Question 1

When the government levies a tax on a company:

Accepted Answer

A)  all the burden of the tax ultimately falls on owners 
B)  it is meeting all of the requirements for vertical equity 
C)  the company is more like a tax collector than a taxpayer 
D)  there are very few distortions to individual incentives 
A)  all the burden of the tax ultimately falls on owners 
B)  it is meeting all of the requirements for vertical equity 
C)  the company is more like a tax collector than a taxpayer 
D)  there are very few distortions to individual incentives

Question 2

Suppose you were designing a tax based on horizontal equity, what aspect of assigning the tax would be the most difficult?

Accepted Answer

A)  whether or not a taxpayer belongs to a high-income group 
B)  the level of transfer payments made to low-income groups 
C)  the source of income for taxpayers 
D)  determining the differences relevant to a family's ability to pay 
A)  whether or not a taxpayer belongs to a high-income group 
B)  the level of transfer payments made to low-income groups 
C)  the source of income for taxpayers 
D)  determining the differences relevant to a family's ability to pay

Question 3

Explain the difference between vertical equity and horizontal equity.

Accepted Answer

Vertical equity means that tax

Question 4

The administrative burden of a tax includes:

Accepted Answer

A)  the amount of money people pay as income taxes 
B)  the reduction in the size of a market because of the tax 
C)  the time and effort of completing tax forms that is imposed on taxpayers who comply with the tax 
D)  the cost of administering programs that use tax revenue 
A)  the amount of money people pay as income taxes 
B)  the reduction in the size of a market because of the tax 
C)  the time and effort of completing tax forms that is imposed on taxpayers who comply with the tax 
D)  the cost of administering programs that use tax revenue

Question 5

Jim and Celia receive great satisfaction from their consumption of micro-brewed beer. Celia would be willing to purchase only one 12-litre bottle and would pay up to $6 for it. Jim would be willing to pay $9 for his first 12-litre bottle, $7 for his second bottle, and $3 for his third bottle. The current market price is $3 per bottle.
-According to the information provided, how much consumer surplus does Celia receive from consuming her 12-litre bottle of micro-brewed beer?

Accepted Answer

A)  $13 
B)  $9 
C)  $6 
D)  $3 
A)  $13 
B)  $9 
C)  $6 
D)  $3

Question 6

Suppose the government imposes a tax of 10 per cent on the first $30 000 of income, and 20 per cent on all income above $30 000, what is the average tax rate when income is $40 000?

Accepted Answer

A)  20 per cent 
B)  15 per cent 
C)  12.5 per cent 
D)  10 per cent 
A)  20 per cent 
B)  15 per cent 
C)  12.5 per cent 
D)  10 per cent

Question 7

Attempts by taxpayers to illegally reduce their tax liability are termed:

Accepted Answer

A)  tax avoidance 
B)  tax evasion 
C)  a tax-return compensation plan 
D)  activities outside the intent of tax law 
A)  tax avoidance 
B)  tax evasion 
C)  a tax-return compensation plan 
D)  activities outside the intent of tax law

Question 8

High marginal tax rates:

Accepted Answer

A)  are used to encourage saving behaviour 
B)  distort incentives to work 
C)  will invariably lead to lower average tax rates 
D)  are not associated with deadweight losses 
A)  are used to encourage saving behaviour 
B)  distort incentives to work 
C)  will invariably lead to lower average tax rates 
D)  are not associated with deadweight losses

Question 9

Explain what the differences are behind a progressive, a regressive and a proportional tax income system.

Accepted Answer

A progressive income tax system would re

Question 10

Suppose the government imposes a tax of 10 per cent on the first $20 000 of income, 20 % on income from $20 000 to 50 000, and 30 per cent on income from 50 000 or more. Amy has an income of $32 000 and Lee has an income of $60 000. What are the tax liabilities, the marginal tax rate and the average tax rate for Amy and Lee?

Accepted Answer

Amy has a tax liability of $4400, her ma

Question 11

Jim and Celia receive great satisfaction from their consumption of micro-brewed beer. Celia would be willing to purchase only one 12-litre bottle and would pay up to $6 for it. Jim would be willing to pay $9 for his first 12-litre bottle, $7 for his second bottle, and $3 for his third bottle. The current market price is $3 per bottle.
-According to the information provided, assume that the government places a tax of $4 on each bottle of micro-brewed beer. What is Celia's consumer surplus from micro-brewed beer?

Accepted Answer

A)  zero 
B)  $4 
C)  $8 
D)  $12 
A)  zero 
B)  $4 
C)  $8 
D)  $12

Question 12

State and local governments:

Accepted Answer

A)  are funded entirely by their own tax base 
B)  receive the majority of their tax revenues from company income tax 
C)  are generally not responsible for collecting sales tax 
D)  receive some of their funds from the federal government 
A)  are funded entirely by their own tax base 
B)  receive the majority of their tax revenues from company income tax 
C)  are generally not responsible for collecting sales tax 
D)  receive some of their funds from the federal government

Question 13

Vertical equity and horizontal equity are associated with:

Accepted Answer

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 
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

Question 14

Suppose the government imposes a tax of 10 per cent on the first $24 000 of income and 20 per cent on all incomes above $24 000, what are the tax liability and the average tax rate for a person whose income is $48 000?

Accepted Answer

A)  10 per cent and 20 per cent, respectively 
B)  10 per cent and $24 000, respectively 
C)  $7200 and 15 per cent, respectively 
D)  $7200 and 20 per cent, respectively 
A)  10 per cent and 20 per cent, respectively 
B)  10 per cent and $24 000, respectively 
C)  $7200 and 15 per cent, respectively 
D)  $7200 and 20 per cent, respectively

Question 15

Tax evasion can occur unintentionally.

Accepted Answer

A) True 
 B)False

Question 16

Because the marginal tax rate rises as income rises:

Accepted Answer

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 
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

Question 17

Resources devoted to complying with the tax laws constitute a type of deadweight loss.

Accepted Answer

A) True 
 B)False

Question 18

Company income is taxed three times: first when the corporation earns profits; second when the bondholders pay tax on interest income; and third when individuals pay tax on company dividends.

Accepted Answer

A) True 
 B)False

Question 19

If a company generates a profit and distributes some of this as dividends, then profit ends up being:

Accepted Answer

A)  never taxed 
B)  taxed twice 
C)  taxed once 
D)  taxed three times 
A)  never taxed 
B)  taxed twice 
C)  taxed once 
D)  taxed three times

Question 20

The assumptions implied by the 'flypaper theory':

Accepted Answer

A)  are mostly valid in developed industrialised countries 
B)  are necessary for one to discuss the ability-to-pay principle 
C)  are rarely valid 
D)  provide a fundamental building block for the modern theory of tax incidence 
A)  are mostly valid in developed industrialised countries 
B)  are necessary for one to discuss the ability-to-pay principle 
C)  are rarely valid 
D)  provide a fundamental building block for the modern theory of tax incidence

Exam 12: The Design of the Tax System

When the government levies a tax on a company:

Suppose you were designing a tax based on horizontal equity, what aspect of assigning the tax would be the most difficult?

Explain the difference between vertical equity and horizontal equity.

The administrative burden of a tax includes:

Suppose the government imposes a tax of 10 per cent on the first $30 000 of income, and 20 per cent on all income above $30 000, what is the average tax rate when income is $40 000?

Attempts by taxpayers to illegally reduce their tax liability are termed:

High marginal tax rates:

Explain what the differences are behind a progressive, a regressive and a proportional tax income system.

State and local governments:

Vertical equity and horizontal equity are associated with:

Suppose the government imposes a tax of 10 per cent on the first $24 000 of income and 20 per cent on all incomes above $24 000, what are the tax liability and the average tax rate for a person whose income is $48 000?

Tax evasion can occur unintentionally.

Because the marginal tax rate rises as income rises:

Resources devoted to complying with the tax laws constitute a type of deadweight loss.

Company income is taxed three times: first when the corporation earns profits; second when the bondholders pay tax on interest income; and third when individuals pay tax on company dividends.

If a company generates a profit and distributes some of this as dividends, then profit ends up being:

The assumptions implied by the 'flypaper theory':

Ten Lessons From Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

Supply, Demand and Government Policies

Consumers, Producers and the Efficiency of Markets

Application: The Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Costs of Production

Firms in Competitive Markets

Monopoly

Business Strategy

Competition Policy

Monopolistic Competition

The Markets for the Factors of Production

Earnings, Unions and Discrimination

Income Inequity and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, Investment and the Financial System

The Natural Rate of Unemployment

The Monetary System

Inflation: Its Causes and Costs

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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