Deck 19: Public Finance: The Economics of Taxation

Question 1

The total amount of tax you pay divided by your total income is the

A) marginal tax rate.
B) average tax rate.
C) total tax rate.
D) proportional tax rate.

Answer 1

B

Question 2

The U.S. individual income tax is designed to be ________.

A) progressive
B) regressive
C) proportional
D) an ability-to-pay tax

Answer 2

A

Question 3

Refer to the information provided in Table 19.3 below to answer the question that follows.
Table 19.3 $$\begin{array} { c c c c } \text { Total Income}&\text { Total Taxes } & \begin{array} { c } \text { Average Tax } \\\text { Rate }\end{array} & \begin{array} { c } \text { Marginal Tax } \\\text { Rate }\end{array} \\\hline \$ 10,000 & \$ 1,000 & 0.1 & 0.1 \\\$ 20,000 & \$ 2,000 & 0.1 & 0.1 \\\$ 30,000 & \$ 3,000 & 0.1 & 0.1 \\\$ 40,000 & \$ 4,000 & 0.1 & 0.1 \\\hline\end{array}$$

-Refer to Table 19.3. The tax rate structure in this example is

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

Answer 3

proportional.

Question 4

A comprehensive tax of 15% on all forms of income with no deductions or exclusions is an example of a

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

Question 5

Every tax has two parts: a(n) ________ and a(n) ________.

A) base; rate structure
B) incidence; rate
C) base; incidence
D) rate structure; excess burden

Question 6

A tax whose burden, expressed as a percentage of income, increases as income increases is

A) a regressive tax.
B) a progressive tax.
C) a proportional tax.
D) an ability-to-pay tax.

Question 7

The excise tax is ________.

A) progressive
B) regressive
C) proportional
D) an ability-to-pay tax

Question 8

The tax rate structure is the ________.

A) measure or value upon which a tax is levied
B) measure of who pays the tax
C) study of how taxes change over time
D) percentage of a tax base that must be paid in taxes

Question 9

A local property tax is a tax on ________, while a tax on your salary is a tax on ________.

A) a flow; a stock
B) a stock; a flow
C) a flow; income
D) a residential holding; a flow

Question 10

A tax whose burden is the same proportion of income for all households is

A) a regressive tax.
B) a progressive tax.
C) a proportional tax.
D) an equal tax.

Question 11

Refer to the information provided in Table 19.2 below to answer the question that follows.
Table 19.2 $$\begin{array} { c c c c } \text { Total Income }&\text { Total Taxes } & \begin{array} { c } \text { Average Tax } \\\text { Rate }\end{array} & \begin{array} { c } \text { Marginal Tax } \\\text { Rate }\end{array} \\\hline \$ 5,000 & \$ 750 & 0.15 & 0.15 \\\$ 10,000 & \$ 1,200 & 0.12 & 0.09 \\\$ 15,000 & \$ 1,500 & 0.10 & 0.06 \\\$ 20,000 & \$ 1,600 & 0.08 & 0.0 \\\hline\end{array}$$

-Refer to Table 19.2. The tax rate structure in this example is

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

Question 12

Refer to the information provided in Table 19.4 below to answer the question that follows.
Table 19.4 $$\begin{array} { c c c c } \text { Total Income }&\text { Total Taxes } & \begin{array} { c } \text { Average Tax } \\\text { Rate }\end{array} & \begin{array} { c } \text { Marginal Tax } \\\text { Rate }\end{array} \\\hline \$ 10,000 & \$ 500 & 0.050 & 0.05 \\\$ 20,000 & \$ 1,500 & 0.075 & 0.10 \\\$ 30,000 & \$ 3,000 & 0.100 & 0.15 \\\$ 40,000 & \$ 8,000 & 0.200 & 0.50 \\\hline\end{array}$$

-Refer to Table 19.4. The tax rate structure in this example is

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

Question 13

A tax whose burden, expressed as a percentage of income, falls as income increases is a

A) regressive tax.
B) progressive tax.
C) proportional tax.
D) benefits-received tax.

Question 14

The ________ tax rate is the tax rate paid on any additional income earned.

A) average
B) total
C) marginal
D) proportional

Question 15

The measure or value upon which a tax is levied is the

A) tax base.
B) tax rate.
C) tax structure.
D) tax incidence.

Question 16

A family that earns $20,000 a year pays $1,000 a year in payroll taxes. A family that earns $40,000 a year pays $2,000 a year in payroll taxes. The payroll tax is

A) a progressive tax.
B) a regressive tax.
C) a proportional tax.
D) a benefits-received tax.

Question 17

After subtracting all deductions and exemptions from total income, you are left with

A) taxable income.
B) marginal income.
C) standardized income.
D) the tax base.

Question 18

A family that earns $20,000 a year pays $400 a year in taxes on clothing. A family that earns $40,000 a year pays $200 a year in taxes on clothing. The tax on clothing is

A) a progressive tax.
B) a regressive tax.
C) a proportional tax.
D) a benefits-received tax.

Question 19

A family that earns $20,000 a year pays $200 a year in city wage taxes. A family that earns $40,000 a year pays $1,600 a year in city wage taxes. The city wage tax is

A) a progressive tax.
B) a regressive tax.
C) a proportional tax.
D) a benefits-received tax.

Question 20

The largest portion of federal government revenues comes from ________.

A) the individual income tax
B) excise taxes
C) social insurance payroll taxes
D) corporate income taxes

Question 21

Which of the following statements is true?

A) Economists believe that average tax rates have a greater influence on behavior than marginal tax rates.
B) Economists believe that marginal tax rates have a greater influence on behavior than average tax rates.
C) Economists believe that marginal and average tax rates influence behavior to the same extent.
D) Economists believe that neither marginal nor average tax rates have any influence on behavior.

Question 22

Your employer pays for the maintenance on your car. The monetary value of this car maintenance is

A) included in your economic income, but not your money income.
B) not included in your economic income, but included in your money income.
C) not included in either economic income or money income.
D) included in both economic and money income.

Question 23

Refer to Scenario 19.1 below to answer the questions that follow.
SCENARIO 19.1: An individual earning $60,000 pays $12,000 in taxes. The marginal tax rate on any income earned above $60,000 is 25%.
Refer to Scenario 19.1. When this person earns $70,000, her tax payment would be

A) $2,500.
B) $14,500.
C) $17,500.
D) indeterminate from this information.

Question 24

A theory of fairness that holds that taxpayers should contribute to the government in proportion to the benefits they receive from public expenditures is the

A) ability-to-pay principle.
B) equity principle.
C) benefits-received principle.
D) equality-for-all principle.

Question 25

A theory of taxation that states that citizens should bear tax burdens in line with their ability to pay taxes is the

A) ability-to-pay principle.
B) equity principle.
C) benefits-received principle.
D) equal payment principle.

Question 26

If the average tax rate exceeds the marginal tax rate, the tax would be

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

Question 27

Which of the following is a tax based on the benefits-received principle?

A) A property tax, if the revenue is used to finance public education.
B) A tax on imports that is used to finance job retraining for workers who have lost their jobs because of the competition from imported products.
C) A progressive income tax that is used to finance national defense.
D) A tax added to the camping fee at national parks that is used to maintain and upgrade camping facilities at national parks.

Question 28

The progressive income tax is a tax based on the

A) benefits-received principle.
B) tax equity principle.
C) efficiency tax principle.
D) ability-to-pay principle.

Question 29

Refer to Scenario 19.1 below to answer the questions that follow.
SCENARIO 19.1: An individual earning $60,000 pays $12,000 in taxes. The marginal tax rate on any income earned above $60,000 is 25%.
Refer to Scenario 19.1. When this person earns $60,000, her average tax rate is

A) 5%.
B) 20%.
C) 25%.
D) indeterminate from this information.

Question 30

If the marginal tax rate exceeds the average tax rate, the tax would be

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

Question 31

Refer to Scenario 19.1 below to answer the questions that follow.
SCENARIO 19.1: An individual earning $60,000 pays $12,000 in taxes. The marginal tax rate on any income earned above $60,000 is 25%.
Refer to Scenario 19.1. When this person earns $70,000, her average tax rate is

A) 20.7%.
B) 22.5%.
C) 25%.
D) indeterminate from this information.

Question 32

Horizontal equity holds that

A) those with equal ability to pay should bear unequal tax burdens.
B) those with equal ability to pay should bear equal tax burdens.
C) those who benefit the most from government services should bear the higher tax burden.
D) those who benefit the most from government services should have the greatest voice in determining what gets produced.

Question 33

Individuals are allowed to deduct a percentage of their expenditures for health care from their taxable income if these expenditures are above a certain amount. This reduces the amount that must be paid in taxes. Allowing for these deductions would improve ________ of the federal income tax.

A) the horizontal equity
B) the vertical equity
C) both vertical and horizontal equity
D) the progressivity

Question 34

The benefits-received principle of taxation is not often used because

A) if tax payments are linked to the benefits received, taxpayers tend to overstate the benefits that they receive from public goods.
B) it leads to an overproduction of public goods.
C) it is difficult to determine the values individual taxpayers place on goods and services that are produced using tax revenue.
D) it leads to less equality in the after-tax distribution of income.

Question 35

Vertical equity holds that

A) those with equal ability to pay should bear equal tax burdens.
B) those who benefit the most from governmental services should bear the higher tax burden.
C) those with greater ability to pay should pay more.
D) those with equal ability to pay should bear unequal tax burdens.

Question 36

During 2012, Sean's consumption equals $25,000 and the change in his net worth is -$5,000. Sean's economic income for 2012 is

A) $5,000.
B) $20,000.
C) $25,000.
D) $30,000.

Question 37

Refer to Scenario 19.1 below to answer the questions that follow.
SCENARIO 19.1: An individual earning $60,000 pays $12,000 in taxes. The marginal tax rate on any income earned above $60,000 is 25%.
Refer to Scenario 19.1. Suppose this person earns $70,000 and gives a $1,000 tax deductible donation to charity. The donation reduces her tax payment by ________.

A) $200
B) $207
C) $250
D) $1000

Question 38

If the marginal tax rate equals the average tax rate, the tax would be

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

Question 39

Economic income is the sum of consumption and

A) net worth.
B) the change in net worth.
C) wealth.
D) transfer payments.

Question 40

If the government used the revenue from the excise tax on alcohol to fund research on alcoholism treatment programs, this would be an example of

A) an ability-to-pay tax.
B) a benefits-received tax.
C) a vertical equity tax.
D) a user fee.

Question 41

Thomas Hobbes argued for a tax on consumption instead of on income because

A) the standard of living depends not on income, but on how much income is spent.
B) consumption is the best indication of ability to pay.
C) a tax on income discourages saving by taxing savings twice.
D) a tax on consumption raises more revenue than a tax on income.

Question 42

Horizontal equity holds that those with greater ability to pay should pay less.

Question 43

You own a house in Malibu, CA. During the recent downturn in the house values in the area your house's value declined by $100,000. If you do not sell your home during this period, your economic income ________ and your taxable income ________.

A) was unchanged; fell
B) fell; was unchanged
C) fell; fell
D) was unchanged; was unchanged

Question 44

Vertical equity holds that those with greater ability to pay should pay more.

Question 45

During 2012, Tony's assets equal $300,000 and his net worth is $50,000. Tony's liabilities are

A) $50,000.
B) $150,000.
C) $200,000.
D) $250,000.

Question 46

A retail sales tax is a proportional tax with respect to income.

Question 47

Irving Fisher argued for a tax on consumption instead of on income because

A) the standard of living depends not on income, but on how much is consumed.
B) consumption is the best indication of ability to pay.
C) a tax on income discourages saving by taxing savings twice.
D) a tax on consumption raises more revenue than a tax on income.

Question 48

Refer to the information provided in Table 19.1 below to answer the questions that follow.
Table 19.1
$$\begin{array} { | c | c | } \hline \text { Total Income } & \text { Total Taxes } \\\hline \$ 10,000 & \$ 1,000 \\\hline 20,000 & 2,400 \\\hline 30,000 & 4,500 \\\hline 40,000 & 8,000 \\\hline\end{array}$$

-Relating to the Economics in Practice on page 392: Refer to Table 19.1. At an income level of $20,000, the average tax rate is

A) 1.2%.
B) 8.3%.
C) 12%.
D) 24%.

Question 49

You own stock that increases in value by $3,000 but you do not cash in the stock. The $3,000 is

A) counted as part of economic income but not part of taxable income.
B) counted as both economic and taxable income.
C) counted as taxable income but not economic income.
D) counted as neither taxable nor economic income.

Question 50

Wealth or net worth is equal to

A) assets plus liabilities.
B) assets minus liabilities.
C) consumption plus changes in net worth.
D) income minus savings.

Question 51

Which of the following statements is false?

A) An income tax taxes savings twice only if consumption is the measure used to gauge a person's ability to pay.
B) Proponents of income as a tax base argue that you should not be taxed on what you draw out of the common pot, but rather on the basis of your ability to draw from the pot.
C) The double taxation of saving tends to increase the saving rate because people have to save more to keep the after-tax yield constant.
D) At this time, there is not clear consensus on what the best tax base is.

Question 52

A tax that exacts a higher proportion of income from higher-income people than it does from lower-income households is a regressive tax.

Question 53

For the purpose of defining economic income, capital gains count as income only when they are realized.

Question 54

Refer to the information provided in Table 19.1 below to answer the questions that follow.
Table 19.1
$$\begin{array} { | c | c | } \hline \text { Total Income } & \text { Total Taxes } \\\hline \$ 10,000 & \$ 1,000 \\\hline 20,000 & 2,400 \\\hline 30,000 & 4,500 \\\hline 40,000 & 8,000 \\\hline\end{array}$$

-Relating to the Economics in Practice on page 392: Refer to Table 19.1. If income increases from $30,000 to $40,000, the marginal tax rate is

A) 5%.
B) 20%.
C) 35%.
D) indeterminate from this information.

Question 55

Refer to the information provided in Table 19.1 below to answer the questions that follow.
Table 19.1
$$\begin{array} { | c | c | } \hline \text { Total Income } & \text { Total Taxes } \\\hline \$ 10,000 & \$ 1,000 \\\hline 20,000 & 2,400 \\\hline 30,000 & 4,500 \\\hline 40,000 & 8,000 \\\hline\end{array}$$

-Relating to the Economics in Practice on page 392: Refer to Table 19.1. At an income level of $40,000, the average tax rate is

A) 2%.
B) 5%.
C) 15%.
D) 20%.

Question 56

Refer to the information provided in Table 19.1 below to answer the questions that follow.
Table 19.1
$$\begin{array} { | c | c | } \hline \text { Total Income } & \text { Total Taxes } \\\hline \$ 10,000 & \$ 1,000 \\\hline 20,000 & 2,400 \\\hline 30,000 & 4,500 \\\hline 40,000 & 8,000 \\\hline\end{array}$$

-Relating to the Economics in Practice on page 392: Refer to Table 19.1. The tax rate structure in this example is

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

Question 57

Refer to the information provided in Table 19.1 below to answer the questions that follow.
Table 19.1
$$\begin{array} { | c | c | } \hline \text { Total Income } & \text { Total Taxes } \\\hline \$ 10,000 & \$ 1,000 \\\hline 20,000 & 2,400 \\\hline 30,000 & 4,500 \\\hline 40,000 & 8,000 \\\hline\end{array}$$

-Relating to the Economics in Practice on page 392: Refer to Table 19.1. At an income level of $10,000, the average tax rate is

A) 1%.
B) 5%.
C) 10%.
D) 20%.

Question 58

Double taxation of saving may

A) reduce the saving rate.
B) increase the rate of investment.
C) increase the rate of economic growth.
D) increase the budget deficit.

Question 59

Refer to the information provided in Table 19.1 below to answer the questions that follow.
Table 19.1
$$\begin{array} { | c | c | } \hline \text { Total Income } & \text { Total Taxes } \\\hline \$ 10,000 & \$ 1,000 \\\hline 20,000 & 2,400 \\\hline 30,000 & 4,500 \\\hline 40,000 & 8,000 \\\hline\end{array}$$

-Relating to the Economics in Practice on page 392: Refer to Table 19.1. If income increases from $20,000 to $30,000, the marginal tax rate is

A) 3%.
B) 15%.
C) 21%.
D) indeterminate from this information.

Question 60

During 2012, Tony's assets equal $200,000 and his liabilities are $250,000. Tony's net worth is

A) -$50,000.
B) $50,000.
C) $300,000.
D) $550,000.

Question 61

Refer to the information provided in Figure 19.1 below to answer the questions that follow. Figure 19.1
Refer to Figure 19.1. After firms can respond to the payroll tax, the per-hour wage paid by firms equals

A) $12.
B) $10.
C) $7.
D) $5.

Question 62

As a result of an increase in the payroll tax that employers must pay on their employeesʹ wages, employers reduce the starting wage for new employees. This is an example of

A) tax shifting.
B) tax incidence.
C) a regressive tax.
D) tax avoidance.

Question 63

Which of the following taxes is most easily shifted?

A) an income tax that allows for no deductions of exemptions
B) a retail sales tax
C) a uniform tax on land
D) a tax on imported rice

Question 64

Assets minus liabilities equals net worth.

Question 65

The government imposes a luxury tax on automobiles that cost more than $40,000. As a result, fewer individuals purchase cars that cost more than $40,000. This is an example of

A) tax equity.
B) tax shifting.
C) tax evasion.
D) tax incidence.

Question 66

Tax shifting ________.

A) is the way in which a tax is structured
B) is the ultimate distribution of a tax's burden
C) occurs when taxes cause prices to increase, but wages to fall
D) occurs when taxed agents can alter their behavior and do something to avoid paying a tax

Question 67

Refer to the information provided in Figure 19.1 below to answer the questions that follow. Figure 19.1
Refer to Figure 19.1. The total tax collections from this payroll tax are:

A) $700.
B) $1,400.
C) $2,100.
D) $3,500.

Question 68

Wealth is a flow measure.

Question 69

Refer to the information provided in Figure 19.1 below to answer the questions that follow. Figure 19.1
Refer to Figure 19.1. The workersʹ share of the tax burden is ________ and the employersʹ share of the tax burden is ________.

A) $2,100; $1,400
B) $1,400; $2,100
C) $700; $1,400
D) $0; $2,100

Question 70

A household is hurt on the ________ side when its net profits or wages fall, and it is hurt on the ________ side when the prices of goods and services increase.

A) sources; uses
B) uses; sources
C) flow; stock
D) input; output

Question 71

Refer to the information provided in Figure 19.1 below to answer the questions that follow. Figure 19.1
Refer to Figure 19.1. Initially after the payroll tax is imposed, the firmsʹ cost per unit of labor is ________ per hour and the workersʹ take home pay is ________ per hour.

A) $10; $9
B) $9; $9
C) $10; $10
D) $12; $7

Question 72

Consumption is the total value of all goods that a household consumes in a given period.

Question 73

Refer to the information provided in Figure 19.1 below to answer the questions that follow. Figure 19.1
Refer to Figure 19.1. After firms can respond to the payroll tax, employment will be

A) 500.
B) 650.
C) 700.
D) 800.

Question 74

Refer to the information provided in Figure 19.1 below to answer the questions that follow. Figure 19.1
Refer to Figure 19.1. Prior to the imposition of a payroll tax, this labor market was in equilibrium at a wage of ________ and employment of ________ workers.

A) $5.00; 500
B) $7.00; 800
C) $10.00; 700
D) $12.00; 650

Question 75

Refer to the information provided in Figure 19.1 below to answer the questions that follow. Figure 19.1
Refer to Figure 19.1. Initially after the payroll tax is imposed, there will be

A) an equilibrium in the labor market.
B) an excess demand for labor of 100 units.
C) an excess supply of labor of 150 units.
D) an excess supply of labor or 100 units.

Question 76

Refer to the information provided in Figure 19.1 below to answer the questions that follow. Figure 19.1
Refer to Figure 19.1. After firms can respond to the payroll tax, the workers will take home a per-hour wage of

A) $12.
B) $10.
C) $7.
D) $5.

Question 77

Firms may react to a payroll tax by

A) substituting labor for capital.
B) increasing their output.
C) shifting to more capital intensive techniques.
D) increasing workers' wages.

Question 78

Refer to the information provided in Figure 19.1 below to answer the questions that follow. Figure 19.1
Refer to Figure 19.1. The payroll tax imposed is ________ per unit of labor.

A) $2
B) $3
C) $5
D) $10

Question 79

A person's wealth is the total value of all the things they own.

Question 80

Tax incidence is the ________.

A) behavior of shifting the tax to another party
B) ultimate distribution of a tax's burden
C) structure of the tax
D) measure of the impact the tax has on employment and output