Deck 12: The Design of the Tax System

Question 1

Lump-sum taxes are equitable but not efficient.

Answer 1

False

Question 2

When a tax does not have a deadweight loss, the reduction in surplus is exactly offset by tax revenue collected by the government.

Answer 2

True

Question 3

Complex tax laws result from political processes.

Answer 3

True

Question 4

There is little disagreement among people about tax policy because most people attach the same weights to the goals of equity and efficiency.

Question 5

A budget deficit is when a government owes money to overseas investors.

Question 6

A progressive tax is a tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers.

Question 7

To gauge the extent to which the tax system distorts incentives, the marginal tax rate is the appropriate tax rate to use.

Question 8

'Vertical equity' refers to the idea that taxpayers with similar abilities to pay taxes should pay the same amount.

Question 9

Administrative burden and changes in behaviour are inefficiencies of any tax system.

Question 10

Company income is taxed three times: first when the corporation earns profits; second when the bondholders pay tax on interest income; and third when individuals pay tax on company dividends.

Question 11

The ability-to-pay principle states that people should pay taxes based on the benefits they receive from government services.

Question 12

Social security is an income support measure, designed primarily to maintain the living standards of the poor.

Question 13

Some welfare groups argue that the GST places a disproportionate tax burden on lower income earners.

Question 14

Resources devoted to complying with the tax laws constitute a type of deadweight loss.

Question 15

After a tax is imposed some people change their behaviour. These changes cause a deadweight loss to be generated.

Question 16

The most important taxes for state and local governments in Australia are individual and company income taxes.

Question 17

Income tax is a good example of a lump-sum tax.

Question 18

Road construction funded by taxes on petrol is an example of the benefits principle applied to the equity of the tax burden.

Question 19

Tax schemes that satisfy the benefits principle are always considered to be the most equitable.

Question 20

An efficient tax system is one that generates a lot of revenue even if the administrative burden is high.

Question 21

When the marginal tax rate exceeds the average tax rate, the tax is progressive.

Question 22

The GST can be described as a:

A) payroll tax
B) excise tax
C) consumption tax
D) income tax

Question 23

The largest source of revenue for state governments is:

A) property tax
B) transfers from the federal government
C) individual income tax
D) tax on goods and services

Question 24

Tax evasion is another term for tax avoidance.

Question 25

Tax avoidance can occur unintentionally.

Question 26

The 'poverty trap' refers to the problem where low income earners are effectively taxed at a high marginal tax rate when they begin to work more, and consequently lose some of their government benefits.

Question 27

The marginal tax rate is:

A) how much every dollar earned is taxed
B) how much every dollar earned is taxed, on average
C) how much the first $18 200 earned is taxed
D) how much every extra dollar earned is taxed

Question 28

Vertical equity states that taxpayers with a greater ability to pay taxes should contribute a decreasing proportion of each increment in income to taxes.

Question 29

Tax evasion is when a person will try to minimise their marginal tax rate.

Question 30

If the government imposes a tax of 20 per cent on the first $20 000 of income and 40 per cent on all incomes above $20 000, a person whose income is $30 000 would face a tax liability of $8000.

Question 31

The average tax rate of a taxpayer is only likely to equal the marginal tax rate when the taxpayer:

A) collects a government salary
B) has a very high income
C) has a very low income
D) is a middle-income earner

Question 32

When a tax is levied as a percentage of the total amount spent in retail stores, this tax is called a:

A) value-added tax
B) retail tax
C) commercial tax
D) sales tax

Question 33

It is only if a taxpayer has a very low income that his average tax rate will equal his marginal tax rate.

Question 34

A 'tax liability' refers to:

A) the fine incurred when a taxpayer is caught evading tax
B) the amount of tax a taxpayer owes at the end of the financial year
C) the taxpayer who is liable to pay the tax
D) the fine incurred when a taxpayer is caught avoiding tax

Question 35

State and local governments:

A) are funded entirely by their own tax base
B) receive the majority of their tax revenues from company income tax
C) are generally not responsible for collecting sales tax
D) receive some of their funds from the federal government

Question 36

A lump-sum tax results in equality between average and marginal tax rates.

Question 37

Governments tax company income primarily on the basis of:

A) profit
B) its total revenue
C) pollution levels
D) all of the above

Question 38

The average tax rate is total taxes paid divided by total income.

Question 39

The marginal tax rate is the extra taxes paid on an additional dollar of income.

Question 40

If higher income taxpayers pay a higher percentage of their income in taxes, then the tax system is classed as progressive.

Question 41

A lump-sum tax has a marginal tax rate that is:

A) always positive
B) always negative
C) zero
D) greater than the prevailing average tax rate

Question 42

One of the benefits from switching taxation away from income towards consumption is that:

A) it will necessarily increase tax revenues
B) it is always administratively simpler
C) it distorts incentives to earn income
D) it eliminates disincentives to save

Question 43

The resource cost of tax compliance is:

A) not considered in calculations of tax burden
B) solely a product of company income taxes
C) solely a product of property taxes
D) included in the administrative burden of a tax

Question 44

The administrative burden of a tax includes:

A) the amount of money people pay as income taxes
B) the reduction in the size of a market because of the tax
C) the time and effort of completing tax forms that is imposed on taxpayers
D) the cost of administering programs that use tax revenue

Question 45

High marginal tax rates:

A) are used to encourage saving behaviour
B) distort incentives to work
C) will invariably lead to lower average tax rates
D) are not associated with deadweight losses

Question 46

A poorly designed tax policy tends to be accompanied by which of the following costs?

A) the transfer of money from the government to the taxpayer
B) marginal rates
C) large administrative costs
D) equity penalties

Question 47

If your income is $80 000 and you paid $500 car registration, your:

A) lump-sum tax is $500
B) proportional tax $500
C) average tax rate is six per cent
D) marginal tax rate is six per cent

Question 48

Amy's marginal tax rate was 18 per cent last year. This means the amount she paid on the last dollar she earned in that year was:

A) more than $0.18
B) exactly $0.18
C) more than 18 per cent
D) less than $0.18

Question 49

Lump-sum taxes:

A) are most frequently used to tax real property
B) do not distort incentives
C) are the most distortionary taxes
D) are used in taxing sales

Question 50

Deadweight losses from taxation are equal to:

A) the reduction in revenue a supplier suffers from the imposition of the tax
B) taxes that target expenditures on social security
C) the reduction in consumer surplus resulting from the tax
D) the change in people's behaviour as a result of the tax

Question 51

A tax on all forms of income will:

A) lower the effective rate of interest on savings
B) increase the potential income from saving
C) increase the amount of income received in the economy
D) enhance the incentives to save

Question 52

If tax laws become simplified then:

A) the administrative burden of taxes is decreased
B) compliance costs are most likely to increase
C) the government always collects less in tax revenue
D) the amount of tax revenue lost to tax evasion always increases

Question 53

Attempts by taxpayers to illegally reduce their tax liability are termed:

A) tax avoidance
B) tax evasion
C) a tax-return compensation plan
D) activities outside the intent of tax law

Question 54

When tax laws give preferential treatment to specific types of behaviour, it is called:

A) tax evasion
B) a political pay-off
C) a tax loophole
D) compensation for the benefit of society

Question 55

Suppose a tax is imposed on cameras. The administrative burden of the tax comes from:

A) those consumers who still choose to buy cameras, but pay a higher price
B) those consumers who choose not to buy the camera after the tax raises the price
C) those citizens who must include the camera tax in their tax returns
D) those consumers who are unable to avoid paying the tax on cameras

Question 56

If marginal tax rates decrease, the:

A) deadweight loss from taxes is unaffected
B) deadweight loss from taxes will be reduced
C) deadweight loss from taxes will rise
D) average tax rate will be falling

Question 57

If the government imposes a $2 tax on pizza and so the price of pizza rises from $7 to $9, the deadweight loss will arise from:

A) the pizza suppliers who lose $2 of revenue
B) the consumers who pay the tax
C) the government which pays $2 to the taxpayer
D) the consumers who change their behaviour because of the tax

Question 58

One reason why deadweight losses are so difficult to avoid is that:

A) administrative burden and deadweight loss reflect a clear trade-off to policymakers
B) income taxes are not paid by everyone
C) consumption taxes must be universally applied to all commodities
D) taxes affect the decisions that people make

Question 59

Policymakers consider two main objectives when designing a taxation system:

A) revenue and debt reduction
B) equity and efficiency
C) revenue and expenditures
D) expenditures and efficiency

Question 60

With a lump-sum tax, the:

A) marginal tax rate is always less than the average tax rate
B) 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

Question 61

Suppose the government imposes a tax of 32 per cent on the first $40 000 of income, and 45 per cent on all income above $40 000, what is the marginal tax rate when income is $80 000?

A) 20 per cent
B) 32 per cent
C) 77 per cent
D) 45 per cent

Question 62

When the marginal tax rate exceeds the average tax rate, the tax is:

A) proportional
B) regressive
C) non-egalitarian
D) progressive

Question 63

The benefits principle of taxation can be used to argue that wealthy citizens should pay higher taxes than poorer ones on the basis that:

A) police services are more frequently used in poor neighbourhoods
B) the wealthy benefit more from services provided by government than the poor
C) the poor are more active in political processes
D) there is more crime in rich neighbourhoods than poor neighbourhoods

Question 64

Suppose the government imposes a tax of 15 per cent on the first $70 000 of income anD.20 per cent on all incomes above $70 000, what are the tax liability and the marginal tax rate for a person whose income is $80 000?

A) both are 15 per cent
B) 20 per cent and $10 500, respectively
C) $12 500 and 20 per cent, respectively
D) $10 500 and 15 per cent, respectively

Question 65

Taxes have no deadweight loss when:

A) they are equitable
B) they are equitable and efficient
C) they are efficient
D) it is very rare for a tax to have no deadweight loss

Question 66

Australia's tax system:

A) is mainly made up of lump sum taxes
B) imposes no deadweight loss
C) satisfies the flypaper principle
D) is considered vertically equitable

Question 67

Lump-sum taxes are rarely used in the real world because:

A) lump-sum taxes have low administrative burdens but high deadweight losses
B) lump-sum taxes have low deadweight losses but high administrative burdens
C) poor taxpayers must pay the same level of tax as rich taxpayers
D) lump-sum taxes have both high deadweight losses and high administrative burdens

Question 68

Large deadweight losses and large administrative burdens are characteristic of a tax system that is best defined as:

A) equitable
B) efficient
C) inequitable
D) inefficient

Question 69

The marginal tax rate is equal to:

A) total sales taxes divided by total expenditures
B) extra taxes paid on each dollar of income
C) extra taxes paid divided by total income
D) total income divided by total taxes

Question 70

If we are trying to gauge how much the income tax system distorts incentives, then:

A) the average tax rate is the most meaningful measure
B) the distortion is entirely captured in the administrative burden of the tax
C) total tax revenue collected is the most meaningful measure
D) the marginal tax rate is the most meaningful measure

Question 71

The most appropriate measure of the sacrifice made by a taxpayer is the:

A) average tax rate
B) marginal tax rate
C) lump-sum tax rate
D) sales tax rate

Question 72

When the marginal tax rate equals the average tax rate, the tax is:

A) proportional
B) progressive
C) regressive
D) egalitarian

Question 73

Which of the following statements is most correct?

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
B) 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

Question 74

A lump-sum tax imposes a minimal administrative burden on taxpayers because:

A) everyone can easily compute the amount of tax they owe
B) there is no benefit to hiring an accountant to do your taxes
C) everyone owes the same amount of tax, regardless of earnings
D) all of the above are true

Question 75

An income tax in which the average tax rate increases as taxpayer income increases would be considered a:

A) progressive tax
B) regressive tax
C) distortion-free tax
D) proportional tax

Question 76

One tax system is less efficient than another if it:

A) places a lower tax burden on lower income families than on higher income families
B) places a higher tax burden on lower income families than on higher income families
C) raises the same amount of revenue at a higher cost to taxpayers
D) raises the same amount of revenue at a lower cost to taxpayers

Question 77

Suppose the government imposes a tax of 10 per cent on the first $24 000 of income anD.20 per cent on all incomes above $24 000, what are the tax liability and the average tax rate for a person whose income is $48 000?

A) 10 per cent and 20 per cent, respectively
B) 10 per cent and $24 000, respectively
C) $7200 and 15 per cent, respectively
D) $7200 and 20 per cent, respectively

Question 78

The average tax rate measures the:

A) fraction of spending paid in taxes
B) fraction of income paid in taxes
C) incremental rate of tax on income
D) average deadweight loss from all taxes

Question 79

An efficient tax system has low:

A) rates of marginal tax
B) deadweight losses
C) rates of average tax
D) transfers between the Commonwealth government and the States

Question 80

Which of the following statements is most correct?

A) deadweight loss is the efficiency that a tax creates as people allocate resources according to market incentives
B) deadweight loss is the inefficiency that a tax creates as people allocate resources according to market incentives
C) deadweight loss is the inefficiency that a tax creates as people allocate resources according to the tax incentives
D) deadweight loss is the efficiency that a tax creates as people allocate resources according to the tax incentives