CH 20 review

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.

Your friend Edgar has just finished his first year working full time and comes home beaming, carrying an envelope from the IRS, which has sent him a check for $650 after he sent in his tax forms. Which of the following is the most likely explanation for the reimbursement check?

Edgar had more taxes withheld than he needed to pay.

The greatest percentage of U.S. tax revenues come from: The percentage is approximately:

Income and payroll taxes contribute about equal shares; 40 percent

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.

Which tax rate is charged on the last dollar a taxpayer earns?

Marginal tax

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

An example of nondiscretionary government spending is:

Social Security.

It is often argued that cigarette taxes are regressive. For this to be true, which of the following must be the case?

Taxpayers pay a smaller percentage as income increases.

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?

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.

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 did address market failure

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 did not address 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 did not address market failure

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.

An example of discretionary government spending is:

a highway project.

For a tax to be regressive, taxpayers must pay:

a smaller percentage as income increases.

If the government wished to encourage spending, the best tax to choose would be

a tax on savings

The primary goal of taxes on particular goods is usually to

change behavior

If demand is elastic, an increase in the level of tax will <blank> tax revenue. This is because the <blank> effect will be greater than the <blank> effect.

decrease; Quantity; Price

All other things equal, the size of the deadweight loss due to a sales tax depends primarily on: the deadweight loss will be greater than the reduction in:

elasticity; quantity

All things equal, the size of the deadweight loss due to a sales tax depends primarily on: The deadweight loss will be greater than the reduction in:

elasticity; quantity

as income taxes rates rise, revenues:

first rise then fall

A cyclically balanced budget:

is balanced over the economic business cycle.

A <blank> tax is very efficient because of the way taxpayers respond to the tax

lump-sum

Which tax is is deducted directly from your paycheck and used to pay for Social Security and Medicare.

payroll tax

Taxes drive a wedge between the:

price paid by buyers and the price received by sellers.

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.

progressive

d. A capital gains tax that charges a flat rate of 40 percent, but only on capital gains over $1 million.

progressive

a. An income tax of 25 percent on income from all sources.

proportional

As the tax rates get higher, at some point, taxes can get so high that the <blank> effect dominates the <blank> effect, and raising taxes further will <blank> total revenue

quantity; price; decrease

as tax rates get higher, at some point taxes can get so high that the <blank> effect dominates the <blank> effect, and raising taxes further will <blank> total revenue

quantity; price; decrease

The primary goal of general taxes, such as income taxes, is to

raise revenue

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

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): Income tax cigarette tax payroll tax Income tax exemption charity donations

raising revenue to change behavior and raise revenue raise revenue to change behavior

Some people advocate for a lump-sum tax on income, under which people would all pay the same absolute tax, and there would be no deductions or extra paperwork. One advantage of a tax of this type is that it would: A disadvantage of a tax of this type is that:

reduce the administrative burden of the tax; it is regressive

A payroll tax of 10 percent on income under $200,000.

regressive

A system in which average tax rates are higher than marginal tax rates is called:

regressive

Which tax is levied in such a way that low-income taxpayers pay a greater proportion of their income toward taxes than do high-income taxpayers?

regressive

c. A fee of $500 per year for municipal services, charged to everyone who lives within the city limits.

regressive

People with a low income spend more of their overall income on food and clothing than wealthier people. As a result, they tend to spend a higher proportion of their income relative to people with high income. Given this trend, a general sales tax of eight percent is likely to be <blank>. suppose food and clothing are exempted. This is likely to make the tax <blank>

regressive; less regressive

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.

a tax drives a wedge between the price received by the <blank> and the price paid by the <blank>

seller; consumer

Suppose the governemnt want 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: Alcohol Milk Diamonds Vacations Socks

small; small; large; large; small

The Laffer curve shows the relationship between:

tax rates and tax revenues

The "Flatulence Tax": Proposed, but ultimately not adopted, in New Zealand to help reduce methane emissions from livestock.

the tax did address market failure

The main reason to balance a budget cyclically rather than annually is:

to allow the government to use discretionary fiscal policies.

The concept of incidence is used to describe:

who bears the burden of any sort of tax.