Deck 16: Efficient and Equitable Taxation

Question 1

Tax avoidance is

A) illegal in the United States.
B) changing your behavior so as to reduce your tax liability.
C) the same as tax evasion.
D) a minor source of concern in the United States.

Answer 1

changing your behavior so as to reduce your tax liability.

Question 2

A time endowment is

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

Answer 2

the maximum number of hours in a year that a person can work.

Question 3

Natural monopolies have U-shaped cost curves.

A) True
B) False
C) Uncertain

Answer 3

False

Question 4

Vertical equity incorporates the notion that

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

Question 5

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

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

Question 6

A linear income tax schedule is known as

A) a flat income tax.
B) a regressive tax.
C) a Haig-Simons tax.
D) a user fee.

Question 7

Tax evasion is more likely to occur when people feel that their tax dollars are not being used properly.

A) True
B) False
C) Uncertain

Question 8

Tax evasion is

A) an illegal act.
B) prevalent in the United States.
C) failing to pay legally due taxes.
D) all of these answer options are correct.

Question 9

The Ramsey Rule implies that goods be __________ in consumption.

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

Question 10

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

A) True
B) False
C) Uncertain

Question 11

A natural monopoly has

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

Question 12

Horizontal equity incorporates the notion that

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

Question 13

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

A) True
B) False
C) Uncertain

Question 14

Average cost pricing is found

A) when supply equals demand.
B) when AC = MR.
C) when P = 0.
D) where AC = AR.

Question 15

Optimal commodity taxation would

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

Question 16

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

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

Question 17

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

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

Question 18

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) time inconsistency of optimal policy.
C) the double-counting game.
D) Wagner's Law.

Question 19

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

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

Question 20

Refer to Figure 16.3 below.When the MC_z line crosses the D_z line,profits for the firm are

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

Question 21

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

A) True
B) False
C) Uncertain

Question 22

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 23

One of the conditions mentioned in our formulation of the Ramsey Rule is that goods be unrelated in consumption.Do you think this is a reasonable assumption? If this condition does not hold,will the Ramsey Rule still work?

Question 24

Changing tax regimes can sometimes be difficult and lead to inequities.

A) True
B) False
C) Uncertain

Question 25

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

A) True
B) False
C) Uncertain

Question 26

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

A) True
B) False
C) Uncertain

Question 27

In 2009,President Obama proposed raising the income tax on those making over $250,000 per year.Discuss the merits of this plan.

Question 28

Consider a monopolist that has a total cost curve of TC = 110Q - (0.25)Q².The market demand equation is Q_d = 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 29

Suppose the demand for good X can be represented by the following equation: X_d = 22 - (1/4)P.Furthermore,suppose that the demand for good Y can be represented by Y_d = 50 - P.
(A)Find the elasticity of demand for both good X and good Y when the price is $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 ε = -(1/S)(P/X),where S is the slope of the demand curve,X is the quantity demanded,and P is the price.

Question 30

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

A) True
B) False
C) Uncertain

Question 31

Optimal user fees are paid only by the consumers of the good or service produced.

A) True
B) False
C) Uncertain

Question 32

Ms.Mahmood is a retired schoolteacher whose pension income is $25,000 per year.She also receives Social Security 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 33

It is easier to under-report income in industries that deal with a lot of cash.

A) True
B) False
C) Uncertain