Deck 36: 6: Sec 366 Mc Should the Tax Laws Be Reformed to Encourage Saving

Question 1

Reforming tax laws to encourage saving is motivated by which of the Ten Principles of Economics from Chapter 1?

A)The cost of something is what you give up to get it (Principle 2).
B)Trade can make everyone better off (Principle 5).
C)Markets are usually a good way to organize economic activity (Principle 6).
D)A country's standard of living depends on its ability to produce goods and services (Principle 8).

Answer 1

B

Question 2

Higher saving is associated with

A)a larger capital stock and higher productivity.
B)a larger capital stock but not higher productivity.
C)higher productivity but not a higher capital stock.
D)neither a higher capital stock nor higher productivity.

Answer 2

A

Question 3

Which of the following does the U.S.currently have?

A)means-tested government benefits and tax laws that tax capital income only once
B)means-tested government benefits and tax laws that tax some capital income twice
C)tax laws that tax capital income only once,but not means-tested government benefits
D)tax laws that tax some capital income twice,but not means-tested government benefits

Answer 3

B

Question 4

Means-tested programs tend to favor

A)those with high income as would a consumption tax.
B)those with high income while a consumption tax would favor those with low income.
C)those with low income as would a consumption tax.
D)those with low income while a consumption tax would favor those with high income.

Question 5

U.S.public policy discourages saving because

A)other things the same,taxes increase the return from savings.
B)means tested programs such as Medicaid provide lower benefits to those who did not save.
C)none of parents' bequest to their children is taxed.
D)some forms of capital income are taxed twice.

Question 6

Which of the following raise the incentive for households to save?

A)means-testing of government benefits and inheritance taxes
B)means-testing of government benefits but not inheritance taxes
C)inheritance taxes,but not means-testing of government benefits
D)neither means-testing of government benefits nor inheritance taxes

Question 7

Which of the following are taxed?

A)both corporate profits and dividends paid to stockholders
B)corporate profits but not dividends paid to stockholders
C)dividends paid to stockholders but not corporate profits
D)neither corporate profits nor dividends paid to stock holders

Question 8

Means-tested government benefits base benefits on

A)a household's wealth and are an incentive to save.
B)a household's wealth and are a disincentive to save.
C)the current interest rate and are an incentive to save.
D)the current interest rate and are a disincentive to save.

Question 9

Policies that reduce the incentive for households to save include

A)means-testing.
B)College and university financial aid administration.
C)inheritance taxes.
D)All of the above.

Question 10

Which of the following are currently provisions of the U.S.tax system and discourage saving?

A)some forms of capital income are taxed twice
B)if they are large enough,bequests are taxed
C)both a and b
D)neither a nor b

Question 11

Of means tested programs and IRA's,which lower the rate of return on saving?

A)Both means-tested programs and IRA's.
B)Means-tested programs,but not IRA's.
C)IRA's but not means-tested programs.
D)Neither means-tested program,or IRA's.

Question 12

Which of the following is correct?

A)No forms of capital income are taxed twice.
B)The tax code cannot be rewritten to provide greater incentive to save.
C)Means-tested benefits increase the incentive to save.
D)There is a correlation between national savings rates and measures of economic well-being.

Question 13

Means-tested college aid,base college aid primarily on

A)a student's abilities,and create an incentive to save.
B)a student's abilities but create a disincentive to save.
C)the current interest rate and are an incentive to save.
D)the current interest rate and are a disincentive to save.

Question 14

Which of the following reduce the incentive for households to save?

A)both means-testing of government benefits and inheritance taxes
B)means-testing of government benefits but not inheritance taxes
C)inheritance taxes,but not means-testing of government benefits
D)neither means-testing of government benefits nor inheritance taxes

Question 15

A reduction in the tax rate on income from saving would

A)most directly benefit the poor in the short run.
B)increase real wages over time.
C)decrease the capital stock over time.
D)decrease productivity over time.

Question 16

Double taxation means that both

A)the profits of corporations and the dividends shareholders receive are taxed,which is not currently the case in the United States.
B)the profits of corporations and the dividends shareholders receive are taxed,which is currently the case in the U.S.
C)wage income and employee benefits are taxed,which is not currently the case in the United States.
D)wage income and employee benefits are taxed,which is currently the case in the United States.

Question 17

Double taxation means that both

A)wage income and interest income are taxed,which is currently the case in the United States.
B)wage income and interest income are taxed,which is not currently the case in the United States.
C)the profits of corporations and the dividends shareholders receive are taxed,which is currently the case in the United States.
D)the profits of corporations and the dividends shareholders receive are taxed,which is not currently the case in the United States.

Question 18

Proponents of tax-law changes to encourage saving would

A)argue that corporate tax rates should be decreased.
B)increase the number of government benefits which are means-tested.
C)argue that state sales tax should be replaced with state income tax.
D)favor none of the above programs.

Question 19

Higher saving is associated with

A)a larger capital stock and a higher standard of living.
B)a larger capital stock but not a higher standard of living.
C)a higher standard of living but not a larger capital stock.
D)neither a higher standard of living nor a higher capital stock.

Question 20

Accumulated over a long span of time,the tax rate on interest income

A)removes all benefits from saving.
B)reduces the benefits from saving by a small amount.
C)reduces the benefits from saving by a large amount.
D)does nor reduce any of the benefits from saving.

Question 21

Which of the following is true concerning IRA's,401(k)and 403(b)plans?

A)There are no limits on the amount of funds people can hold in them.
B)Some people are not eligible to hold them.
C)There are never penalties for withdrawals.
D)All of the above are correct.

Question 22

Which of the following might explain a decrease in national saving when the tax rate on savings is reduced?

A)its income effect on saving and its effect on the government budget
B)its income effect on saving but not its effect on the government budget
C)its effect on the government budget but not its income effect on saving
D)neither its income effect on saving nor its effect on the government budget

Question 23

Which of the following is not an argument by those who oppose tax-law changes to encourage saving?

A)Saving is not very responsive to changes in the tax rate.
B)Saving is not an important determinant of a nation's ability to produce output.
C)Reducing the budget deficit instead of changing the tax laws could raise saving.
D)Changes in the tax laws to induce saving would distribute the tax burden less fairly.

Question 24

A higher rate of return on saving has

A)an income effect that discourages saving and a substitution effect that encourages saving.
B)an income effect that encourages saving and a substitution effect that discourages saving.
C)income and substitution effects that both decrease saving.
D)income and substitution effects that both increase saving.

Question 25

Which of the following are both correct?

A)Data show no correlation between saving and measures of economic well-being.A reduction in tax rates may reduce saving because of the income effect.
B)Data show no correlation between saving and measures of economic well-being.A reduction in tax rates may reduce saving because of the substitution effect.
C)Data show a positive correlation between saving and measures of economic well-being.A reduction in tax rates may reduce saving because of the income effect.
D)Data show a positive correlation between saving and measures of economic well-being.A reduction in tax rates may reduce saving because of the substitution effect.

Question 26

Which of the following two effects of a decrease in the tax rate on saving would raise savings?

A)the income effect and the substitution effect
B)the income effect but not the substitution effect
C)the substitution effect but not the income effect
D)neither the substitution effect nor the income effect

Question 27

An increase in the tax rate on interest income

A)raises the amount earned on savings.Saving will rise if the income effect of the increase in the tax rate is larger than the substitution effect.
B)raises the amount earned on savings.Saving will rise if the income effect of the increase in the tax rate is smaller than the substitution effect.
C)reduces the amount earned on savings.Saving will fall if the income effect of the increase in the tax rate is larger than the substitution effect.
D)reduces the amount earned on savings.Saving will fall if the income effect of the increase in the tax rate is smaller than the substitution effect.

Question 28

Which of the following is true concerning IRA's,401(k)and 403(b)plans?

A)Not everyone is eligible to put funds into them.
B)There are restrictions on the amount of funds that can be put into them.
C)Except under unusual circumstances,there are penalties for withdrawals before retirement.
D)All of the above are correct.

Question 29

A decrease in the tax rate is more likely to increase the standard of living if the income effect of a change in the interest rate is

A)small and an increase in private saving tends to have a small impact on the capital stock.
B)small and an increase in private saving tends to have a large impact on the capital stock.
C)large and an increase in private saving tends to have a small impact on the capital stock.
D)large and an increase in private saving tends to have a large impact on the capital stock.

Question 30

If a reduction in taxes on savings reduced the amount of private saving,then the

A)income effect equaled the substitution effect.
B)income effect outweighed the substitution effect.
C)the substitution effect outweighed the income effect.
D)None of the above.

Question 31

Eliminating means requirements for government benefits would

A)raise saving and primarily benefit people with lower incomes.
B)raise saving but primarily benefit people with higher incomes.
C)reduce saving but primarily benefit people with lower incomes.
D)reduce saving and primarily benefit people with higher income.

Question 32

Which of the following would likely increase private saving?

A)both expansion of means testing and a consumption tax
B)expansion of means testing,but not a consumption tax
C)a consumption tax,but not expansion of means testing
D)neither expansion of means testing nor a consumption tax

Question 33

Which of the following would likely increase private saving?

A)Both expansion of IRA type accounts and a consumption tax.
B)Expansion of IRA type accounts,but not a consumption tax.
C)A consumption tax,but not expansion of IRA type accounts.
D)Neither expansion of IRA type accounts nor a consumption tax.

Question 34

IRAs,and 401(k)and 403(b)plans

A)impose added taxes on those who save.
B)place no limits on the amount people can deposit into these programs.
C)impose penalties for withdrawals except under certain circumstances.
D)None of the above is correct.

Question 35

Suppose the tax rate on interest income from saving were reduced.

A)The income effect,but not the substitution effect,would tend to reduce private saving.
B)The substitution effect,but not the income effect,would tend to reduce private saving.
C)Both the income and substitution effect would tend to reduce private saving.
D)Neither the income nor the substitution effect would tend to reduce private saving.

Question 36

Assuming that the substitution effect is large relative to the income effect,tax reform designed to increase saving

A)increases the interest rate and decreases spending on capital goods.
B)increases the interest rate and increases spending on capital goods.
C)decreases the interest rate and increases spending on capital goods.
D)decreases the interest rate and decreases spending on capital goods.

Question 37

A year ago a country reduced the tax rate on all interest income from 40% to 10%.During the year private saving was $600 billion as compared to $500 billion the year before the tax reform.Taxes collected on interest income fell by $150 billion.Assuming no other changes in government revenues or spending which of the following is correct?

A)the substitution effect was larger than the income effect;national saving rose
B)the substitution effect was larger than the income effect;national saving fell
C)the income effect was larger than the substitution effect;national saving rose
D)the income effect was larger than the substitution effect;national saving fell

Question 38

A year ago a country reduced the tax rate on all interest income from 20% to 10%.During the year private saving was $500 billion as compared to $400 billion the year before the tax reform.Taxes on interest income fell by $10 billion.Assuming no other changes in income,or government revenues or spending,which of the following is correct?

A)the substitution effect was larger than the income effect;national saving rose
B)the substitution effect was larger than the income effect;national saving fell
C)the income effect was larger than the substitution effect;national saving rose
D)the income effect was larger than the substitution effect;national saving fell

Question 39

Which of the following might explain a decrease in national saving when the tax rate on savings is reduced?

A)its substitution effect on saving and its effect on the government budget
B)its substitution effect on saving but not its effect on the government budget
C)its effect on the government budget but not its substitution effect on saving
D)neither its substitution effect on saving nor its effect on the government budget

Question 40

Suppose tax laws were reformed to encourage saving by increasing the rate of return on savings.Which of the following would be true?

A)Both the income effect and the substitution effect would tend to increase the amount of money a household saved.
B)The income effect would tend to increase household savings while the substitution effect would tend to decrease household savings.
C)The income effect would tend to decrease household savings while the substitution effect would tend to increase household savings.
D)Both the income effect and the substitution effect would tend to decrease the amount of money a household saved.

Question 41

Opponents of tax reforms intended to raise saving argue that such reforms

A)favor those with high income,and that saving may not rise because of the substitution effect.
B)favor those with high income,and that saving may not rise because of the income effect.
C)favor those with low income,and that saving may not rise because of the substitution effect.
D)favor those with low income,and that saving may not rise because of the income effect.

Question 42

A reduction in the tax rate on interest income

A)would necessarily raise national saving.
B)would primarily benefit the wealthy.
C)both a and b are correct.
D)None of the above are correct.

Question 43

Eliminating double-taxation would likely

A)raise saving and primarily benefit people with lower incomes.
B)raise saving but primarily benefit people with higher incomes.
C)reduce saving but primarily benefit people with lower incomes.
D)reduce saving and primarily benefit people with higher income.

Question 44

A consumption tax that replaces an income tax

A)only taxes a household on the money it spends.
B)discourages saving.
C)would likely result in a lower level of saving than an income tax.
D)ultimately taxes income twice - once when the household pays income tax and once when the household makes a purchase.