + 2X, and the MB of unreported income is MB = 44 - 3X, what will be the amount of unreported income? How much of a change will there be if enforcement becomes more strict, resulting in MC = 9 + 2X?

Question 23

Neutral taxation is taxing different commodities at the same tax rate.

A)True
B)False
C)Uncertain

Question 24

Vertical equity incorporates the notion that

A)taxes paid should be unassociated with income levels.
B)those earning equal incomes should pay the same in taxes.
C)there should be no excess burden created by a tax.
D)those earning higher incomes should pay more in taxes.

Question 25

In 2015, the Government of Canada implemented a reduction in income tax for the middle class and an increase in income tax for incomes of greater than $200,000. Discuss the merits of this plan.

Question 26

People who are risk neutral are more likely to engage in tax evasion than people who are risk loving.

A)True
B)False
C)Uncertain

Question 27

Consider a monopolist that has a total cost curve of TC = 110Q - (0.25)Q2. The market demand equation is Qd = 155 - P.
(A)What are the total revenue, marginal revenue, marginal cost, equilibrium quantity, equilibrium price, and profits for the monopolist in this market?
(B)Suppose the government instructs the firm to produce using average cost pricing. What are the equilibrium quantity, equilibrium price, and profits?
(C)Suppose further that the government wants the firm to produce where supply equals demand. What will be the equilibrium quantity, equilibrium price, and profits?

Question 28

Suppose the demand for good X can be represented by the following equation: Xd = 22 - (1/4)PX. Furthermore, suppose that the demand for good Y can be represented by Yd = 50 - PY.
(A)Find the elasticity of demand for both good X and good Y when the prices of both are $10.
(B)Suppose that an ad valorem tax is placed on both goods. Good Y is taxed at a rate of 5%. To ensure that the inverse elasticity rule holds, what must be the rate at which good X is taxed?
Reminder: Elasticity at a given price is found using the formula s = -(1/S)(P/X), where S is the slope of the demand curve, X is the quantity demanded, and P is the price.

Question 29

Refer to the figure below. The marginal cost of underreporting can be written as MC = X2 + 0.4.
(A)What is the maximum marginal tax level (t)possible that will ensure tax evasion is zero?
(B)If the marginal tax rate is equal to 0.56, how much income will be evaded?

Question 30

Ms. Mahmood is a retired schoolteacher whose pension income is $25,000 per year. She also receives Canadian Pension Plan income of $5,000 per year. Mr. Little is a young man who does not choose to work. He inherited $600,000 from his Aunt Clara, which he invested in a bond fund that provides a 5 percent return, generating $30,000 income per year. If we are concerned about the equity of taxation, should we consider these two people as equals and tax them equally? Explain why or why not.

Question 31

Tax avoidance is

A)the same as tax evasion.
B)illegal in Canada.
C)changing your behaviour so as to reduce your tax liability.
D)all of these answers are correct.

Question 32

Refer to the figure below. Assume that the equation of Dx is P = 50 - 2Xd.
(A)If the original price of the good was $10 and a $4 tax was imposed, what is the tax income? Wha is the excess burden?
(B)How much marginal excess burden will be created if an additional dollar of tax is levied?
(C)How much additional tax is collected?

Question 33

Income is a poor measure of relative position when attempting to determine horizontal equity.

A)True
B)False
C)Uncertain

Question 34

It is easier to underreport income in industries that deal with a lot of cash.

A)True
B)False
C)Uncertain

Question 35

Work in the underground economy is a legal way to avoid taxes.

A)True
B)False
C)Uncertain

Question 36

Tax amnesty is when people are forgiven their tax obligations.

A)True
B)False
C)Uncertain

Question 37

Optimal user fees are paid by everyone, regardless if they are consumers of the good or service produced or not.

A)True
B)False
C)Uncertain

Question 38

Tax evasion is more likely to occur when marginal tax rates are higher and the marginal penalty rate increases.

A)True
B)False
C)Uncertain