Econ Ch. 20

In an election debate, two candidates for governor are debating about whether to raise the general sales tax from 5 to 7 percent. Candidate A argues that this would increase tax revenues, enabling the state to maintain essential services. Candidate B argues that the tax would hurt retailers and consumers, slowing down the economy so much that it would decrease tax revenues too. What assumptions must the candidates be making in order to justify their position?

Candidate A assumes that the price effect would be larger than the quantity effect.

A presidential candidate vows to cut entitlement spending by 20 percent in the first few weeks that she is in office. Which of the following are likely reasons as to why the candidate could *not* achieve this reduction?

Congress, not the president, controls entitlement spending. Entitlement spending is mostly non-discretionary. The budget process is usually a very slow process and reform takes time.

A local government is considering ways to raise taxes to pay for more sidewalks. One prominent citizen suggests taxing people based on how much they walk on the sidewalk, measured in yards each day. Which of the following is the most likely explanation for why this tax would be very inefficient?

Levying this tax would entail a large administrative cost.

The demand for cigarettes, which create negative externalities through secondhand smoke, is often relatively inelastic. When the price of cigarettes changes, the quantity demanded changes by a smaller portion. Using this fact, a tax on cigarettes is most likely to accomplish which of the following outcomes?

Raise revenue more than reduce smoking

Suppose you turn on the television to find an ad by a local politician accusing car dealers of making too much money off of consumers. As a remedy for this abuse, the official proposes to tax the dealers at a higher rate and reward car buyers with the proceeds of the tax. Which of the following would explain why this tax may not benefit consumers after all?

Some of the economic incidence of the tax might fall on the consumers. Some of the tax revenue will go to administrative costs. The tax might cause higher car prices as some of the tax is passed on to the consumers.

In comparing a flat tax on all income or a property tax that is charged based on the assessed value of real estate, which of the following is the most likely finding in terms of both deadweight loss and administrative costs (assuming that the price elasticity of income is higher than the price elasticity of property ownership)?

The flat tax on income will mean less administrative cost but more deadweight loss.

Which of the following explains why most people's marginal tax rate is higher than their average tax rate? A system in which average tax rates are higher than marginal tax rates is called:

The marginal tax rate is the tax you pay on your last dollar earned, while the average rate is the overall proportion of income paid in taxes. regressive.

All other things being equal, which of the following explains why taxing several goods at a modest rate is better than taxing one good at a very high rate?

When taxing one good at a very high tax rate, the deadweight loss becomes much larger in comparison to taxing many goods.

The table below shows an income tax schedule for the imaginary country of Independence. Connor is a citizen of Independence who earns $93,000 per year at his job. Assume Connor is not eligible for any deductions or exemptions. a. Connor pays $_____________ in income tax. b. Connor's marginal tax rate is _____________%. Connor's overall tax rate is _____________%. c. Connor isn't crazy about his job and wants to move to a job in a related industry that pays $100,000. With his new job, Connor will have to pay $_____________ in taxes. d. The income tax in Independence is _____________.

a. $10,416 b. 15% 11.2% c. $11,500 d. progressive

The table below shows Independence's personal income tax schedule. In answering the following questions, you may assume the following. (1) All income other than capital gains falls under the personal income tax. (2) Deductible expenses are subtracted from income before income tax is calculated. (3) Charitable donations and money paid in payroll taxes are tax-deductible. (4) Payroll tax is 5 percent of earned income up to $50,000. (5) Capital gains tax is 3 percent on capital gains over $10,000. (6) Sales tax is 6 percent. Evangeline is a citizen of Independence, whose income and expenditures are shown in the table below. a. Evangeline pays $_____________ in payroll taxes. b. Evangeline pays $_____________ in capital gains taxes. c. Evangeline's adjusted income subject to the personal income tax is $_____________ . Evangeline pays $_____________ in personal income tax. d. Evangeline pays $_____________ in sales taxes. e. Evangeline pays $_____________ in taxes, in total. Evangeline pays _____________% of her overall income in total taxes.

a. $2500 b. $300 c. $84,500 _______ d. $600 e. ______ _______

The figure below shows a hypothetical market for gasoline. a. Suppose an excise tax of $1.50 per gallon is levied on gasoline suppliers. Draw the after-tax supply curve. Consumers will pay $_____________. Producers will receive $_____________. b. The government will collect $_____________ million in tax revenue as a result of the tax. c. Suppose the tax is raised to $3 per gallon. Draw the new after-tax supply curve. The government will collect an additional $_____________ million as a result of the tax increase from $1.50 to $3.00. d. Suppose the tax is raised again to $4.50 per gallon. Draw the new after-tax supply curve. The tax revenue would _____________.

a. $4 $2.50 b. $6 c. $3 d. stay the same

National governments frequently borrow money to fund current expenditures. a. Complete the table by filling in the prior year debt for each year listed. b. For each year, is this economy experiencing a budget surplus or budget deficit? 2015: _____________. 2016: _____________. 2017: _____________. 2018: _____________. c. Debt is what percentage of GDP in 2015? d. Between 2015 and 2018, by what percentage has GDP changed? By what percentage has the debt changed? Is debt as a percentage of GDP growing, constant, or shrinking between 2015 and 2018?

a. $5,350 $5,225 $5,525 b. deficit surplus deficit deficit c. 62% d. 3% 108% ___________

The table below shows supply and demand in the market for sub sandwiches in Wheretown, where the local government wants to raise revenue via a $1 tax on all sandwiches, collected from sandwich shops. a. In the following diagram, plot the after-tax supply curve. Before the tax, the equilibrium quantity is _____________ units and equilibrium price is $_____________. After the tax, the equilibrium quantity is _____________ units and equilibrium price is $_____________. Before the tax, the price paid by consumers is $_____________, and after the tax, the price paid by consumers is $_____________. Before the tax, the price received by suppliers is $_____________, and after the tax, the price received by suppliers is $_____________. b. Before the tax, consumer surplus is $_____________, and after the tax, consumer surplus is $_____________. Before the tax, producer surplus is $_____________, and after the tax, producer surplus is $_____________. c. Draw the tax revenue on the graph. Wheretown receives $_____________ in tax revenue. d. The deadweight loss caused by the tax is: $_____________. e. Suppose it costs Wheretown $35 to collect the tax revenue from sandwich shops. In the end, the amount of revenue from the sub tax that is actually available to spend on public services is: $_____________.

a. 50 units $5.50 40 units $6.00 $5.50 $6.00 $5.50 $5.00 b. $62.50 $40 $62.50 $40 c. $40 d. $5 e. $5

In each of the following examples, determine whether the price effect or the quantity effect dominates when the tax is applied. a. The government raises taxes on iPads from $10 per iPad to $20 per iPad. Prior to the tax increase, 10 million iPads were sold each year. The new equilibrium quantity is 9 million iPads. b. In response to concerns about chewing gum in schools, the government raises the tax on packs of gum from $0.20 per pack to $0.30 per pack. Before the tax increase, 50 million packs were sold each year. After the tax increase, 40 million packs are sold each year. c. Worried that Americans are addicted to coffee, the government raises the $0.05 tax on a cup of coffee to $0.10. Before the tax increase, 10 billion cups were sold each year. Afterward, 5 billion cups are sold each year.

a. The price effect dominates. b. The price effect dominates. c. The price and quantity effects are the same.

Governments throughout history have levied some very interesting taxes. Each of the following taxes changed citizens' behavior. Determine whether it's likely that the tax also addressed a market failure. a. The Hat Tax: Adopted by the British government, requiring every hat to bear a stamp on the inside showing it was legal. The tax _____________ address a market failure. b. The "Flatulence Tax": Proposed, but ultimately not adopted, in New Zealand to help reduce methane emissions from livestock. The tax _____________ a market failure. c. The Window Tax: Levied by English King William III on the number of windows in a house, which tended to be more numerous in wealthier homes. The tax _____________ address a market failure. d. The Cowardice Tax: Introduced in medieval England and applied to people who refused to defend the country at the request of the king. The tax _____________ address a market failure.

a. did not b. did c. did not d. did

Determine whether each of the following taxes is proportional, regressive, or progressive. a. An income tax of 25 percent on income from all sources. This tax is _____________. b. An income tax with three brackets and corresponding marginal tax rates: 10 percent for income up to $50,000; 20 percent for income up to $100,000; and 30 percent for income over $100,000. This tax is _____________. c. A fee of $500 per year for municipal services, charged to everyone who lives within the city limits. This tax is _____________. d. A capital gains tax that charges a flat rate of 40 percent, but only on capital gains over $1 million. This tax is _____________. e. A payroll tax of 10 percent on income under $200,000. This tax is _____________ .

a. proportional b. progressive c. regressive d. progressive e. regressive

Consider each of the following tax policies and decide for each whether the primary public policy goal is most likely raising revenue or changing behavior (with or without a market failure). a. Income tax The primary public policy goal is most likely _____________. b. Cigarette tax The primary public policy goal is most likely _____________. c. Payroll tax The primary public policy goal is most likely _____________. d. Income tax exemption for charity donations The primary public policy goal is most likely _____________.

a. raising revenue b. to change behavior and raise revenue c. raise revenue d. to change behavior

Suppose the government wants to levy a new excise tax. For each of the following goods, determine whether you would expect an excise tax to result in large or small deadweight loss. a. Alcohol Deadweight loss is relatively _____________. b. Milk Deadweight loss is relatively _____________. c. Diamonds Deadweight loss is relatively _____________. d. Tropical vacations Deadweight loss is relatively _____________. e. Socks Deadweight loss is relatively _____________.

a. small b. small c. large d. large e. small

Both a payroll tax and an excise tax on alcohol raise revenue and, respectively, shrink the markets for labor and alcohol. Although both have some functions in common, governments may have different goals when levying them. The most likely motivation for a payroll tax is to: The most likely motivation for an alcohol tax is to:

raise revenue for public expenditures. reduce the consumption of alcohol to reduce the social costs of its consumption.

When the federal government borrows money, it can fund higher expenditures in the short term but incurs a debt that accrues interest and has to be paid off in the long term. As a consequence, increased borrowing now would: Assuming that the overall size of the economy grows significantly more than government spending over time, this would:

require much higher taxes in the future. reduce the need for higher tax rates in the future.