Deck 20: Public Finance: Expenditures and Taxes

Question 1

Proprietary income refers to

A) revenue flowing to the government from taxes.
B) money borrowed by the government to finance its operations.
C) revenue generated by government-run businesses.
D) transfer payments from the government to the owners of property resources.

Answer 1

revenue generated by government-run businesses.

Question 2

Government borrowing

A) is the primary means of financing public expenditures.
B) provides a stimulus to government spending with no opportunity cost.
C) may crowd out private sector investment.
D) is prohibited by the U.S. constitution.

Answer 2

may crowd out private sector investment.

Question 3

The opportunity cost of borrowing funds to finance government deficits is

A) greatest when the economy is doing well.
B) greatest when the economy is in a recession.
C) zero.
D) the same regardless of the state of the economy.

Answer 3

greatest when the economy is doing well.

Question 4

Total governmental purchases-federal, state, and local combined-accounted for about what percentage of domestic output in 2015?

A) 35 percent
B) 18 percent
C) 10 percent
D) 5 percent

Question 5

Revenues flowing to the government from government-run or government-sponsored businesses, such as public utilities and state lotteries, are known as

A) proprietary income.
B) transfer payments.
C) tax revenue.
D) subsidies.

Question 6

Transfer payments are about percent of U.S. domestic output (as of 2015).

A) 35
B) 8
C) 15
D) 22

Question 7

The tax rates embodied in the federal personal income tax are such that

A) a rising absolute amount, but a declining proportion, of income is paid in taxes.
B) the marginal and average tax rates are equal, making the tax progressive.
C) the average tax rate rises more rapidly than does the marginal tax rate as income rises.
D) the marginal tax rate is higher than the average tax rate, causing the average tax rate to rise as income rises.

Question 8

The largest source of tax revenue for the U.S. federal government is

A) personal income taxes.
B) property taxes.
C) corporate income taxes.
D) sales and excise taxes.

Question 9

Which of the following is not an important source of revenue for the federal government?

A) corporate income taxes
B) property taxes
C) payroll taxes
D) personal income taxes

Question 10

Government purchases and transfer payments

A) differ because the latter absorb resources while the former do not.
B) differ because the former absorb resources while the latter do not.
C) are alike because both are more inflationary than private spending.
D) are alike because both absorb resources.

Question 11

Which of the following is an exhaustive governmental outlay?

A) a federal $5,000 subsidy check to an Illinois farmer
B) a Temporary Assistance to Needy Families payment made by the state of New York
C) a NASA payment to Boeing Corporation for space hardware
D) a federal old age insurance payment to a retired coal miner

Question 12

The maximum federal marginal tax rate on taxable personal income is, as of 2016,

A) 50 percent.
B) 39.6 percent.
C) 35 percent.
D) 28 percent.

Question 13

The three most important sources of federal tax revenue in order of descending importance are

A) sales, payroll, and personal income taxes.
B) personal income, corporate income, and sales taxes.
C) personal income, corporate income, and payroll taxes.
D) personal income, payroll, and corporate income taxes.

Question 14

As a proportion of domestic output, taxes in the United States

A) are lower than in most other industrially advanced countries.
B) are higher than in most other industrially advanced countries.
C) are approximately the same as in most other industrially advanced countries.
D) doubled in the 1990s.

Question 15

In 2014, "Tax-Freedom Day" (the day average workers have earned enough to pay their tax bills) was

A) April 15.
B) April 17.
C) April 21.
D) July 4.

Question 16

Approximately what percentage of the federal government's tax revenues are generated from personal income taxes (in 2015)?

A) 75 percent
B) 28 percent
C) 33 percent
D) 47 percent

Question 17

In determining one's personal income tax, taxable income is

A) total income less deductions and exemptions.
B) all income.
C) all income other than wages and salaries.
D) wage and salary income only.

Question 18

The largest category of federal spending is for

A) health care.
B) science, space, and technology.
C) pensions and income security.
D) national defense.

Question 19

The addition of government to the circular-flow model illustrates that government

A) purchases resources in the resource market.
B) provides services to businesses and households.
C) purchases goods in the product market.
D) does all of the things stated in the other possible answers.

Question 20

The total amount of U.S. tax revenue needed to finance the public sector

A) has been a declining percentage of the domestic output in this century.
B) equals about 40 percent of domestic output.
C) equals about 15 percent of domestic output.
D) is larger today, as a percentage of total output, than in 1960.

Question 21

Indy currently earns $50,000 in taxable income and pays $8,000 in taxes. Suppose that Indy faces a marginal tax rate of 25 percent and his boss offers him a raise of $2,000 per year. Indy should

A) accept the raise because his after-tax income will rise by $1,500.
B) reject the raise because his after-tax income will fall by $3,000.
C) reject the raise because his after-tax income will fall by $4,500.
D) reject the raise because his after-tax income will fall by $6,000.

Question 22

With respect to state finance, for most states

A) estate taxes are the major source of revenue and most expenditures are for health services.
B) the corporate income tax is the major source of revenue and natural resource development is the major type of expenditure.
C) property taxes are the basic source of revenue and education is the major type of expenditure.
D) sales and excise taxes are the major source of revenue and education is the major type of expenditure.

Question 23

The main difference between sales and excise taxes is that

A) sales taxes apply to a wide range of products, while excise taxes apply only to a select group of products.
B) excise taxes apply to a wide range of products, while sales taxes apply only to a select list of products.
C) sales taxes are consumption taxes, while excise taxes are not.
D) excise taxes are consumption taxes, while sales taxes are not.

Question 24

The average tax rate is

A) equal to the change in taxes/change in taxable income.
B) equal to total taxes/total taxable income.
C) the sum of the marginal tax rate and the rate of transfer payments.
D) the tax on incremental income less the tax on total income.

Question 25

The marginal tax rate is

A) the difference between the total tax rate and the average tax rate.
B) the percentage of total income paid as taxes.
C) equal to the change in taxes/change in taxable income.
D) equal to the total taxes/total taxable income.

Question 26

Approximately what percentage of local government expenditures goes to finance education?

A) 36
B) 46
C) 53
D) 69

Question 27

If you would have to pay $5,000 in taxes on a $25,000 taxable income and $7,000 on a $30,000 taxable income, then the marginal tax rate on the additional $5,000 of income is

A) 40 percent, and the average tax rate is about 23 percent at the $30,000 income level.
B) 50 percent, and the average tax rate is 40 percent at the $30,000 income level.
C) 40 percent, and the average tax rate is 25 percent at the $25,000 income level.
D) 30 percent, but average tax rates cannot be determined from the information given.

Question 28

Taxable income is

A) total income less deductions and exemptions.
B) the same as gross income.
C) the only income to which marginal tax rates apply.
D) the sum of all wage and property income.

Question 29

A progressive tax is such that

A) tax rates are higher the greater one's income.
B) the same tax rate applies to all income receivers, so that the rich pay absolutely more taxes than the poor.
C) entrepreneurial income is exempt from taxation.
D) the revenues it yields are spent on transfer payments.

Question 30

One difference between sales and excise taxes is that

A) sales taxes are only applied at the state level, while excise taxes are only applied at the federal level.
B) excise taxes apply to a wide range of products, while sales taxes apply only to a select list of products.
C) sales taxes are calculated as a percentage of the price paid, while excise taxes are levied on a per-unit basis.
D) excise taxes are calculated as a percentage of the price paid, while sales taxes are levied on a per-unit basis.

Question 31

The basic tax rate on taxable corporate income is

A) 15 percent.
B) 22 percent.
C) 35 percent.
D) 52 percent.

Question 32

The marginal tax rate is

A) less than the average tax rate when a tax is progressive.
B) calculated by dividing total taxes paid by one's total taxable income.
C) the percentage of one's total income that is paid in taxes.
D) the percentage of an increment of income that is paid in taxes.

Question 33

Assume that in year 1 your average tax rate is 20 percent on a taxable income of $20,000. If the marginal tax rate on the next $10,000 of taxable income is 30 percent, what will be the average tax rate if your taxable income rises to $30,000?

A) 7 percent
B) 30 percent
C) about 16 percent
D) about 23 percent

Question 34

Assume that in year 1 you pay an average tax rate of 20 percent on a taxable income of $20,000. In year 2, you pay an average tax rate of 25 percent on a taxable income of $30,000. Assuming no change in tax rates, the marginal tax rate on your additional $10,000 of income is

A) 5 percent.
B) 12 percent.
C) 35 percent.
D) 42 percent.

Question 35

Government lotteries are

A) used by a large number of states to supplement their tax revenues.
B) illegal in the United States but are a common source of revenue in other countries.
C) used by local governments but not by state governments.
D) a form of progressive taxation.

Question 36

With respect to local finance,

A) death and gift taxes are the major source of revenue and most expenditures are for hospitals and health services.
B) the corporate income tax is the major source of revenue and natural resource development is the major type of expenditure.
C) property taxes are the basic source of revenue and education is the major type of expenditure.
D) sales and excise taxes are the major source of revenue and highway construction and maintenance is the major type of expenditure.

Question 37

Taxes on commodities or on purchases are known as

A) corporate income taxes.
B) sales and excise taxes.
C) personal income taxes.
D) payroll taxes.

Question 38

An income tax is progressive if the

A) absolute amount paid as taxes varies directly with income.
B) percentage of income paid as taxes is the same regardless of the size of income.
C) percentage of income paid as taxes increases as income increases.
D) tax rate varies inversely with income.

Question 39

Currently (2016) the marginal tax rates of the federal personal income tax

A) are less than corresponding average tax rates.
B) rise from 5 to 35 percent.
C) fall from 20 to 10 percent.
D) rise from 10 to 39.6 percent.

Question 40

The average tax rate is

A) equal to the marginal tax rate if the tax is progressive.
B) the total tax rate minus the marginal tax rate.
C) the ratio of total taxes paid to total taxable income.
D) the tax rate that applies to incremental dollars of income.

Question 41

A tax that takes a larger proportion of income from low-income groups than from high-income groups is a

A) stabilizing tax.
B) regressive tax.
C) progressive tax.
D) proportional tax.

Question 42

In 2013, U.S. governments (local, state, and federal) employed approximately how many million workers?

A) 16.0
B) 19.4
C) 21.9
D) 23.5

Question 43

The sales tax is a regressive tax because the

A) percentage of income paid as taxes falls as income rises.
B) administrative costs associated with the collection of the tax are relatively high.
C) percentage of income paid as taxes is constant as income rises.
D) tax tends to reduce the total volume of consumption expenditures.

Question 44

Assume that you pay $10,000 of tax on a taxable income of $50,000. If your taxable income were $150,000, your tax payment would be $25,000. This suggests the tax is

A) progressive.
B) proportional.
C) regressive.
D) discriminatory.

Question 45

Assume you pay a tax of $4,000 on a taxable income of $24,000. If your taxable income were $30,000, your tax payment would be $5,000. This suggests that the tax is

A) progressive.
B) proportional.
C) regressive.
D) discriminatory.

Question 46

At the state and local levels of the U.S. government, a majority of government employees work in which of the following areas?

A) postal service
B) education
C) hospitals and other health care
D) police and corrections

Question 47

Which of the following statements is most consistent with the benefits-received principle of taxation?

A) A childless couple should not be required to pay taxes for the support of public schools.
B) Prosperous corporations should pay substantial taxes even if they use few government goods and services.
C) The best tax is the income tax.
D) People with high incomes should pay more taxes than people with low incomes.

Question 48

Approximately what percentage of state spending goes to finance education?

A) 36
B) 44
C) 47
D) 53

Question 49

Approximately what percentage of the U.S. labor force works for U.S. governments at the federal, state, and local levels (as of 2013)?

A) 8
B) 11
C) 14
D) 22

Question 50

The benefits-received principle of taxation is most evident in

A) inheritance taxes.
B) excise taxes on gasoline.
C) the personal income tax.
D) the corporate income tax.

Question 51

Using income as the tax base, which of the following best illustrates a regressive tax?

A) the federal inheritance tax
B) a 7 percent general sales tax
C) the corporate income tax
D) the personal income tax

Question 52

Which of the following is correct about the U.S. tax system?

A) The primary federal tax system is regressive, while the primary state and local tax systems are progressive.
B) Both the primary federal tax system and the primary state and local tax systems are regressive.
C) The primary federal tax system is progressive, while the primary state and local tax systems are regressive.
D) Both the primary federal tax system and the primary state and local tax systems are progressive.

Question 53

Entry fees at national parks and monuments are an example of

A) the ability-to-pay principle of taxation.
B) the benefits-received principle of taxation.
C) government bureaucracy and inefficiency.
D) the principle of limited and bundled choice.

Question 54

The federal gasoline tax is assessed on a per-gallon basis, and the proceeds are used for highway maintenance and improvements. This tax is consistent with the

A) ability-to-pay principle of taxation.
B) benefits-received principle of taxation.
C) single-tax theory of taxation.
D) pay-as-you-go theory of taxation.

Question 55

The ability-to-pay principle of taxation

A) has been declared unconstitutional because it deprives individuals of property without due process of law.
B) suggests that people should pay taxes in proportion to the benefits they derive from public goods and services.
C) suggests that taxes should vary directly with people's income and wealth.
D) suggests that taxes should vary inversely with people's income and wealth.

Question 56

The rationale for ability-to-pay taxation and the contention that those with large incomes should pay more taxes both absolutely and relatively is that

A) high-income receivers are generally in a better position to shift taxes than are low-income receivers.
B) the transfer system is regressive and it is therefore essential to have an offsetting progressive tax structure.
C) rational consumers spend their first dollars of income on the most urgently desired goods and successive dollars on less essential goods.
D) taxes should be paid for financing public goods in direct proportion to the satisfaction an individual derives from those goods.

Question 57

The federal income tax is consistent with the principle of taxation, whereas an excise tax on sporting event tickets is consistent with the principle of taxation.

A) benefits-received; ability-to-pay
B) benefits-received; pay-as-you-go
C) ability-to-pay; benefits-received
D) ability-to-pay; pay-as-you-go

Question 58

If each taxpayer paid the same lump-sum amount regardless of income level, the tax system would be

A) disproportionate.
B) progressive.
C) proportional.
D) regressive.

Question 59

Which of the following best reflects the ability-to-pay philosophy of taxation?

A) a tax on residential property
B) a progressive income tax
C) an excise tax on gasoline
D) an excise tax on coffee

Question 60

Federal employment in the United States is dominated by what two functions?

A) national defense and postal service
B) health care and police
C) postal service and education
D) health care and national defense

Question 61

Assume the supply curve for product X is perfectly elastic and that government imposes a $2-per-unit excise tax. We can conclude that the resulting

A) increase in output will be greater the less elastic the demand curve.
B) decrease in output will be greater the less elastic the demand curve.
C) decrease in output will be greater the more elastic the demand curve.
D) increase in output will be greater the more elastic the demand curve.

Question 62

If the supply of a product is perfectly elastic and demand is downsloping, an excise tax of $2 per unit will increase price by

A) more than $2.
B) less than $2.
C) $2 and increase equilibrium output.
D) $2 and reduce equilibrium output.

Question 63

The more inelastic are demand and supply, the

A) larger is the efficiency loss of an excise tax.
B) smaller is the efficiency loss of an excise tax.
C) higher is the proportion of an excise tax paid by consumers.
D) smaller is the proportion of an excise tax paid by producers.

Question 64

If the demand for a product is perfectly elastic and supply is upsloping, a $1 excise tax per unit on suppliers will

A) not raise price at all.
B) lower price by $1.
C) raise price by more than $1.
D) raise price by $1.

Question 65

Assume the Environmental Protection Agency imposes an excise tax on polluting firms. In which of the following situations would we expect the additional costs to be borne most heavily by consumers?

A) Demand is highly elastic and supply is highly inelastic.
B) Demand and supply are both highly elastic.
C) Demand and supply are both highly inelastic.
D) Demand is highly inelastic and supply is highly elastic.

Question 66

Suppose that government imposes a specific excise tax on product X of $2 per unit and that the price elasticity of demand for X is unitary (coefficient = 1). If the incidence of the tax is such that the producers of X pay $1.75 of the tax and the consumers pay $.25, we can conclude that the

A) supply of X is highly inelastic.
B) supply of X is highly elastic.
C) demand for X is highly inelastic.
D) demand for X is highly elastic.

Question 67

The U.S. tax-transfer system (as distinct from the tax system alone) is

A) progressive.
B) proportional.
C) bimodal.
D) regressive.

Question 68

Suppose that government imposes a specific excise tax on product X of $2 per unit and that the price elasticity of supply of X is unitary (coefficient = 1). If the incidence of the tax is such that the consumers of X pay $1.85 of the tax and the producers pay $0.15, we can conclude that the

A) supply of X is highly inelastic.
B) supply of X is highly elastic.
C) demand for X is highly inelastic.
D) demand for X is highly elastic.

Question 69

Suppose that government imposes a specific excise tax on product X of $2 per unit and that the price elasticity of demand for X is unitary (coefficient = 1). If the incidence of the tax is such that consumers pay $1.80 of the tax and the producers pay $.20, we can conclude that the

A) supply of X is highly inelastic.
B) supply of X is highly elastic.
C) demand for X is highly inelastic.
D) demand for X is highly elastic.

Question 70

Overall, the U.S. tax system (combined federal, state, and local) is

A) highly progressive.
B) slightly progressive.
C) slightly regressive.
D) highly regressive.

Question 71

The greater the elasticity of supply of and demand for a good, the

A) smaller will be the efficiency loss of an excise tax on the good.
B) more likely the good will be a public good rather than a private good.
C) larger will be the efficiency loss of an excise tax on the good.
D) larger will be the proportion of an excise tax on the good that will be shifted forward to consumers.

Question 72

In 2011, the 20 percent of families with the lowest incomes paid an effective average federal tax rate (on all federal taxes) of about , whereas the 20 percent of families with the highest incomes paid an effective average tax rate of about .

A) 5.5 percent; 50 percent
B) 10.3 percent; 30.9 percent
C) 8.4 percent; 27.5 percent
D) 1.9 percent; 23.4 percent

Question 73

Assume the demand for automobile tires is highly inelastic and that the supply is highly elastic. The burden of a $2 excise tax on each tire will be

A) borne by resource suppliers that provide the inputs for manufacturing tires.
B) shared about equally by buyers and sellers of tires.
C) borne primarily by buyers of tires.
D) borne primarily by sellers of tires.

Question 74

If the demand for a product is perfectly inelastic, the incidence of an excise tax will be

A) entirely on the buyer.
B) mostly on the buyer.
C) entirely on the seller.
D) mostly on the seller.

Question 75

The incidence of a tax pertains to

A) the degree to which it alters the distribution of income.
B) how easy it is to evade the tax.
C) who actually bears the burden of a tax.
D) the progressiveness or regressiveness of tax rates.

Question 76

According to the Organization for Economic Cooperation and Development (OECD),

A) the United States has the most progressive tax system among OECD nations.
B) the United States has the least progressive tax system among OECD nations.
C) the U.S. tax system has the same degree of progressivity as those of nations such as Canada, Japan, and France.
D) the U.S. tax system has the same degree of progressivity as those of many developing nations.

Question 77

Suppose that government imposes a specific excise tax on product X of $2 per unit and that the price elasticity of supply of X is unitary (coefficient = 1). If the incidence of the tax is such that the producers of X pay $1.90 of the tax and the consumers pay $.10, we can conclude that the

A) supply of X is highly inelastic.
B) supply of X is highly elastic.
C) demand for X is highly inelastic.
D) demand for X is highly elastic.

Question 78

If the demand for a product is perfectly inelastic and the supply curve is upsloping, a $1 excise tax per unit of output will

A) raise the price by less than $1.
B) raise the price by more than $1.
C) raise the price by $1.
D) lower the price by $1.

Question 79

The efficiency loss of a tax is the idea that

A) in addition to taking income from the citizenry, taxes also increase the rate of inflation.
B) taxes cause a decline in output for which marginal benefit exceeds marginal cost.
C) taxes diminish incentives to work.
D) government spends dollars less efficiently than do households and businesses.

Question 80

In 2013, the top 1 percent of all taxpayers in the United States paid what percentage of the federal income tax?

A) 23.4 percent
B) 37.8 percent
C) 39.6 percent
D) 58.5 percent