Chapter 12

Chapter 12
The Design of the Tax System

MULTIPLE CHOICE
1. Which of the following statements is most correct?

a. As a nation gets richer, the government has larger tax revenue, but typically takes a smaller share of income in
taxes.
b. Poor countries usually have relatively large tax burdens.
c. As a nation gets richer, the government typically takes a larger share of income in taxes.
d. There is little evidence of a relationship between income and taxes for most countries.
ANSWER: c. As a nation gets richer, the government typically takes a larger share of income in taxes.
TYPE: M SECTION: 1 DIFFICULTY: 2
2. In 1789 the average American paid what percent of his income in taxes?
a. approximately 2 percent.
b. approximately 5 percent.
c. approximately 10 percent.
d. approximately 25 percent.
ANSWER: b. approximately 5 percent.
3. Over the past 100 years, as the economy’s income has grown,
a. tax rates, as a percentage of total income have fallen.
b. tax revenues, as a percentage of total income have fallen.
c. household after-tax income has fallen.
d. the government has grown even more.
ANSWER: d. the government has grown even more.
4. Who said, ”in this world nothing is certain but death and taxes”?
a. Mark Twain
b. P.T. Barnum
c. Ben Franklin
d. Richard Nixon
ANSWER: c. Ben Franklin
5. The U.S. federal government collects taxes in a number of ways. Rank the following sources of revenue from largest
to the smallest.
a. corporate income tax, social security tax, personal income tax, import tax
b. estate tax, corporate income tax, excise tax, individual income tax
c. corporate income tax, payroll tax, individual income tax, excise tax
d. individual income tax, payroll tax, corporate income tax, excise tax
ANSWER: d. individual income tax, payroll tax, corporate income tax, excise tax
6. Rate these taxes to the Federal government from most to least important.
a. individual income taxes, Social insurance taxes, Corporate income taxes
b. Social insurance taxes, Corporate income taxes, individual income taxes
c. Corporate income taxes, individual income taxes, Social insurance taxes
d. Corporate income taxes, Social insurance taxes, individual income taxes
ANSWER: a. individual income taxes, Social insurance taxes, Corporate income taxes
337
Chapter 12/The Design of the Tax System  338
7. Most people agree that the tax system

a. should be both efficient and equitable.
b. cannot raise enough revenue to cover government expenditures.
c. could raise more revenue if tax rates were lowered.
d. should be rewritten to require everyone to pay the same percentage of their income to taxes.
ANSWER: a. should be both efficient and equitable.
8. Deadweight losses occur in markets in which

a. firms decide to downsize.
b. the government imposes a tax.
c. profits fall because of low consumer demand.
d. equilibrium price rises, causing a loss in consumer surplus.
ANSWER: b. the government imposes a tax.
9. Which of the following countries has the largest tax burden?

a. Mexico
b. Russia
c. Germany
d. France
ANSWER: d. France
10. When comparing the tax burden of several major countries, the United States’ tax burden is
a. at the top.
b. in the middle.
c. near the bottom.
d. dead last.
ANSWER: b. in the middle.
11. Poor countries usually have

a. very high tax burdens.
b. average tax burdens when compared with other countries.
c. relatively low tax burdens.
d. zero tax burdens because of high poverty levels.
ANSWER: c. relatively low tax burdens.
12. In the United States the payroll tax is also referred to as a

a. dividend income tax.
b. social insurance tax.
c. employer value tax.
d. capital gains tax.
ANSWER: b. social insurance tax.
13. A payroll tax is a tax on

a. the wages that a firm pays its workers.
b. each additional dollar of income earned by a worker.
c. specific goods like gasoline and cigarettes.
d. a firm based on the number of workers it has on its payroll.
ANSWER: a. the wages that a firm pays its workers.
14. In 2001, social insurance taxes for the average American were
a. $1,465.
b. $1,980.
c. $2,155.
d. $2,435.
ANSWER: d. $2,435.
15. The payroll tax differs from the individual income tax because the payroll tax is primarily earmarked to pay for
a. employer provided pensions.
b. Social Security and Medicare.
c. employer-provided health benefits.
d. job loss and training programs.
ANSWER: b. Social Security and Medicare.
TYPE: M SECTION: 1 DIFFICULTY:
16. Corporate profits (if they are distributed as dividends) are

a. never taxed.
b. taxed twice.
c. taxed once.
d. taxed three times.
ANSWER: b. taxed twice.
17. Corporate profits are

a. included in payroll taxes.
b. exempt from taxes.
c. taxed twice, once as profit and once as dividends.
d. taxed to pay for Medicare.
ANSWER: c. taxed twice, once as profit and once as dividends.
18. A transfer payment is a government payment

a. to companies that provide goods or services to government agencies.
b. designed to transfer funds from one agency of the government to another.
c. which transfers revenue from the federal government to state government.
d. not made in exchange for a good or service.
ANSWER: d. not made in exchange for a good or service.
19. The most common explanation for Social Security payments accounting for a larger share of federal government
expenditures is
a. increases in life expectancy.
b. people becoming eligible for Social Security benefits at an earlier age.
c. increases in birth rates among teenagers and the poor.
d. falling payroll tax receipts.
ANSWER: a. increases in life expectancy.
20. Temporary Assistance for Needy Families (TANF) falls into which spending category?
a. Medicare
b. income security
c. guaranteed social eligibility
d. Social Security
ANSWER: b. income security
21. Which of the following is NOT true about government spending on national defense?
a. It is the second-largest spending category for the U.S. federal government.
b. It includes salaries of military personnel.
c. It fluctuates over time as the political climate changes.
d. It is not financed with tax revenue.
ANSWER: d. It is not financed with tax revenue
22. A budget deficit

a. occurs when government receipts are less than spending.
b. occurs when government spending is less than receipts.
c. occurs when government receipts are equal to spending.
d. is the accumulation of years of government overspending.
ANSWER: a. occurs when government receipts are less than spending.
23. The government finances budget deficits by

a. selling stock, much like a corporation.
b. printing additional currency.
c. borrowing from the public.
d. raising taxes on products such as cigarettes and alcoholic beverages.
ANSWER: c. borrowing from the public.
24. The government finances the budget deficit by

a. borrowing from the public.
b. borrowing solely from the Federal Reserve Bank.
c. printing currency in the amount of the budget deficit.
d. requiring that budget surpluses occur every other year to pay off the deficits.
ANSWER: a. borrowing from the public.
25. State and local governments receive the largest portion of their tax revenues from
a. sales taxes and income taxes.
b. income taxes and property taxes.
c. payroll taxes and income taxes.
d. property taxes and sales taxes.
ANSWER: d. property taxes and sales taxes.
26. The tax that generates the most revenue for state and local government is the
a. corporate income tax.
b. individual income tax.
c. property tax.
d. sales tax.
ANSWER: d. sales tax.
27. State and local governments

a. are funded entirely by their own tax base.
b. receive the majority of their tax revenues from corporate income tax.
c. are generally not responsible for collecting sales tax.
d. receive some of their funds from the federal government.
ANSWER: d. receive some of their funds from the federal government.
28. The single largest expenditure by state and local governments is on

a. highways.
b. police.
c. public welfare.
d. education.
ANSWER: d. education.
29. For state and local governments, education accounts for what percent of spending?
a. 25 percent
b. 34 percent
c. 50 percent
d. 75 percent
ANSWER: b. 34 percent.
30. The largest source of income for the federal government is

a. individual income taxes.
b. corporate taxes.
c. tariffs.
d. fines and penalties.
ANSWER: a. individual income taxes.
31. The U.S. federal government collects what amount of taxes in the economy?
a. about 1/4
b. about 1/2
c. about 2/3
d. about 3/4
ANSWER: c. about 2/3.
32. In 2001, the average American paid approximately how much to the federal government?
a. $3,000
b. $4,500
c. $6,500
d. $9,000
ANSWER: c. $6,500
33. Approximately what percent of the Federal government’s receipts come from individual income taxes?
a. 10 percent
b. 25 percent
c. 35 percent
d. 50 percent
ANSWER: d. 50 percent
34. A person’s tax liability refers to

a. the percentage of income that a person much pay in taxes.
b. the amount of tax a person owes to the government.
c. the amount of tax the government is required to refund each person.
d. deductions that can be legally subtracted from a person’s income each year.
ANSWER: b. the amount of tax a person owes to the government.
35. A family's income tax liability is

a. a standard percentage of all income earned.
b. determined by wage income rather than dividend and interest income.
c. based on total income.
d. usually the same from year to year.
ANSWER: c. based on total income.
36. The government taxes corporate income on the basis of

a. profit.
b. the amount the firm receives for the goods or services it sells.
c. the number of employees.
d. All of the above are correct.
ANSWER: a. profit.
37. Which of the following is true about the percent of total income the U.S. government takes as taxes?
a. In 1902 the government collected 7 percent of total income and in 2000, it collected 31 percent.
b. In 1902 the government collected 16 percent of total income and in 2000, it collected 46 percent.
c. In 1902 the government collected 21 percent of total income and in 2000, it collected 35 percent.
d. In 1902 the government collected 17 percent of total income and in 2000, it collected 13 percent.
ANSWER: a. In 1902 the government collected 7 percent of total income and in 2000, it collected 31 percent.
38. As the economy’s income has grown, the government has

a. grown at about the same pace.
b. grown even more.
c. grown at a slower pace.
d. stagnated over the years.
ANSWER: b. grown even more.
39. The amount of income tax owed by a family is

a. not simply proportional to its total income.
b. largely unaffected by deductions.
c. total income minus tax credits.
d. some constant fraction of income.
ANSWER: a. not simply proportional to its total income.
40. When calculating income tax liability, government policymakers have deemed certain expenses as deductible, but
would NOT include
a. mortgage interest payments.
b. interest earned on a passbook savings account.
c. charitable giving.
d. large medical expenses.
ANSWER: b. interest earned on a passbook savings account.
On Taxable Income The Tax Rate is
Up To $27,050 15.0%
From $27,050 to $65,550 27.5
From $65,550 to $136,750 30.5
From $136,750 to $297,350 35.5
41. Given the tax table, if Danielle makes $38,000 this year on her new job, her tax liability would be approximately
a. $4,058.
b. $5,700.
c. $7,069.
d. $10,450.
ANSWER: c. $7,069.
42. Given the tax table, if Janice makes $97,500 this year, her tax liability would be approximately
a. $23,431.
b. $24,390.
c. $26,815.
d. $29,740.
ANSWER: b. $24,390.
43. Given the table, if Morgan makes $142,700 this year, her tax liability would be approximately
a. $26,502.
b. $38,473.
c. $42,118.
d. $50,659.
ANSWER: b. $38,473.
44. As government debt increases,

a. evidence suggests that spending on social insurance programs will be reduced.
b. government must spend a larger share of its revenue on interest payments.
c. a trade-off with government deficits is inevitable.
d. taxes must rise to cover the deficit.
ANSWER: b. government must spend a larger share of its revenue on interest payments.
45. The U.S. federal government spends its revenues in a number of ways. Rank the following spending categories from
largest to smallest.
a. Social Security, national defense, income security, net interest
b. health care, national defense, net interest, income security
c. Social Security, health care, national defense, federal judicial system (including prisons)
d. national defense, social security, net interest, income security
ANSWER: a. Social Security, national defense, income security, net interest
46. The three largest categories of spending by the Federal government in order from first to third would be
a. Social Security, income security, and national defense.
b. national defense, income security, and Social Security.
c. Social Security, national defense, and income security.
d. income security, Social Security, and national defense.
ANSWER: c. Social Security, national defense, and income security.
47. In 2001, total spending per person by the federal government amounted to
a. $4,750.
b. $5,425.
c. $6,540.
d. $7,285.
ANSWER: c. $6,540.
48. The largest category of federal government spending is growing because

a. the U.S. must spend more on national defense because of the war against terror.
b. the elderly population is increasing because life expectancy is up.
c. the national debt is at an all-time high and interest payments have been mounting.
d. health care costs are rising faster than any other service in the U.S.
ANSWER: b. the elderly population is increasing because life expectancy is up.
49. Specific spending programs that are included under the general category of income security include:
a. Health Programs.
b. Medicare.
c. Social Security.
d. Food Stamps.
e. All of the above are correct.
ANSWER: d. Food Stamps.
50. State and local governments

a. use a mix of taxes and fees to generate revenue.
b. are required by federal mandate to levy income taxes.
c. are required to tax property at a standard rate set by the federal government.
d. cannot impose state excise taxes on products that are taxed by the federal government.
ANSWER: a. use a mix of taxes and fees to generate revenue.
51. States are sometimes given the responsibility of administering federal programs under federal guidelines. These
types of programs usually fall into the category of
a. defense.
b. Medicare.
c. income security.
d. Social Security.
ANSWER: c. income security.
52. Most analysts expect the largest federal spending category to continue to grow in importance for many years into
the future. What category of spending is this?
a. National defense
b. Social Security
c. Income security
d. Farm support programs
ANSWER: b. Social Security
53. The government's health plan for the elderly is called

a. Medicaid.
b. Medicare.
c. Social Security.
d. TANF
ANSWER: b. Medicare.
54. Medicare is the

a. government’s health plan for the elderly.
b. government’s health plan for the poor.
c. same thing as Social Security.
d. Both a and c are correct.
ANSWER: a. government’s health plan for the elderly.
55. The federal healthcare spending program that specifically targets the poor is called
a. Medicaid
b. Medicare
c. National Institutes of Health
d. Health Plus
ANSWER: a. Medicaid
56. Medicaid is the

a. government’s health plan for the elderly.
b. government’s health plan for the poor.
c. same thing as Social Security.
ANSWER: b. the government’s health plan for the poor.
57. Like spending on Social Security, the share of federal government spending on Medicare has risen substantially over
time. This is most likely a result of
a. A rising population of poor in the economy.
b. The elderly population growing more rapidly than the overall population.
c. Immigration policy that continues to promote an influx of migrant farm workers.
d. All of the above are important factors.
ANSWER: b. The elderly population growing more rapidly than the overall population.
58. Medicare has been the focus of many proposed reforms over the last several years because
a. health care costs have risen more rapidly than the cost of other goods and services produced in the economy.
b. nationalized health care systems have demonstrated that they are more efficient than private health care systems.
c. cures for many major diseases are likely to be found in the next few years.
d. government health care research has found that limiting access to doctors will increase the general health of the
population.
ANSWER: a. health care costs have risen more rapidly that the cost of other goods and services produced in the
economy.
59. Because the marginal tax rate rises as income rises,

a. higher income families, in general, pay a larger percentage of their income in taxes.
b. lower income families, in general, pay a larger percentage of their income in taxes.
c. a disproportionately large share of the tax burden falls unjustly upon the poor.
d. higher income families pay the same percentage of their income in taxes as lower-income families.
ANSWER: a. higher income families, in general, pay a larger percentage of their income in taxes.
60. A tax on the wages that a firm pays its workers is called a(n).
a. income tax.
b. excise tax.
c. consumption tax.
d. payroll tax.
ANSWER: d. payroll tax.
61. The marginal tax rate for a taxpayer is necessarily equal to his average tax rate only when he
a. has a very high income.
b. has a very low income.
c. is self-employed.
d. invests in a retirement plan..
ANSWER: b. has a very low income.
62. Taxes on specific goods such as cigarettes, gasoline, and alcoholic beverages are called
a. sales taxes.
b. excise taxes.
c. social insurance taxes.
d. consumption taxes.
ANSWER: b. excise taxes.
63. For state and local governments, sales taxes and property taxes make up
a. 1/4 of all receipts.
b. 1/3 of all receipts.
c. 1/2 of all receipts.
d. 2/3 of all receipts.
ANSWER: b. 1/3 of all receipts.
64. A tax levied on the total amount spent in retail stores is called a
a. sales tax.
b. excise tax.
c. retail tax.
d. commercial tax.
ANSWER: a. sales tax.
65. When a state levies a sales tax, the tax

a. is paid only by the state’s residents.
b. occasionally excludes items that are deemed to be necessities.
c. is commonly levied on labor services.
d. is universally applied to wholesale purchases as well as retail purchases.
ANSWER: b. occasionally excludes items that are deemed to be necessities.
66. Which of the following statement(s) about state income taxes is most correct?
a. Some states do not tax income at all.
b. If states tax income, they must follow federal guidelines for designing the tax structure.
c. States are not allowed to use an increasing marginal tax rate structure in the design of their income tax system.
d. All of the statements above are true.
ANSWER: a. Some states do not tax income at all.
67. Federal government programs that contain revenue sharing agreements between the federal government and state
and local governments are
a. never used to redistribute funds between high-income states and low-income states.
b. usually limited to income maintenance programs.
c. often tied to specific programs that the federal government wants to subsidize.
d. never considered an effective use of federal revenues.
ANSWER: c. often tied to specific programs that the federal government wants to subsidize.
68. The most common way in which redistribution of tax revenue between high- and low-income states is accomplished
through
a. congressional mandates that require states to redistribute income.
b. voluntary redistribution initiatives promoted by the legislatures of high-income states.
c. voluntary redistribution initiatives promoted by the legislatures of low-income states.
d. federal government revenue sharing programs.
ANSWER: d. federal government revenue sharing programs.
69. Rank the following state and local government expenditure categories from largest to smallest.
a. education, public welfare, highways
b. transfer payments to the poor, education, public safety
c. police, road maintenance, public schools
d. public health, public safety, public utilities
ANSWER: a. education, public welfare, highways
70. State and local government spending on public welfare includes

a. trash removal.
b. transfer payments to the poor.
c. libraries.
d. road repairs.
ANSWER: b. transfer payments to the poor.
71. The public welfare spending category for state and local governments includes
a. many programs that are initiated by private foundations.
b. contributions in support of public universities.
c. some federal programs that are administered by state and local governments.
ANSWER: c. some federal programs that are administered by state and local governments.
72. When government receipts exceed total government spending during a fiscal year the difference
a. is a budget surplus.
b. is a budget deficit.
c. is the national debt.
d. becomes federal tax refunds.
ANSWER: a. is a budget surplus.
73. Among the major spending categories for state and local governments, which of the following statements is correct?
a. The biggest single expenditure is for education.
b. The public welfare category does not include the costs of administering some federal programs.
c. As a general rule, spending on public schools and public universities exceeds that spent on all other services
combined.
d. Local services such as libraries, police, trash removal, fire protection, park maintenance, etc. collectively are a
very small share of expenditures.
ANSWER: a. The biggest single expenditure is for education.
74. State and local governments generate revenue from all of the following sources EXCEPT
a. sales taxes.
b. the federal government.
c. corporate income taxes.
d. customs duties.
ANSWER: d. customs duties.
75. Public schools, which educate most students through high school, are paid for primarily by
a. state governments.
b. local governments.
c. the federal government.
d. taxpayers directly.
ANSWER: b. local governments.
76. Which of the following is NOT a cost of taxes to taxpayers?

a. the tax payment itself
b. deadweight losses
c. administrative burdens
d. goods and services provided by the government.
ANSWER: d. goods and services provided by the government.
77. An efficient tax system is one that imposes small

a. deadweight losses and administrative burdens.
b. marginal rates and deadweight losses.
c. administrative burdens and transfers of money.
d. marginal rates and transfers of money.
ANSWER: a. deadweight losses and administrative burdens.
78. Taxes create deadweight losses because they

a. reduce profits of firms.
b. distort incentives.
c. cause prices to rise.
d. create revenue for the government.
ANSWER: b. distort incentives.
79. Deadweight loss from taxes in a market represents the

a. inefficiency that taxes create.
b. shift in benefit from producers to consumers.
c. part of consumer and producer surplus that is now revenue to the government.
d. loss in profit to producers when quantity demanded falls as a result of higher prices.
ANSWER: a. inefficiency that taxes create.
80. One reason that deadweight losses are so difficult to avoid is that
a. taxes affect the decisions that people make.
b. income taxes are not paid by everyone.
c. consumption taxes must be universally applied to all commodities.
d. administrative burden and deadweight loss reflect a clear tradeoff to policymakers.
ANSWER: a. taxes affect the decisions that people make.
81. Part of the deadweight loss from taxing labor earnings is that people
a. will work more.
b. will be reluctant to hire accountants to file their tax returns.
c. with low tax liabilities will universally be worse off than under some other tax policy.
d. will work less.
ANSWER: d. will work less.
82. When the government taxes labor earnings we can expect people to
a. work more so they can keep the same standard of living.
b. work less and enjoy more leisure.
c. quit their present job and find one that pays better.
d. stop working altogether and go on welfare in protest.
ANSWER: b. work less and enjoy more leisure.
Ski Weekend Trip

Value to Allyn $85
Value to Pam $75
Value to Greg $65
Value to Dana $40
83. Given the table, if the price of a weekend ski pass is $38 and this price reflects the actual unit cost of providing a
weekend of skiing, the amount of surplus value that accrues to all four skiers from their weekend trip is
a. $265.
b. $113.
c. $140.
d. $105.
ANSWER: b. $113.
weekend of skiing, how much consumer surplus accrues to Allyn and Greg individually?
a. $85 and $65 respectively
b. $49 and $35 respectively
c. $47 and $27 respectively
d. $37 and $17 respectively
ANSWER: c. $47 and $27 respectively
weekend of skiing, if the government imposes a tax of $15 on each weekend ski pass, the deadweight loss associated
with the tax is
a. $2.
b. $37.
c. $52.
d. $97.
ANSWER: a. $2.
Hot Fudge Brownie Delight

Value to Brad $8.00
Value to Jennifer $6.00
86. Given the table, if the government imposes a $2.00 tax on delights, causing the price to increase from $5.00 to $7.00,
total consumer surplus
a. falls by less than the tax revenue generated.
b. falls by more than the tax revenue generated.
c. falls by the same amount as the tax revenue generated.
d. will not fall since Jennifer will no longer be in the market.
ANSWER: b. falls by more than the tax revenue generated.
87. Given the table, if the government imposes a $2.00 tax on delights causing the price to increase from $5.00 to $7.00,
deadweight loss arises because
a. Jennifer will pay more tax as a percentage of her value of delights than Brad.
b. Brad must pay the $2.00 tax from his consumer surplus.
c. Brad will have to pay a higher price for delights.
d. Jennifer will leave the market.
ANSWER: d. Jennifer will leave the market.
88. Given the table, if the government imposes a $2.00 tax on delights causing the price to increase from $5.00 to $7.00,
total consumer surplus will fall from
a. $4 to $1.
b. $7 to $4.
c. $3 to $1.
d. $7 to $3.
ANSWER: a. $4 to $1.
89. Deadweight losses from taxation are associated with

a. taxes that distort the incentives that people face.
b. taxes that target expenditures on survivor’s benefits for Social Security.
c. taxes that have no efficiency losses.
d. lump-sum taxes.
ANSWER: a. taxes that distort the incentives that people face.
90. Part of the administrative burden of a tax is associated with

a. the money people pay to the government in taxes.
b. reducing the size of the market because of the tax.
c. the headache of filling out tax forms imposed on taxpayers who comply with the tax.
d. the cost of administering programs that use tax revenue.
ANSWER: c. the headache of filling out tax forms imposed on taxpayers that comply with the tax.
91. The deadweight loss associated with a tax on a commodity is generated by

a. those consumers who still choose to consume the commodity, but pay a higher price that reflects the tax.
b. those consumers who choose to not consume the commodity that is taxed.
c. all citizens who are able to use services provided by government.
d. those consumers who are unable to avoid paying the tax.
ANSWER: b. those consumers who choose to not consume the commodity that is taxed.
92. When taxes are imposed on a commodity,

a. there is never a deadweight loss.
b. some consumers alter their consumption by not purchasing the taxed commodity.
c. tax revenue will rise by the amount of the tax multiplied by the before-tax level of consumption.
d. these taxes are considered nondistortionary.
ANSWER: b. some consumers alter their consumption by not purchasing the taxed commodity.
93. The U.S. income tax

a. discourages saving.
b. encourages saving.
c. has no effect on saving.
d. will reduce the administrative burden of taxation.
ANSWER: a. discourages saving.
94. When interest income from savings is taxed,

a. more will be saved to make up for what is lost in taxes.
b. the same amount as without the tax.
c. less will be saved.
d. None of the above are correct since the government would not tax interest on savings.
ANSWER: c. less will be saved.
95. A consumption tax is a tax on only

a. goods and not services.
b. the amount of income that people spend.
c. the amount of income that people earn.
d. the amount of income that people save.
ANSWER: b. the amount of income that people spend.
96. An advantage of a consumption tax over the present tax system is that a consumption tax
a. is much harder for taxpayers to cheat.
b. would save the government millions in administrative costs.
c. places more of the tax burden on the wealthy.
d. does not discourage saving.
ANSWER: d. does not discourage saving.
97. Which of the following would NOT cause our current tax system to resemble a consumption tax?
a. Individual Retirement Accounts
b. Keogh plans
c. 401(K) plans
d. money market accounts
ANSWER: d. money market accounts
98. When a taxpayer attempts to legally reduce her tax liability, she is engaging in
a. tax avoidance.
b. tax evasion.
c. a tax return compensation plan.
d. activities outside the intent of tax law.
ANSWER: a. tax avoidance.
99. Tax avoidance

a. and tax evasion are both legal.
b. and tax evasion are both illegal.
c. is legal and tax evasion is illegal.
d. is illegal and tax evasion is legal.
ANSWER: c. is legal and tax evasion is illegal.
100. In the absence of taxes, Janet would prefer to purchase a large sport utility vehicle (SUV). However, the government
has recently decided to place a $10,000 nuisance tax on SUVs. Which of the following statements best reflects the
effect of this tax if Jane decides to purchase a small economy car as a result of the tax?
a. Other people who choose to purchase SUVs will incur the cost of the deadweight loss of the tax.
b. There are no deadweight losses as long as some people still choose to purchase SUVs.
c. All deadweight losses are mitigated if there is a net decrease in air pollution.
d. Janet is worse off, and her loss of welfare is part of the deadweight loss of the tax.
ANSWER: d. Janet is worse off, and her loss of welfare is part of the deadweight loss of the tax.
101. Tax evasion is

a. facilitated by legal deductions to taxable income.
b. the same as tax avoidance.
c. recommended by the American Accounting Association.
d. illegal.
ANSWER: d. illegal.
102. When tax laws give preferential treatment to specific types of behavior it is called
a. tax evasion.
b. a political payoff.
c. a tax loophole.
d. compensation for the benefit of society.
ANSWER: c. a tax loophole.
103. In many cases, tax loopholes are designed by Congress to

a. give special treatment to specific types of behavior.
b. reduce the overall administrative burden of the tax system.
c. reduce the headache of filling out tax forms.
ANSWER: a. give special treatment to specific types of behavior.
104. A mortgage interest deduction would be considered

a. tax evasion.
b. a subsidy to the poor.
c. a deduction that benefits all members of society equally.
d. a tax loophole.
ANSWER: d. a tax loophole.
105. The U.S. tax code gives preferential treatment to investors in municipal bonds. This is an example of a
a. tax loophole.
b. tax evasion.
c. administrative burden.
d. tax enforcement.
ANSWER: a. tax loophole.
106. As tax laws become more complex,

a. the administrative burden of taxes is increased.
b. compliance costs are most likely to decrease.
c. the government always collects more in tax revenue.
d. the amount of tax revenue lost to tax evasion always decreases.
ANSWER: a. the administrative burden of taxes is increased.
107. Which of the following is NOT an administrative burden of our tax system?
a. government resources used to enforce tax laws
b. keeping tax records throughout the year
c. making charitable contributions at the end of the year for tax deductions
d. time spent in April filling out forms
ANSWER: c. making charitable contributions at the end of the year for tax deductions
108. The deadweight loss of an income tax is determined by the

a. amount of total tax revenue to the government.
b. marginal tax rate.
c. average tax rate.
d. loss in consumer surplus when the tax is imposed.
ANSWER: b. marginal tax rate.
109. A tax on all forms of income will

a. lower the effective rate of interest on savings.
b. increase the potential income from saving.
c. increase the amount of income received in the economy.
d. enhance the incentives to save.
ANSWER: a. lower the effective rate of interest on savings.
Income Tax rate

$0 to $40,000 20%
Over $40,000 50%
110. Given the table, what is the average tax rate for a person who makes $60,000?
a. 20%
b. 30%
c. 40%
d. 50%
ANSWER: b. 30%
Income Tax rate

$0 to $40,000 25%
$40,000 to $100,000 40%
Over $100,000 60%
a. 30%
b. 40%
c. 50%
d. 60%
ANSWER: b. 40%
Income Tax rate

$0 to $50,000 20%
$50,000 to $100,000 40%
Over $100,000 60%
a. 25%
b. 35%
c. 45%
d. 60%
ANSWER: b. 35%
113. If your income is $40,000 and your income tax liability is $5,000 your
a. marginal tax rate is 8 percent.
b. average tax rate is 8 percent.
c. marginal tax rate is 12.5 percent.
d. average tax rate is 12.5 percent.
ANSWER: d. average tax rate is 12.5 percent.
114. Becky's average tax rate on her November income is 15 percent. The marginal tax rate on her December income of
$10,000 exceeds her average tax rate. The tax liability on her December income will
a. be less than $1,500.
b. exactly equal $1,500.
c. exceed $1,500.
d. From the information provided, any of the answers above could be correct.
ANSWER: c. exceed $1,500.
115. Nancy paid a tax of $0.50 on the last dollar she earned in 1999. Nancy's marginal tax rate in 1999 was
a. more than 50 percent.
b. exactly 50 percent.
c. higher than her average tax rate.
d. lower than her average tax rate.
ANSWER: b. exactly 50 percent.
116. High marginal tax rates

a. distort incentives to work.
b. are used to encourage saving behavior.
c. will invariably lead to lower average tax rates.
d. are not associated with deadweight losses.
ANSWER: a. distort incentives to work.
117. In 1987, the marginal tax rate in Iceland was

a. 0 percent.
b. 25 percent.
c. 50 percent.
d. 100 percent.
ANSWER: a. 0 percent.
118. Because of Iceland’s tax holiday in 1987 GDP

a. decreased by 4 percent and total work hours fell by 8 percent.
b. decreased by 6 percent and total work hours fell by 4 percent.
c. increased by 4 percent and total work hours increased by 3 percent.
d. increased by 8 percent and total work hours increased by 6 percent.
ANSWER: c. increased by 4 percent and total work hours increased by 3 percent.
119. Because of Iceland’s tax holiday in 1987 there was a

a. temporary increase in total work hours.
b. permanent increase in total work hours.
c. permanent increase in both GDP and total work hours.
d. temporary increase in both GDP and total work hours.
ANSWER: d. temporary increase in both GDP and total work hours.
120. If marginal tax rates increase, the

a. deadweight loss from taxes is unaffected.
b. deadweight loss from taxes will be reduced.
c. deadweight loss from taxes will rise.
d. average tax rate will be falling.
ANSWER: c. deadweight loss from taxes will rise.
121. The most efficient tax possible is a

a. marginal income tax.
b. lump-sum tax.
c. consumption tax.
d. Corporate profit tax.
ANSWER: b. lump-sum tax.
122. Lump-sum taxes

a. are most frequently used to tax real property.
b. do not distort incentives.
c. are the most distortionary tax.
d. are used in taxing sales.
ANSWER: b. do not distort incentives.
123. The marginal tax rate for a lump-sum tax

a. is always positive.
b. is always negative.
c. is zero.
d. can take on any value, but must always lie above the average tax.
ANSWER: c. is zero.
124. With a lump-sum tax, the

a. marginal tax rate is always less than the average tax rate.
b. average tax rate is always less than the marginal tax rate.
c. marginal tax rate falls as income rises.
d. marginal tax rate rises as income rises.
ANSWER: a. marginal tax rate is always less than the average tax rate.
125. If the government imposes a tax of $3,000 on everyone, this tax would best be described as a(n)
a. income tax.
b. consumption tax.
c. lump-sum tax.
d. marginal tax.
ANSWER: c. lump-sum tax.
Taxpayer Income
Leslie $40,000
Tuggin $30,000
126. Given the table, if the government imposes a $2,000 lump-sum tax, the average tax rate for Leslie and Tuggin
respectively would be
a. 5 percent and 6.7 percent.
b. 8 percent and 6 percent.
c. 12 percent and 9 percent.
d. 13 percent and 10 percent.
ANSWER: a. 5 percent and 6.7 percent.
127. Given the table, if the government imposes a $3,000 lump-sum tax, thse marginal tax rate for Tuggin would be
a. 0 percent.
b. 4 percent.
c. 9 percent.
d. 10 percent.
ANSWER: a. 0 percent.
Use this information to answer questions 128-134.

Suppose Jim and Joan receive great satisfaction from their consumption of cheesecake. Joan would be willing to purchase
only one slice and would pay up to $6 for it. Jim would be willing to pay $9 for his first slice, $7 for his second slice, and $3
for his third slice. The current market price is $3 per slice.
128. How much consumer surplus does Joan receive from consuming her slice of cheesecake?
a. $6
b. $3
c. $9
d. $12
ANSWER: b. $3
129. How much total consumer surplus do Joan and Jim collectively receive from consuming cheesecake when it is
priced at $3 a slice?
a. $3
b. $6
c. $9
d. $13
ANSWER: d. $13
130. Assume that the government places a tax of $4 on each slice of cheesecake. What is Joan's consumer surplus from
cheesecake?
a. zero
b. $2
c. $3
d. $6
ANSWER: a. zero
131. If a tax of $4 is levied on each slice of cheesecake, what is the deadweight loss of the tax?
a. $3
b. $6
c. $8
d. $9
ANSWER: a. $3
132. If a tax of $4 is levied on each slice of cheesecake, how much tax revenue will be generated from sales to Jim and
Joan?
a. zero
b. $4
c. $8
d. $12
ANSWER: c. $8
133. If a tax of $2 is levied on each slice of cheesecake, what is the deadweight loss of the tax?
a. zero
b. $3
c. $6
d. $8
ANSWER: a. zero
134. If a tax of $4 is levied on each slice of cheesecake,

a. Jim will bear the full burden of the deadweight loss.
b. Joan will bear the full burden of the deadweight loss.
c. both Joan and Jim will share the burden of the deadweight loss.
d. there will be no deadweight loss.
ANSWER: b. Joan will bear the full burden of the deadweight loss.
135. Changing the basis of taxation from income earned to amount spent will
a. necessarily reduce tax revenues.
b. lower effective interest rates on savings.
c. distort incentives to earn income.
d. eliminate disincentives to save.
ANSWER: d. eliminate disincentives to save.
136. Tax systems that impose record keeping requirements on taxpayers are said to have
a. an auditing burden.
b. a lower incidence of compliance.
c. an administrative burden.
d. a certification requirement.
ANSWER: c. an administrative burden.
137. In designing a tax system, policymakers have two objectives,

a. maximum revenue and the smallest cost to taxpayers.
b. efficiency and the smallest cost to taxpayers.
c. efficiency and equity.
d. maximum revenue and debt reduction.
ANSWER: c. efficiency and equity.
138. One tax system is less efficient than another if it

a. places a lower tax burden on lower income families than on higher income families.
b. places a higher tax burden on lower income families than on higher income families.
c. raises the same amount of revenue at a higher cost to taxpayers.
d. raises the same amount of revenue at a lower cost to taxpayers.
ANSWER: c. raises the same amount of revenue at a higher cost to taxpayers.
139. Small deadweight losses and small administrative burdens are characteristic of a tax system that is best defined as
a. equitable.
b. communistic.
c. capitalistic.
d. efficient.
ANSWER: d. efficient.
140. Which of the following statements about people who do most of their saving through tax-deferred retirement
accounts is most correct?
a. Their tax bill will reflect a lower return on savings than would otherwise be the case.
b. Their tax bill is largely based on consumption rather than income.
c. Even though taxes are deferred to some later date, their after-tax lifetime income is unchanged.
d. Tax-deferred savings plans are designed to increase tax equity.
ANSWER: b. Their tax bill is largely based on consumption rather than income.
141. Taxes create deadweight loss when they

a. distort behavior.
b. cause the price of the product to increase.
c. don’t raise sufficient government revenue.
d. cannot be computed easily.
ANSWER: a. distort behavior.
142. If one is trying to gauge the sacrifice made by a taxpayer,

a. the average tax rate is the most appropriate measure to use.
b. the marginal tax rate is the most appropriate measure to use.
c. the lump-sum tax rate is the most appropriate measure to use.
d. the sales tax rate is the most appropriate measure to use.
ANSWER: a. the average tax rate is the most appropriate measure to use.
143. Total taxes paid divided by total income is called the

a. lump-sum tax liability.
b. marginal tax rate.
c. average tax rate.
d. average consumption tax liability.
ANSWER: c. average tax rate.
144. The average tax rate measures the

a. fraction of spending paid in taxes.
b. fraction of income paid in taxes.
c. incremental rate of tax on income.
d. average deadweight loss from all taxes.
ANSWER: b. fraction of income paid in taxes.
145. If we are trying to gauge how much the income tax system distorts incentives, then
a. the average tax rate is the most meaningful measure.
b. the distortion is entirely captured in the administrative burden of the tax.
c. total tax revenue collected is the most meaningful measure.
d. the marginal tax rate is the most meaningful measure.
ANSWER: d. the marginal tax rate is the most meaningful measure.
146. Suppose the government imposes a tax of 10 percent on the first $40,000 of income and 20 percent on all income
above $40,000. What is the average tax rate when income is $50,000?
a. 20 percent
b. 10 percent
c. 12 percent
d. 15 percent
ANSWER: c. 12 percent
above $40,000. What is the tax liability and the marginal tax rate for a person whose income is $50,000?
a. 12 percent and 20 percent, respectively
b. 12 percent and $50,000, respectively
c. $6,000 and 12 percent, respectively
d. $6,000 and 20 percent, respectively
ANSWER: d. $6,000 and 20 percent, respectively
above $40,000. What is the tax liability and the marginal tax rate for a person whose income is $30,000?
a. both are 10 percent
b. 10 percent and $2,000, respectively
c. $3,000 and 10 percent, respectively
d. $3,000 and 20 percent, respectively
ANSWER: c. $3,000 and 10 percent, respectively
149. Which of the following in NOT a reason that a lump-sum tax imposes a minimal administrative burden on
taxpayers?
a. Everyone can easily compute the amount of tax they owe.
b. There is no benefit to hiring an accountant to do your taxes.
c. Everyone owes the same amount of tax, regardless of earnings.
d. There is no deadweight loss.
ANSWER: d. There is no deadweight loss.
150. If the government were to impose a tax that assigned everyone the same tax liability, it would be
a. a lump-sum tax.
b. an equitable tax.
c. supported by the poor.
d. a progressive tax.
ANSWER: a. a lump-sum tax.
151. One advantage of a lump-sum tax over other taxes is that it

a. is more equitable as well as efficient.
b. doesn’t cause deadweight loss.
c. would place a larger tax burden on the rich.
d. would actually encourage saving.
ANSWER: b. doesn’t cause deadweight loss.
TYPE: M SECTION: 2 DIFFICULTY:
152. Which of the following is NOT an advantage of a lump-sum tax?

a. It would not cause deadweight loss.
b. It imposes a minimal administrative burden on taxpayers.
c. It is more equitable.
d. It is more efficient.
ANSWER: c. It is more equitable.
153. Lump-sum taxes are rarely used in the real world because
a. while lump-sum taxes have low administrative burdens, they have high deadweight losses.
b. while lump-sum taxes have low deadweight losses, they have high administrative burdens.
c. lump-sum taxes take the same amount of money from both poor and rich.
d. lump-sum taxes are very inefficient.
ANSWER: c. lump-sum taxes take the same amount of money from both poor and rich.
154. When taxes are justified on the basis that taxpayers receive specific government services, the tax
a. is considered horizontally equitable.
b. burden is minimized.
c. satisfies the benefits principle.
d. is considered vertically equitable.
ANSWER: c. satisfies the benefits principle.
155. If a poor family has three children in public school and a rich family has two children in private school, the benefits
principle would suggest that
a. the poor family should pay more in taxes to pay for public education than the rich family.
b. the rich family should pay more in taxes to pay for public education than the poor family.
c. the benefits of private school exceed those of public school.
d. public schools should be financed by property taxes.
ANSWER: a. the poor family should pay more in taxes to pay for public education than the rich family.
156. The benefits principle of taxation can be used to argue that wealthy citizens should pay higher taxes than poorer
ones on the basis that
a. police services are more frequently used in poor neighborhoods.
b. the wealthy benefit more from services provided by government than the poor.
c. the poor are more active in political processes.
d. there is more crime in rich neighborhoods than poor neighborhoods.
ANSWER: b. the wealthy benefit more from services provided by government than the poor.
157. The relationship between taxes and labor-force participation is most strongly seen with
a. single women.
b. married women.
c. married men.
d. single men.
ANSWER: b. married women.
158. Vertical equity and horizontal equity are associated with

a. the benefits principle of taxation.
b. the ability-to-pay principle of taxation.
c. taxes that have no deadweight losses.
d. falling marginal tax rates.
ANSWER: b. the ability-to-pay principle of taxation.
159. When the marginal tax rate exceeds the average tax rate, the tax is
a. proportional.
b. regressive.
c. non-egalitarian.
d. progressive.
ANSWER: d. progressive.
160. When the marginal tax rate equals the average tax rate, the tax is
a. proportional.
b. progressive.
c. regressive.
d. egalitarian.
ANSWER: a. proportional.
161. Which of the following tax systems is most fair?

a. proportional tax
b. regressive tax
c. progressive tax
d. There is no objective way to assess fairness.
ANSWER: d. There is no objective way to assess fairness.
162. Which of the following statements is most correct?

a. A general sales tax on food is regressive when low-income taxpayers spend a larger proportion of their income
on food than high-income taxpayers.
b. A general sales tax on food is regressive when middle income taxpayers spend a smaller proportion of their
income on food than high-income taxpayers.
c. A general sales tax on food is regressive when high-income taxpayers spend a larger proportion of their income
on food than middle income taxpayers.
d. A general sales tax on food is regressive when high-income taxpayers spend a larger proportion of their income
on food than low-income taxpayers.
ANSWER: a. A general sales tax on food is regressive when low-income taxpayers spend a larger proportion of their
income on food than high income taxpayers.
163. An income tax in which the average tax rate is the same for all taxpayers would be considered a
a. progressive tax.
b. regressive tax.
c. distortion-free tax.
d. proportional tax.
ANSWER: d. proportional tax.
164. Two families who live in Plains, GA have identical incomes. The Smiths deduct $5,000 from their taxable income for
mortgage interest paid during the year while the Jones family lives in an apartment and are not eligible for a
mortgage-interest deduction. This situation exemplifies
a. an application of the benefits principle of taxation.
b. a violation of horizontal equity.
c. a violation of vertical equity.
d. an application of egalitarian tax rules.
ANSWER: b. a violation of horizontal equity.
165. Determination of the incidence of a tax

a. is not required when one is only interested in issues of equity.
b. is identical to the determination of legal liability for a tax.
c. requires one to evaluate where the tax burden eventually falls.
d. is solely determined by conditions of the "flypaper theory" of taxation.
ANSWER: c. requires one to evaluate where the tax burden eventually falls.
166. Tax incidence refers to

a. what product or service the tax is levied on.
b. who bears the tax burden.
c. what sector of the economy the imposed tax most affects.
d. the impact a tax will have on the economy.
ANSWER: b. who bears the tax burden.
167. The "flypaper theory" of taxation suggests that

a. the individual or corporation who actually pays the tax is able to shift the burden of the tax to others.
b. the benefits principle of taxation is not a viable option for policymakers.
c. taxes are never paid by the most wealthy citizens.
d. the individual or corporation who actually pays the tax cannot share the burden of the tax.
ANSWER: d. the individual or corporation who actually pays the tax cannot share the burden of the tax.
168. The flypaper theory of tax incidence

a. ignores the indirect effects of taxes.
b. assumes that most taxes should be “stuck on “ the rich.
c. says that once a tax has been imposed, there is little chance of it changing, so in essence people are stuck with it.
d. is how taxes are described—like flies, they are everywhere and they will never go away.
ANSWER: a. ignores the indirect effects of taxes.
169. The principle that people should pay taxes based on the benefits they receive from government services is called the
a. pay principle.
b. tax-benefit principle.
c. government services principle.
d. benefits principle.
ANSWER: d. benefits principle.
170. The benefits principle is used to justify

a. property taxes.
b. the gasoline tax.
c. taxes on cigarettes and alcoholic beverages.
d. personal income taxes.
ANSWER: b. the gasoline tax.
171. If revenue from a gasoline tax is used to build and maintain public roads, the gasoline tax may be justified on the
basis of
a. the benefits principle.
b. the ability-to-pay principle.
c. vertical equity.
d. horizontal equity.
ANSWER: a. the benefits principle.
172. The theory that the wealthy should contribute more to police protection than the poor because they have more to
protect is based on
a. the ability-to-pay principle.
b. a consumption tax plan.
c. the benefits principle.
d. property tax assessments.
ANSWER: c. the benefits principle.
173. Vertical equity states that taxpayers with a greater ability to pay taxes should
a. contribute a decreasing proportion of each increment in income to taxes.
b. contribute a larger amount.
c. be less subject to administrative burdens of a tax.
d. be less subject to tax distortions that lead to deadweight losses.
ANSWER: b. contribute a larger amount.
174. The claim that all citizens should make an "equal sacrifice" to support government programs is usually associated
with
b. the benefits principle.
c. efficiency arguments.
d. regressive tax arguments.
ANSWER: a. the ability-to-pay principle.
175. A tax system based on the ability-to-pay principle claims that all citizens should
a. pay taxes based on the benefits they receive from government services.
b. pay the same amount in taxes.
c. pay taxes on only the income spent.
d. make an equal sacrifice.
ANSWER: d. make an equal sacrifice.
176. In order to construct a more complete picture of the economic burden of government across income classes,
economists usually
a. include both tax payments as well as transfer payments received.
b. focus only on the tax payments of wealthy tax payers.
c. limit their analysis to taxes based on the ability-to-pay principle.
d. focus their analysis on issues of tax efficiency.
ANSWER: a. include both tax payments as well as transfer payments received.
177. If transfer payments are included when evaluating tax burdens then the average tax rate of the poorest quintile of
taxpayers would be approximately
a. negative 30 percent.
b. negative 10 percent.
c. positive 1 percent.
d. positive 8 percent.
ANSWER: a. negative 30 percent.
178. One of the most difficult issues associated with trying to structure a tax policy to satisfy horizontal equity is
determining
a. whether or not a taxpayer falls within the highest income quintile.
b. the level of transfer payments made to low-income groups.
c. the source of income for taxpayers.
d. what differences are relevant to a family's ability to pay.
ANSWER: d. what differences are relevant to a family's ability to pay.
179. The argument that people should pay taxes according to how well each individual can shoulder the burden is called
b. the equity principle.
c. the benefits principle.
d. regressive.
ANSWER: a. the ability-to-pay principle.
180. The U.S. tax law

a. causes the majority of married couples to pay more tax than if they were single.
b. is such that two married couples with the same total income to pay the same amount of tax.
c. treats a married couple as a single tax payer.
ANSWER: c. treats a married couple as a single tax payer.
181. The marriage tax is an example of

a. how difficult it is to achieve horizontal equity in practice.
b. tax structure that places more focus on efficiency than equity.
c. why income taxes are generally the most preferred way to implement social policy.
d. why vertical equity should be weighted more heavily than horizontal equity in determining optimal tax
structure.
ANSWER: a. how difficult it is to achieve horizontal equity in practice.
182. Horizontal equity means that taxpayers with similar incomes should pay
a. taxes based on their ability to pay.
b. exactly the same amount of taxes.
c. similar amounts of tax.
d. based on the benefits received from government services.
ANSWER: c. similar amounts of tax.
183. "A $1,000 tax paid by a poor person may be a larger sacrifice than a $10,000 tax paid by a wealthy person" is an
argument based on
a. the horizontal equity principle.
b. the benefits principle.
c. a regressive tax argument.
d. the ability-to-pay principle.
ANSWER: d. the ability-to-pay principle.
184. One of the primary reasons that the income tax penalizes married couples is that the
a. income tax excludes some income from taxation.
b. income tax rate is progressive.
c. income tax penalizes saving behavior.
d. source of income is taken into consideration when determining tax liability.
ANSWER: b. income tax rate is progressive.
185. Which of the following tax systems could NOT be structured to satisfy conditions of vertical equity?
a. proportional
b. regressive
c. progressive
d. lump-sum
ANSWER: d. lump-sum
186. Which tax system requires all taxpayers to pay the same percentage of their income in taxes?
a. regressive
b. proportional
c. progressive
d. horizontal equity
ANSWER: b. proportional
187. Which tax system requires higher income taxpayers to pay a higher percentage of their income in taxes?
a. progressive
b. proportional
c. regressive
d. None of the above are correct.
ANSWER: a. progressive
188. Which tax system requires higher-income taxpayers to have lower tax rates, even though they pay a larger amount
of tax, than lower-income taxpayers?
a. regressive
b. progressive
c. proportional
d. None of the above are correct.
ANSWER: a. regressive
TAX A TAX B TAX C TAX D

INCOME AMOUNT OF TAX AMOUNT OF TAX AMOUNT OF TAX AMOUNT OF TAX
$50,000 $12,500 (25%) $15,000 (30%) $10,000 (20%) $15,000 (30%)
100,000 $25,000 (25%) $25,000 (25%) $25,000 (25%) $15,000 (15%)
200,000 $50,000 (25%) $40,000 (20%) $60,000 (30%) $15,000 (7.5%)
189. According to the table, a regressive tax is illustrated by tax

a. A.
b. B.
c. C.
d. D.
ANSWER: b. B.
190. According to the table, a proportional tax is illustrated by tax

a. A.
b. B.
c. C.
d. D.
ANSWER: a. A.
191. According to the table, a lump-sum tax is illustrated by tax

a. A.
b. B.
c. C.
d. D.
ANSWER: d. D.
192. According to the table, a progressive tax is illustrated by tax

a. A.
b. B.
c. C.
d. D.
ANSWER: c. C.
193. A tax on expensive speed boats that are purchased only by the wealthy is not likely to satisfy the condition of
vertical equity on the basis that
a. wealthy buyers are most likely to be subject to the implications of the flypaper theory of tax incidence.
b. horizontal equity is most associated with a tax on luxury items.
c. buyers can easily substitute other luxuries for expensive speedboats.
d. it is very unlikely that the burden of the tax will fall on workers who make the expensive speed boats.
ANSWER: c. buyers can easily substitute other luxuries for expensive speedboats.
194. When the government levies a tax on a corporation,

a. all the burden of the tax ultimately falls on owners.
b. the corporation is more like a tax collector than a taxpayer.
c. output must increase to compensate for reduced profits.
d. less deadweight loss will occur since corporations are entities and not people who respond to incentives.
ANSWER: b. the corporation is more like a tax collector than a taxpayer.
195. Which of the following statements regarding the corporate income tax is most correct?
a. Equity considerations are more easily satisfied than efficiency considerations when corporate income is taxed.
b. The corporate income tax does not distort the incentives of customers.
c. The corporate income tax is the best example of why the flypaper theory of tax incidence is correct.
d. Many economists believe that workers and customers bear much of the burden of the corporate income tax.
ANSWER: d. Many economists believe that workers and customers bear much of the burden of the corporate income
tax.
196. A corporate tax on the income of U.S. car companies will NOT likely affect markets in which way?
a. The price of cars will rise.
b. The wages of autoworkers will fall.
c. Owners of car companies (stockholders) will receive less profit.
d. Less deadweight loss will occur since corporations are entities and not people who respond to incentives.
ANSWER: d. Less deadweight loss will occur since corporations are entities and not people who respond to
incentives.
197. Goals of efficiency and equity in tax policy are

a. complementary in most countries.
b. necessary for application of the ability-to-pay principle.
c. often in conflict with each other.
d. more easily sustained when tax codes are complex.
ANSWER: c. often in conflict with each other.
198. Incentives to work and save are reduced when

a. income taxes are higher.
b. consumption taxes replace income taxes.
c. Pigovian taxes are implemented.
d. All of the above.
ANSWER: a. income taxes are higher.
199. While debate over tax policy is complex, economists play an important role by
a. arguing for policies that clearly lead to efficiency gains in the economy.
b. shedding light on the tradeoff between efficiency and equity in tax policy.
c. articulating the importance of equity as the most important goal of tax policy.
d. demonstrating that there are no tradeoffs in tax policy. Both efficiency and equity can be attained if the tax policy
follows basic economic reasoning.
ANSWER: b. shedding light on the tradeoff between efficiency and equity in tax policy.
200. Who said, “Capital is the embodiment of past labor”?

a. Karl Marx
b. Adam Smith
c. David Ricardo
d. John Maynard Keynes
ANSWER: a. Karl Marx
201. Which of the following is true?

a. Presidents Reagan and George W. Bush lowered tax rates and President Clinton raised tax rates.
b. Presidents Reagan and Clinton lowered tax rates and President George W. Bush raised tax rates.
c. Presidents Clinton and George W. Bush lowered tax rates and President Reagan raised tax rates.
d. President Clinton lowered tax rates and Presidents Reagan and George W. Bush raised tax rates.
ANSWER: a. Presidents Reagan and George W. Bush lowered tax rates and President Clinton raised tax rates.
202. Tim earns income of $60,000 per year and pays $21,000 per year in taxes. Tim paid 20 percent in taxes on the first
$30,000 he earned. What was the marginal tax rate on the second $30,000 he earned?
a. 20 percent
b. 30 percent
c. 50 percent
d. 70 percent
203. Sue earns income of $80,000 per year. Her average tax rate is 30 percent. Sue paid 20 percent in taxes on the first
$30,000 she earned. What was the marginal tax rate on the rest of her income?
a. 20 percent
b. 24 percent
c. 30 percent
d. 36 percent
204. Sue earns income of $80,000 per year. Her average tax rate is 40 percent. Sue paid $4,500 in taxes on the first $30,000
she earned. What was the marginal tax rate on the rest of her income?
a. 15 percent
b. 32 percent
c. 40 percent
d. 55 percent
205. Sue earns income of $80,000 per year. Her average tax rate is 50 percent. Sue paid $5,000 in taxes on the first $30,000
she earned. What was the marginal tax rate on the first $30,000 she earned, and what was the marginal tax rate on
the remaining $50,000?
a. 6.25 percent and 50.00 percent
b. 10.00 percent and 70.00 percent
c. 16.67 percent and 60.00 percent
d. 16.67 percent and 70.00 percent
ANSWER: d. 16.67 percent and 70.00 percent
206. Larry faces a progressive tax structure that has the following marginal tax rates: 0 percent on the first $10,000, 10
percent on the next $10,000, 15 percent on the next $10,000, 25 percent on the next $10,000 and 50 percent on all
additional income. If Larry earns $75,000, what is his average tax rate?
a. 20 percent
b. 25 percent
c. 30 percent
d. 36.67 percent
207. Marcus faces a progressive federal income tax structure that has the following marginal tax rates: 0 percent on the
first $10,000, 10 percent on the next $10,000, 15 percent on the next $10,000, 25 percent on the next $10,000 and 50
percent on all additional income. In addition, he must pay 5 percent of his income in state income tax and 15.3
percent of his labor income in federal payroll taxes. Marcus earns $60,000 per year in salary and another $10,000 per
year in non-labor income. What is his average tax rate?
a. 17.19 percent
b. 46.69 percent
c. 48.87 percent
d. 56.01 percent
ANSWER: b. 46.69 percent
208. Martavius faces a progressive federal income tax structure that has the following marginal tax rates: 0 percent on the
first $10,000, 10 percent on the next $10,000, 15 percent on the next $10,000, 25 percent on the next $10,000 and 50
percent on all additional income. In addition, he must pay 5 percent of his income in state income tax and 15.3
percent of his labor income in federal payroll taxes. Marcus earns $70,000 per year in salary and another $20,000 per
year in non-labor income. What is his average tax rate, and what is the marginal tax rate on his salary?
a. His average tax rate is 17.19 percent and the marginal tax rate on his salary is 55 percent.
b. His average tax rate is 50.23 percent and the marginal tax rate on his salary is 70.3 percent.
c. His average tax rate is 53.63 percent and the marginal tax rate on his salary is 70.3 percent.
d. His average tax rate is 55.79 percent and the marginal tax rate on his salary is 70.3 percent.
ANSWER: b. His average tax rate is 50.23 percent and the marginal tax rate on his salary is 70.3 percent.
209. John and Rachelle face a progressive tax structure that has the following marginal tax rates: 0 percent on the first
$10,000, 10 percent on the next $10,000, 15 percent on the next $10,000, 25 percent on the next $10,000 and 50 percent
on all additional income. John earns $50,000 per year and Rachelle earns $50,000 per year. If John and Rachelle get
married, the “marriage tax” will be
a. $10,000
b. $15,000
c. $20,000
d. $35,000
ANSWER: b. $15,000
210. John and Rachelle face a proportional tax structure with a marginal tax rate of 25 percent. John and Rachelle each
earn $60,000 per year. If John and Rachelle get married, the “marriage tax” will be
a. 0
b. $3,750
c. $15,000
d. $30,000
ANSWER: a. 0
211. Senator Foghorn promised during his campaign for re-election that he would support family values and end the
marriage tax. He also promised to make the rich pay their fair share in taxes, and so would make the income tax
more progressive. In addition, he promised that all couples with the same income would pay the same tax, and that
people with no income would not be taxed. Can Senator Foghorn keep his promises?
a. Yes, as long as he makes sure that the average tax rate remains lower than the marginal tax rate.
b. Yes, as long as the highest marginal tax rate on married couples is no higher than the highest marginal tax rate
on individuals.
c. No, the promises cannot all be met at the same time.
d. No, but only because some couples choose not to marry.
ANSWER: c. No, the promises cannot all be met at the same time.
TRUE/FALSE
1. The U.S. tax burden is high compared to many European countries, but is low compared to many other nations in
the world.
ANSWER: F TYPE: T SECTION: 1
2. Poor countries such as India and Pakistan usually have low tax burdens.
ANSWER: T TYPE: T SECTION: 1
3. Some states do not tax income at all.

4. The U.S. federal government collects about one-half of the taxes in our economy.
5. The most important taxes for the federal government are individual income taxes and payroll taxes for social
insurance.
6. The most important taxes for state and local governments are income taxes and property taxes.
7. Social Security is an income support program, designed primarily to maintain the living standards of the poor.
8. When government receipts fall short of spending, the government is said to run a budget surplus.
9. The efficiency of a tax system refers to the costs it imposes on taxpayers about the revenue collected.
10. The administrative burden of complying with the tax laws is a cost to the government, but not taxpayers.
11. The equity of a tax system concerns whether the tax burden is distributed equally among the population.
12. According to the benefits principle, it is fair for people to pay taxes based on the benefits they receive from the
government.
13. According to the ability-to-pay principle, it is fair for people to pay taxes based on their ability to handle the
financial burden.
14. An efficient tax system is one that imposes small deadweight losses and small administrative burdens.
15. Tax loopholes often arise from ambiguities or omissions in the tax laws.
16. Tax evasion is legal, but tax avoidance is illegal.

17. Lump-sum taxes are considered unfair to low-income taxpayers.

18. Deadweight losses arise because a tax causes some individuals to change their behavior.
19. When a tax does not have a deadweight loss, the reduction in surplus is exactly offset by tax revenue collected by
the government.
20. The administrative burden of any tax system is part of the inefficiency it creates.
21. Lump-sum taxes are equitable but not efficient.

22. Antipoverty programs funded by taxes on the wealthy are sometimes advocated on the basis of the benefits
principle.
23. Vertical equity is not consistent with a regressive tax structure.

24. Resources devoted to complying with the tax laws are a type of deadweight loss.
25. According to one study, the administrative burden of business taxes is ten times larger for small firms than for large
firms.
26. In practice, the U.S. income tax is filled with special provisions that alter a family's tax based on its specific
circumstances.
SHORT ANSWER
1. List the three most important sources of tax revenue to the federal government. How do these differ from the three
most important sources of tax revenue to state and local governments? Why do you think that these different
government entities use different tax bases? Does it make sense?
ANSWER: Federal government: Income tax, payroll tax, and corporate tax. State government: Sales tax, property tax,
income tax. There are both efficiency arguments and equity arguments that suggest it is good to have different tax
jurisdictions that use different tax bases. One argument is that the federal government is more efficient at collecting
taxes from income since it is more difficult for individuals to hide income by moving income across national
boarders than across state boarders. An equity argument is made by the fact that the federal government is able to
better facilitate redistribution of funds from high-income states to low-income states.
TYPE: S SECTION: 1
2. List the three most important expenditure programs of the federal government. How do these differ from the three
most important expenditure programs of state and local governments? Explain why it makes more sense for the
federal government to purchase "national defense" rather than state governments.
ANSWER: Federal government: Social Security, national defense, income security. State government: Education, public
welfare, highways. It makes sense for the federal government to purchase national defense because of the public
goods nature of national defense. As such it minimizes the free-rider problem between states.
TYPE: S SECTION: 1
3. Evaluate the statement: Tax loopholes increase the efficiency of tax systems.
ANSWER: In some cases, tax loopholes are designed to increase the efficiency of tax systems. An example would be where
some types of "income" are excluded from being taxed because the administrative burden of taxing the income
would exceed the revenue. (An example would be frequent flyer miles.)
TYPE: S SECTION: 2
4. A recent increase in federal gasoline taxes was estimated to cause a $150 million reduction in the total (consumer
plus producer) surplus in the gasoline market. If tax revenues increased by $100 million, what is the deadweight loss
associated with the tax? As a result of the tax, 10,000 people sold their cars and started riding their bicycles to work.
How much of the burden of the deadweight loss is incurred by the bicycle riders?
ANSWER: The direct deadweight loss is $50 million. It is impossible to determine how much of the loss is borne by bicycle
riders without more information (some of the deadweight loss may be attributable to walkers or those that switched
to public transportation).
TYPE: S SECTION: 2
5. Use Table A to complete Table B.

TABLE A
On Taxable Income The Tax Rate Is
Up to $27,050 15.0%
From $27,050 to $65,550 27.5%
From $65,550 to $136,750 30.5%
From $136,750 to $297,350 35.5%
Over $297,350 39.1%
TABLE B
Taxpayer Income Tax Amount Average Tax Rate
John $52,700
Todd $132,500
Glen $237,000
Jake $315,250
ANSWER:
Taxpayer Income Tax Amount Average Tax Rate
John $52,700 $11,111.25 21%
Todd $132,500 $35,064.75 26%
Glen $237,000 $71,949.75 30%
Jake $315,250 $100,372.90 32%
TYPE: S SECTION: 2

Chapter 12

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 12

Uploaded by

Copyright:

Available Formats

Chapter 12

The Design of the Tax System

1. Which of the following statements is most correct?

7. Most people agree that the tax system

8. Deadweight losses occur in markets in which

9. Which of the following countries has the largest tax burden?

11. Poor countries usually have

12. In the United States the payroll tax is also referred to as a

13. A payroll tax is a tax on

16. Corporate profits (if they are distributed as dividends) are

17. Corporate profits are

18. A transfer payment is a government payment

22. A budget deficit

23. The government finances budget deficits by

24. The government finances the budget deficit by

27. State and local governments

28. The single largest expenditure by state and local governments is on

30. The largest source of income for the federal government is

34. A person’s tax liability refers to

35. A family's income tax liability is

36. The government taxes corporate income on the basis of

38. As the economy’s income has grown, the government has

39. The amount of income tax owed by a family is

On Taxable Income The Tax Rate is

From $27,050 to $65,550 27.5

From $65,550 to $136,750 30.5

From $136,750 to $297,350 35.5

44. As government debt increases,

48. The largest category of federal government spending is growing because

50. State and local governments

53. The government's health plan for the elderly is called

54. Medicare is the

56. Medicaid is the

59. Because the marginal tax rate rises as income rises,

65. When a state levies a sales tax, the tax

70. State and local government spending on public welfare includes

76. Which of the following is NOT a cost of taxes to taxpayers?

77. An efficient tax system is one that imposes small

78. Taxes create deadweight losses because they

79. Deadweight loss from taxes in a market represents the

Ski Weekend Trip

Hot Fudge Brownie Delight

89. Deadweight losses from taxation are associated with

90. Part of the administrative burden of a tax is associated with

91. The deadweight loss associated with a tax on a commodity is generated by

92. When taxes are imposed on a commodity,

93. The U.S. income tax

94. When interest income from savings is taxed,

95. A consumption tax is a tax on only

99. Tax avoidance

101. Tax evasion is

103. In many cases, tax loopholes are designed by Congress to

104. A mortgage interest deduction would be considered

106. As tax laws become more complex,

108. The deadweight loss of an income tax is determined by the

109. A tax on all forms of income will

Income Tax rate

Income Tax rate

Income Tax rate

116. High marginal tax rates

117. In 1987, the marginal tax rate in Iceland was

118. Because of Iceland’s tax holiday in 1987 GDP

119. Because of Iceland’s tax holiday in 1987 there was a

120. If marginal tax rates increase, the