MID-TERM TEST 1

Subject: Public finance Time allowed:

Student’s name: Truong Thi Khanh Ly – 11205991
Class: Corporate finance AEP 62B

Question 1: True/False Questions: Decide whether the following statements are True or False. Explain
your reasoning
1. In public goods market, we horizontally sum the demands of each individuals to get the social
demand of the public good.
 False
 The horizontal sum is used for private goods. The public goods summed vertically
2. The environmental protection tax is a kind of corrective taxation.
 True
 Corrective taxes are taxes applied on negative externalities. Environmental tax is the tax
levied on the good and product that cause the impact on environment.
3. In the regressive tax, the marginal tax rate is equal or bigger than the average tax rate.
 False
 In a regressive tax system, the marginal tax rate decreases as income rises, so that the
marginal tax rate is less than the average tax rate.
4. Discretionary spending includes spending on Social Security program
 False
 The spending on Social Security program must be included in mandatory spending
5. Government provision of a public good will perfectly crowd out private contributions.
 False
 As the government provides more of a public good, the private sector will provide less, not
crowd out
Question 2: Multiple choice Questions: Choose the correct answer
1. Which of them are the issues in cost – benefit analysis
  a. Common counting errors.
  b. Certainty of costs and benefits
  c. Distributional impacts of public projects.
  d. Both a and c are true.
  e. Both b and c are true.
2. Which of the following kinds of depreciation is the true deterioration in the value of capital
in each period of time?
  a. Depreciation credits
  b. Depreciation allowances
  c. Economic depreciation
  d. Depreciation schedule
  e. Accounting credit
3. Which of the following would prevent the Tiebout result?
  a. Rich people pay the same in taxes as poor people.
  b. Individuals aren't perfectly mobile.
  c. There are few towns nearby.
  d. All of the above are correct.
  e. Both b and c are correct.
4. Which one of them are the issues with Coasians solutions?
  a. Assigning blame for externalities to one specific entity.
  b. The property rights in question are held by more than one party
   c. There are few individuals on one side of the negotiation.
  d. Both a and b
e. Both a and c
5.  In a competitive market in which demand is completely inelastic, who bears a tax levied on
the consumers?
  a. Only the workers
  b. Only the firms
  c. Both the workers and the firms, although the workers bear more of the tax
  d. Both the workers and the firms, although the firms bear more of the tax
  e. More information needed to answer the question

Question 3: What is the definition of indirect tax and direct tax? What are the advantages and
disadvantages of these taxes?
- The direct tax is levied on taxpayer’s income and profits
+ Advantages:
 High revenue yield; governments can estimate with reasonable accuracy the
total amount of money collected
 Used to reduce inequalities in incomes and wealth; poorer people are taxed
less than wealthy people, which is fair
 Based on ability to pay; family commitments and dependents will be taken
into consideration when deciding income tax
+ Disadvantages:
 Reduces work incentive; people may not want to work if they might move
into the next tax bracket
 Reduce enterprise incentives; corporation tax taxes a firm's profits, so a firm
may not expand or even start up
 Tax evasion; high tax rates increase people evading taxes and finding
loopholes so they don't have to pay, so revenues are lower and governments
spend money trying to catch people who do so.
- The indirect tax is charged on goods and services
+ Advantages:
 Cost effective; cheap and easy to collect
 Expand the tax base; everyone pays them, so the effects are spread across all
industrial sectors and groups in society
 Used to target specific products and activities; taxes on cigarettes and alcohol
can discourage consumption to promote healthy lifestyles
 Flexible; quicker and easier for a government to change indirect tax rates
than direct tax rates, so effects are more immediate
+ Disadvantages:
 Inflationary; increasing indirect taxes causes inflation
 Regressive; poorer people have to pay higher proportions of their incomes
than wealthy people
 Revenues are less certain/predictable; difficult for a government to predict
accurately how much consumers will spend on goods and services
 Encourage tax evasion; high tariffs on imported good and excise duties
encourage the illegal smuggling of untaxed/lower taxed items from overseas,
which causes the government to use resources to patrol ports and airport
security
Question 4: Person A in country X has a monthly taxable income of $37,000. MTR is 20% if the
income is between $15,000 and $25,000. MTR is 30% if the income is over $25,000. The current ATR
of A is 18%. X provides a $1,000 exemption per family member. There are 3 members in the family of
A 
a) Calculate the amount of tax payment?
b) Calculate the tax paid if the taxable income increases to $60,000. 

a) Gross income = taxable income + exemption = $37,000 + $3,000 = $40,000

Average tax rate = tax payment/gross income
18% = tax payment/$40,000
 Tax payment = $7,200
b) $15,000 – 25,000 MTR = 20%
$25,000 – over MTR = 30%
Tax payment = tax paid for $15,000 + 10,000*0.2 + 12,000*0.3 = 7,200
Tax paid for $15,000 = $1,600
Tax payment if the taxable income increases to $60,000
Tax payment* = 1,600 + 10,000*0.2 + 35,000*0.3 = $14,100