Deck 12: The Design of the Tax System

Question 1

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

Answer 1

True

Question 2

Taxes that alter supply and demand are consistent with the 'flypaper theory' of taxation.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

Ambiguities or omission in the tax laws generate tax loopholes.

Question 5

GST is widely regarded as a fair tax on all income earners.

Question 6

A budget deficit occurs whenever a government's inflows are greater than its outflows.

Question 7

Lump-sum taxes are equitable but not efficient.

Question 8

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 9

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

Question 10

Economics is the best way to balance the goals of efficiency and equity.

Question 11

Taxes create deadweight losses because they distort incentives.

Question 12

It is rarely straightforward applying the concepts of vertical and horizontal equity to the tax system.

Question 13

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

Question 14

Taxable income is based on total income and excludes any deductions due to expenses or the number of dependents.

Question 15

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

Question 16

There is little disagreement about what constitutes tax equity.

Question 17

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

Question 18

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

Question 19

The administrative burden of any tax system is a part of the inefficiency it creates.

Question 20

Complex tax laws result from political processes.

Question 21

An excise tax on alcohol and tobacco is viewed as an unfair tax on the poor by some critics.

Question 22

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

Question 23

An income tax in which the average tax rate is the same for all taxpayers would be considered a regressive tax.

Question 24

The federal government collects about four-fifths of the taxes in the Australian economy.

Question 25

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

Question 26

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 27

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

Question 28

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

Question 29

Tax evasion is another term for tax avoidance.

Question 30

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

Question 31

Vertical equity states that taxpayers with similar abilities to pay should contribute the same amount, while horizontal equity states that taxpayers with a great ability to pay taxes should contribute a larger amount.

Question 32

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

Question 33

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

Question 34

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

Question 35

Part of the deadweight loss from taxing labour earnings is that people will work more.

Question 36

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 37

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

Question 38

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

Question 39

The marginal tax rate is the appropriate measure of the financial sacrifice made by taxpayers.

Question 40

'Loopholes' refer to the detailed provisions of the tax code that are abused by individuals and companies to avoid paying tax.

Question 41

Tax avoidance can occur unintentionally.

Question 42

Costs to taxpayers include which of the following? (i) transfer of money from the taxpayer to the government
(ii) deadweight losses
(iii) administrative burdens

A) (i) only
B) (i) and (iii) only
C) (ii) and (iii) only
D) (i), (ii) and (iii)

Question 43

A tax on the wages that a firm pays its workers is called a(n):

A) payroll tax
B) excise tax
C) consumption tax
D) income 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 who comply with the tax
D) the cost of administering programs that use tax revenue

Question 45

Deadweight losses from taxation are associated with:

A) taxes that distort the incentives that people face
B) taxes that target expenditures on survivor's benefits for social security
C) taxes that have no efficiency losses
D) lump-sum taxes

Question 46

Governments tax company income primarily on the basis of:

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

Question 47

Part of the deadweight loss from taxing labour earnings is that people will:

A) work less
B) be reluctant to hire accountants to file their tax returns
C) low tax liabilities will universally be worse off than under some other tax policy
D) work more

Question 48

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 49

Mark, Danny, Kristin and Ruthie all love to ski at the local ski resort on weekends. Mark is the most avid skier and places a value of $85 on his weekend skiing. Danny, Kristin and Ruthie place values of $75, $65 and $40, respectively, on their weekend skiing experience. Assume that the price of a weekend ski pass is $38. Further assume that this price reflects the actual unit cost of providing a weekend of skiing.
According to the information provided, if the government imposes a tax of $15 on each weekend ski pass, the deadweight loss associated with the tax is:

A) $2
B) $37
C) $52
D) $97

Question 50

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 51

The amount of tax owed by a family is:

A) not simply proportional to its total income
B) largely unaffected by deductions
C) total income minus tax credits
D) some constant fraction of income

Question 52

Tax evasion can occur unintentionally.

Question 53

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 54

The largest source of revenue for the federal government is the:

A) property tax
B) individual income tax
C) company income tax
D) import and export tax

Question 55

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 56

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 57

If a company generates a profit and distributes some of this as dividends, then profit ends up being:

A) never taxed
B) taxed twice
C) taxed once
D) taxed three times

Question 58

Mark, Danny, Kristin and Ruthie all love to ski at the local ski resort on weekends. Mark is the most avid skier and places a value of $85 on his weekend skiing. Danny, Kristin and Ruthie place values of $75, $65 and $40, respectively, on their weekend skiing experience. Assume that the price of a weekend ski pass is $38. Further assume that this price reflects the actual unit cost of providing a weekend of skiing.
According to the information provided, the amount of surplus value that accrues to Mark, Danny, Kristin and Ruthie from their weekend skiing is:

A) $265
B) $140
C) $113
D) $105

Question 59

Mark, Danny, Kristin and Ruthie all love to ski at the local ski resort on weekends. Mark is the most avid skier and places a value of $85 on his weekend skiing. Danny, Kristin and Ruthie place values of $75, $65 and $40, respectively, on their weekend skiing experience. Assume that the price of a weekend ski pass is $38. Further assume that this price reflects the actual unit cost of providing a weekend of skiing.
According to the information provided, how much consumer surplus accrues to Mark and Kristin individually?

A) $47 and $27, respectively
B) $85 and $65, respectively
C) $49 and $35, respectively
D) $37 and $17, respectively

Question 60

Because the marginal tax rate rises as income rises:

A) higher income families, in general, pay a larger percentage of their income in taxes
B) lower income families, in general, pay a larger percentage of their income in taxes
C) a disproportionately large share of the tax burden falls unjustly upon the poor
D) higher income families pay the same percentage of their income in taxes as lower income families

Question 61

Amy paid a tax of $0.33 on the last dollar she earned in 2007. Amy's marginal tax rate in 2007 was:

A) more than 33 per cent
B) exactly 33 per cent
C) definitely higher than her average tax rate
D) definitely lower than her average tax rate

Question 62

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 63

Tax evasion is:

A) facilitated by legal deductions to taxable income
B) the same as tax avoidance
C) recommended by the Australian Accounting Standards Board
D) illegal

Question 64

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 65

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 66

If marginal tax rates increase, 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 67

Jim and Celia receive great satisfaction from their consumption of micro-brewed beer. Celia would be willing to purchase only one 12-litre bottle and would pay up to $6 for it. Jim would be willing to pay $9 for his first 12-litre bottle, $7 for his second bottle, and $3 for his third bottle. The current market price is $3 per bottle.
According to the information provided, how much consumer surplus does Celia receive from consuming her 12-litre bottle of micro-brewed beer?

A) $13
B) $9
C) $6
D) $3

Question 68

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 69

In the absence of taxes, Jane would prefer to purchase a large four-wheel drive (4WD). However, the government has recently decided to place a $10 000 nuisance tax on 4WDs. Which of the following statements best reflects the effect of this tax if Jane decides to purchase a small economy car as a result of the tax?

A) other people who choose to purchase 4WDs will incur the cost of the deadweight loss of the tax
B) there are no deadweight losses as long as some people still choose to purchase 4WDs
C) all deadweight losses are mitigated if there is a net decrease in air pollution
D) Jane is worse off, and her loss of welfare is part of the deadweight loss of the tax

Question 70

Which of the following factors will influence the size of the deadweight loss from the individual income tax? (i) on average, people will choose to not work as hard as they would if income was not taxed
(ii) on average, people will choose to save less and consume more
(iii) on average, people will choose to reduce their leisure time

A) (i), (ii) and (iii)
B) (i) and (ii) only
C) (i) and (iii) only
D) (ii) and (iii) only

Question 71

If your income is $60 000 and your income tax liability is $15 000, your:

A) lump-sum tax rate is 4 per cent
B) proportional tax rate is 4 per cent
C) average tax rate is 25 per cent
D) marginal tax rate is 25 per cent

Question 72

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 73

Suppose a tax is imposed on cameras. The deadweight loss of the tax is:

A) those consumers who still choose to buy cameras, but pay a higher price that reflects the tax
B) those consumers who choose to not buy the camera after the tax raises the price
C) all citizens who are able to use services provided by government
D) those consumers who are unable to avoid paying the tax on cameras

Question 74

Harry's average tax rate on his November income is 15 per cent. The marginal tax rate on his December income of $10 000 exceeds his average tax rate. The tax liability on his December income:

A) will be less than $1500
B) will exactly equal $1500
C) will exceed $1500
D) from the information provided, any of the answers above could be correct

Question 75

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 76

If everyone had to pay a tax of $100 to register their cars, this would be an example of a:

A) transport tax
B) consumption tax
C) lump-sum tax
D) marginal tax

Question 77

When taxes are imposed on a commodity:

A) there is never a deadweight loss
B) some consumers alter their consumption by not purchasing the taxed commodity
C) tax revenue will rise by the amount of the tax multiplied by the before-tax level of consumption
D) these taxes are considered non-distortionary

Question 78

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 79

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 80

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