Deck 18: Taxation- How It Works and What It Means

Question 1

Which is considered to be a tax on wealth?

A) capital gains tax
B) individual income tax
C) property tax
D) excise tax

Answer 1

property tax

Question 2

Approximately what percentage of federal government revenue comes from individual income taxes?

A) 15.1%
B) 22.9%
C) 33.3%
D) 41.6%

Answer 2

41.6%

Question 3

Which is a fixed amount that a taxpayer can deduct from taxable income?

A) an itemized deduction
B) a standard deduction
C) a tax credit
D) an exemption

Answer 3

a standard deduction

Question 4

Which statement about taxation in the United States is TRUE?

A) Subnational governments rely more on consumption taxes than does the federal government.
B) Subnational governments rely more on individual income taxes than does the federal government.
C) Subnational governments rely less on wealth taxes than does the federal government.
D) Subnational governments rely less on property taxes than does the federal government.

Question 5

Which tax is paid on individual or household purchases of goods (and sometimes services)?

A) sales tax
B) consumption tax
C) individual income tax
D) capital gains tax

Question 6

Which of the following is TRUE?

A) Less-developed countries get a larger proportion of their tax revenues from wealth taxes than any other type of tax.
B) Other OECD countries depend more heavily on consumption taxes than does the United States.
C) Other OECD countries depend more heavily on wealth taxes than does the United States.
D) Other OECD countries depend more heavily on income taxes than does the United States.

Question 7

Which of the following CANNOT be subtracted from gross income as a deduction?

A) contributions to retirement savings accounts
B) reimbursed employee expenses
C) contributions to health savings accounts
D) interest paid on student loans

Question 8

Which tax is based on the value of the estate left behind when a person dies?

A) sales tax
B) consumption tax
C) estate tax
D) capital gains tax

Question 9

Approximately what proportion of U.S.federal tax revenues comes from corporate taxes?

A) 15.1%
B) 20.2%
C) 31.9%
D) 40%

Question 10

The type of tax that yields the highest amount of revenue to all U.S.governments (federal,state,and local combined)is the _________ tax.The tax that yields the second-highest amount is the ________ tax.The tax that yields the least amount of revenue is the _________ tax.

A) payroll; individual income; wealth
B) payroll; individual income; corporate
C) individual income; payroll; corporate
D) individual income; consumption; wealth

Question 11

Which tax is an example of a tax on consumption?

A) capital gains tax
B) individual income tax
C) property tax
D) excise tax

Question 12

Which tax is paid by sellers (producers or merchants)on the sales of particular goods,such as cigarettes or gasoline?

A) sales tax
B) consumption tax
C) individual income tax
D) excise tax

Question 13

Which tax is paid on individual income from sales of assets?

A) excise tax
B) estate tax
C) sales tax
D) capital gains tax

Question 14

There is a 20% tax on the first $15,000 of income,a 30% tax on income above $15,000 until $30,000,and a 40% tax on all income above $30,000.What is the average tax rate for someone making $35,000?

A) 14.29%
B) 20%
C) 27.1%
D) 31.7%

Question 15

Which tax is paid on the value of assets (e.g.,stocks)held by a person or family?

A) sales tax
B) capital gains tax
C) wealth tax
D) excise tax

Question 16

The American Taxpayer Relief Act of 2012:

A) made all of the 2001 tax cuts permanent.
B) increased the top tax rate from 35% to 39.6%.
C) allowed all of the 2001 tax cuts to expire.
D) reduced the top tax rate from 39.6% to 35%.

Question 17

Which tax is paid by consumers to vendors at the point of sale?

A) sales tax
B) property tax
C) wealth tax
D) excise tax

Question 18

Which of the following is a fundamental distinguishing feature of individual income taxes compared with payroll taxes?

A) Individual income taxes are applied to a more narrowly defined set of income sources.
B) Individual income taxes are applied in many cases to the entire income of a family.
C) Individual income taxes are the primary means of financing social insurance programs.
D) Individual income taxes are applied only on income earned up to a maximum value.

Question 19

A tax system in which average tax rates fall as income rises is a ________ tax system; the way in which the average tax rate changes as income rises is a measure of ________ equity.

A) regressive; vertical
B) regressive; horizontal
C) progressive; vertical
D) progressive; horizontal

Question 20

Which tax is paid on earnings from selling assets such as stocks,paintings,and houses?

A) sales tax
B) consumption tax
C) individual income tax
D) capital gains tax

Question 21

The deduction of which item is hardest to justify on ability-to-pay grounds?

A) high medical expenditures
B) property and casualty losses
C) state and local tax payments
D) child care expenses

Question 22

The most cost-efficient tax breaks have large ________ impacts and small ________ impacts.

A) inframarginal; supermarginal
B) inframarginal; marginal
C) marginal; supermarginal
D) marginal; inframarginal

Question 23

The alternative minimum tax (AMT):

A) was established to enforce tax laws and punish tax evaders.
B) was indexed to inflation.
C) will affect more and more people because wages have risen significantly faster than have prices.
D) will affect fewer people in the future because tax loopholes have been eliminated.

Question 24

Which item was the largest tax expenditure of the federal government in 2014?

A) exclusion of pension contributions and earnings,including 401(k)plans
B) deductibility of state and local taxes
C) exclusion of employer contributions for medical insurance from taxable income
D) deductibility of home mortgage interest

Question 25

Which consideration best characterizes the justification for deducting some or all of the cost of business lunches as a deviation from the Haig-Simons comprehensive income definition?

A) externality considerations
B) ability-to-pay considerations
C) cost of earning income considerations
D) imperfect information considerations

Question 26

Suppose two people live in a society that has a 25% income tax.Both people have pretax income of $40,000.In period 1,there was no tax deduction; Lillian gave $6,000 to charity; and Susie gave $4,000 to charity.In period 2,the government makes charitable donations tax deductible,and Lillian gives $8,000.What is the amount Susie must give in period 2 so that the marginal impact of the tax break is equal to the inframarginal impact of the tax break?

A) $2,000
B) $4,500
C) $6,500
D) $7,000

Question 27

Three goals are all considered worthwhile for income tax design,but they cannot be achieved simultaneously.Which of the following is NOT one of those goals?

A) marriage neutrality
B) the same tax rate for each family
C) horizontal equity across families
D) a progressive system

Question 28

The Haig-Simons comprehensive income definition defines taxable resources as:

A) income earned from participating in the labor market.
B) the increase in an individual's wealth.
C) an individual's actual consumption for the year.
D) an individual's potential annual consumption.

Question 29

Suppose there are two people in a society.The federal tax law states that the first $20,000 of income is taxed at 10% and income above that is taxed at 30%.The federal government allows taxes paid to local governments to be deducted.George earns a gross income of $40,000,and Jorge earns a gross income of $65,000.Out of his income,George pays $1,000 in local taxes; out of his income,Jorge pays $20,000 in local taxes.Which of the following statements is TRUE?

A) George's total (local + federal)tax bill is greater than Jorge's total tax bill.
B) The federal tax system is proportional.
C) The federal tax system is progressive.
D) The federal tax system is regressive.

Question 30

Suppose there is a 20% tax on the first $15,000 of taxable income,a 30% tax on taxable income above $15,000 until $30,000,and a 40% tax on all taxable income above $30,000.There is a $3,000 exemption per person.What is the marginal tax rate for a single mother making $35,000 who has one child?

A) 20%
B) 30%
C) 31.7%
D) 40%

Question 31

Which fixed amount can a taxpayer subtract from adjusted gross income for each dependent member of the household,as well as for the taxpayer and his or her spouse?

A) an itemized deduction
B) a standard deduction
C) a tax credit
D) an exemption

Question 32

In 2015,the lowest tax rate on taxable income was ________,while the highest tax rate on taxable income was _________.

A) 0%; 43%
B) 0%; 35%
C) 10%; 39.6%
D) 10%; 43%

Question 33

Which of the following is equal to government revenue losses attributable to tax law provisions that allow special exclusions,exemptions,or deductions from gross income or that provide a special credit,preferential tax rate,or deferral of liability?

A) tax deductions
B) tax expenditures
C) tax credits
D) withholding

Question 34

There is a 50% income tax in a society with only two individuals.Both individuals have pre-tax incomes of $50,000.In period 1,there is no tax deduction,and Harry gives $5,000 to charity while Sally gives $8,000 to charity.In period 2,the government makes charitable donations tax deductible and Harry gives $6,000 and Sally gives $12,000.The marginal impact of the tax break was ________; the inframarginal impact of the tax break was _________.

A) $2,500; $13,000
B) $2,500; $6,500
C) $5,000; $13,000
D) $5,000; $6,500

Question 35

Suppose that you owe $4,000 in income taxes but manage to reduce that amount by $2,000 because you paid college tuition that year.The subtraction of $2,000 is a(n):

A) tax credit.
B) standard deduction.
C) exemption.
D) withholding.

Question 36

There is a 20% tax on the first $15,000 of income,a 30% tax on income above $15,000 until $30,000,and a 40% tax on all income above $30,000.What is the marginal tax rate for someone making $35,000?

A) 14.29%
B) 20%
C) 30%
D) 40%

Question 37

Which statement about the subsidy for home ownership is TRUE?

A) The subsidy mechanism is a tax credit for those who have purchased their home.
B) The subsidy is consistent with the Haig-Simons definition of income.
C) Empirical research shows that the subsidy causes more people to buy homes.
D) The current U.S.tax system does not include the rental value of one's home in taxable income.

Question 38

Which statement about the subsidy for home ownership is TRUE?

A) The rationale behind the subsidy is that homeowners donate more to charitable causes.
B) Empirical research suggests that the tax subsidy does not change homeownership rates but rather induces homeowners to spend more on houses.
C) The rationale behind the subsidy is that there is a positive externality associated with people buying larger,more expensive houses.
D) Empirical research suggests that the home mortgage interest deduction is justified by large positive externalities associated with homeownership.

Question 39

By which item can taxpayers reduce the taxes they owe to the government through spending,for example,on child care?

A) itemized deduction
B) standard deduction
C) tax credit
D) exemption

Question 40

Suppose there are two people in a society that has a 50% income tax.Both people have pretax incomes of $40,000.In period 1,there was no tax deduction; Lillian gave $6,000 to charity,and Susie gave $4,000 to charity.In period 2,the government makes charitable donations tax deductible,and Lillian gives $8,000 to charity.What is the amount Susie must give in period 2 so that the marginal impact of the tax break is exactly twice the inframarginal impact of the tax break?

A) $7,000
B) $8,000
C) $10,000
D) $12,000

Question 41

Compare and contrast tax deductions and tax credits in terms of both efficiency and vertical equity.

Question 42

Explain the concepts of vertical and horizontal equity as goals for tax systems.Which of the concepts is easier to measure in practice? Explain.

Question 43

What is the alternative minimum tax (AMT)? Why was it established? How will its application change over time,and why?

Question 44

According to a 2012 report on tax-paying couples,_____ of couples pay a marriage penalty,_____ of couples receive a marriage subsidy,and _____ of couples have neither a penalty nor a subsidy.

A) 48%; 15%; 38%
B) 38%; 15%; 48%
C) 48%; 38%; 15%
D) 15%; 38%; 48%

Question 45

The existence of a marriage tax means that the:

A) marginal tax rate on a secondary earner is higher after marriage,which might reduce the labor supply of secondary earners.
B) marginal tax rate on a secondary earner is lower after marriage,which might raise the labor supply of secondary earners.
C) average tax rate paid by an individual earning $100,000 is the same as that of a married couple with a combined income of $100,000.
D) each individual faces the same penalty as a result of marriage,regardless of income.

Question 46

What is the difference between the marginal tax rate and the average tax rate? What is the difference between the statutory tax rate and the effective tax rate? Explain.

Question 47

A tax system is marriage neutral if:

A) married couples pay the same tax amount in taxes as single individuals do.
B) the marginal tax rate on income rises as income rises.
C) the tax burden on two people is the same whether they are single or married to each other.
D) couples are taxed as a family rather than as two individuals.

Question 48

(a)What is the rationale behind allowing people to deduct charitable giving from their taxable income?
(b)What are the two reasons given in the text that the government does not simply provide the charitable good itself? Explain.