Econ exam 3 Practice Questions and HW

Is a property tax, as in the United States, a comprehensive wealth tax? Why or why not?

No - a comprehensive wealth tax would include property and improvements, and tangible & _ __intangible personal property; it might also include human capital

Give one or more reasons why a national consumption tax (like VAT in Europe) would probably be a poor idea as a replacement for our personal income tax system.

it is almost impossible to make it progressive; millions of people would need to pay taxes to the government; service income taxes would have to be collected

22. If the average tax rate paid by an individual under a progressive tax rate structure is 30%, a possible marginal tax rate for this individual is: a) 22%. b) 30%. c) 37%. d) 50%.

c) 37%.

Is the payroll tax a unit tax or an ad valorem tax? Explain.

payroll taxes are assessed as a percentage of labor earnings - so they are like an ad valorem tax; payroll tax impacts labor/leisure choices, so it IS distorting

Which of these taxes generates a higher excess burden, relative to the amount of tax collected: an income tax or a consumption tax? Why?

a comprehensive tax on consumption does not distort consumer choice, nor does it impact investment; a personal income tax distorts work/leisure choices; corporate income tax impacts savings/consumption choices; so relative burden of income tax is higher

37. Tax preferences: a) are inclusions, exemptions, and deductions from the tax base. b) increase the rate of tax levied on each amount of income. c) increase the amount of income that is taxable. d) both a) and c) are correct.

a) are inclusions, exemptions, and deductions from the tax base.

26. A payroll tax taxes a worker's wages at 12.4 percent until the worker earns $147,000 per year. All labor earnings in excess of $147,000 are not subject to tax. The tax rate structure of the payroll tax is therefore: a) regressive. b) proportional. c) progressive. d) flat-rate.

a) regressive.

41. A tax on the value of real estate holdings is a: a) selective tax on wealth. b) general tax on income. c) selective tax on labor. d) general tax on wealth.

a) selective tax on wealth.

24. Assume that the demand for new cars is perfectly elastic. A $400 per car tax is levied on buyers. As a result of the tax, a) the price received by sellers will fall by $400. b) the price paid by buyers, including the tax, will increase by $400. c) the quantity of cars sold per year will be unchanged. d) the excess burden of the tax will be zero.

a) the price received by sellers will fall by $400.

Which of the following is true of an ad valorem tax? a. It increases with the price of the good being taxed. b. It has a smaller excess burden than a unit tax that raises the same revenue. c. It distorts consumer choices less than a lump sum tax. d. It is a general tax on consumption.

a. It increases with the price of the good being taxed.

If horizontal equity is achieved in taxation: a. individuals of equal economic capacity will pay equal taxes. b. vertical equity will also be achieved. c. a flat-tax will be used. d. the tax system will not result in losses of efficiency in markets.

a. individuals of equal economic capacity will pay equal taxes.

The incidence, or true burden of a tax: a. is not dependent of the economic actor upon which the tax is imposed. b. falls most heavily on the buyer if price elasticity of demand is higher than price elasticity of supply. c. falls most heavily on the seller if price elasticity of demand is zero. d. is paid entirely by the seller if supply elasticity is infinite

a. is not dependent of the economic actor upon which the tax is imposed.

31. Since fiscal year 2020, the total U.S. national debt once again exceeds: a) 200% of GDP. b) 100% of GDP, but still less than 200% of GDP. c) 50% of GDP, but still less than 100% of GDP. d) 25% of GDP, but still less than 50% of GDP.

b) 100% of GDP, but still less than 200% of GDP.

39. Which of these statements is a reason why governments impose income taxes on corporations and other limited liability businesses? a) Corporations are not persons and therefore cannot benefit from government spending. b) Corporate managers have the ability to recharacterize private consumption as corporate expense. c) Imposing corporate tax increases the efficiency of markets by reducing excess burden. d) Double taxation of dividends helps discourage corporations from retaining higher than optimal levels of earnings.

b) Corporate managers have the ability to recharacterize private consumption as corporate expense.

17. Which of the following is true about the Medicaid program in the United States? a) It is a program of health insurance for the elderly. b) It is a program that pays most health care costs for the poor. c) Its costs are paid entirely by the federal government. d) Its costs have been declining in recent years.

b) It is a program that pays most health care costs for the poor.

19. Which of the following is true of the Medicare program in the United States? a) It is only available to those who pass a means test. b) It is available to all citizens aged 65 and older. c) The costs are completely borne by fees paid by those insured. d) It places no limits on reimbursement to medical providers.

b) It is available to all citizens aged 65 and older.

27. If the US government runs a surplus for several years in a row, which of the following is likely to occur? a) National savings will decrease. b) The value of the federal debt will decrease. c) The value of the federal debt will increase. d) Market equilibrium interest rates are likely to rise as a result of the surpluses.

b) The value of the federal debt will decrease.

34. A comprehensive wealth tax would: a) impact wages and the efficiency of labor markets. b) impact financial assets and the efficiency of capital markets. c) be inefficient due to its large excess burden. d) both a) and b) are correct.

b) impact financial assets and the efficiency of capital markets.

The tax base of a payroll tax is: a. consumer expenditures. b. labor income. c. interest income. d. a combination of expenditures, labor income, and interest income.

b. labor income

8. If government officials were most concerned about protecting consumers from higher prices, they would favor imposing taxes on goods: a. that are necessities. b. that are luxuries. c. for which the tax is likely to be forward shifted. d. for which the tax cannot be backward shifted.

b. that are luxuries.

20. Which of the following best describes a unit tax? a) A fixed tax levied on all people, regardless of any purchases. b) A tax levied as a percentage of the price of a good purchased. c) A constant tax levied on each unit sold. d) None of the above.

c) A constant tax levied on each unit sold.

40. The retail sales tax charged in most states is equivalent to: a) a comprehensive tax on income. b) a selective tax on wealth. c) a set of selective excise taxes. d) a tax on the profits of retailers.

c) a set of selective excise taxes.

28. Other things being equal, a government budget deficit: a) increases the demand for loanable funds by businesses. b) increases the supply of loanable funds from households. c) decreases the supply of loanable funds from households. d) is unlikely to affect market equilibrium interest rates.

c) decreases the supply of loanable funds from households.

38. As a result of government borrowing to cover deficits, households may increase their savings to provide themselves with funds to pay anticipated future taxes. (This is known as Ricardian Equivalence). Assuming this occurs, increased government borrowing will: a) reduce private investment. b) increase private investment. c) have no effect on private investment. d) increase interest rates.

c) have no effect on private investment.

18. If the quantity of health care consumed is more than the efficient quantity: a) some will not have access to healthcare that would have access at the efficient point. b) the healthcare system will suffer in quality. c) some resources spent on healthcare could be spent more efficiently elsewhere. d) the system will feature lower marginal costs and marginal benefits.

c) some resources spent on healthcare could be spent more efficiently elsewhere.

32. The efficiency loss ratio relative to tax is: a) the excess burden minus the tax revenue. b) the deadweight loss divided by one minus the tax revenue. c) the excess burden divided by the tax revenue. d) the excess burden minus the deadweight loss.

c) the excess burden divided by the tax revenue.

23. Other things being equal, the more elastic is the supply for a taxed good, a) the greater is the portion of the tax paid by sellers. b) the smaller is the excess burden of the tax. c) the greater is the portion of the tax paid by buyers. d) the lower is the fraction of a tax on sellers that can be shifted forward to buyers.

c) the greater is the portion of the tax paid by buyers.

25. If vertical equity is achieved in taxation, a) horizontal equity will also be achieved. b) individuals of equal economic capacity will pay equal taxes. c) those with the highest ability to pay taxes will pay the most taxes. d) the tax system will not result in losses in efficiency in markets.

c) those with the highest ability to pay taxes will pay the most taxes.

What is the primary reason the United States manages to collect a high percentage of income tax assessed on its wage-earning citizens? a. The IRS audits a large percentage of tax returns and almost always catches those who attempt to evade taxes. b. Penalties for tax evasion are so severe that citizens don't attempt to cheat the IRS. c. The income tax withholding system requires employers to withhold taxes from wages and remit those payments to the government. d. The United States actually does not manage to collect a high percentage of income tax assessed on wage earners.

c. The income tax withholding system requires employers to withhold taxes from wages and remit those payments to the government.

5. Which of the following is not necessarily an impact of persistent budget deficits? a. The tax burden is shifted from current to future taxpayers. b. Governments can accomplish current projects that have large social benefits, without raising taxes. c. The portion of the budget allocated for interest payments increases as a fraction of total spending. d. The absolute amount of government debt is increased.

c. The portion of the budget allocated for interest payments increases as a fraction of total spending.

6. If the quantity of health care consumed is more than the efficient quantity: a. some will not have access to healthcare that would have access at the efficient point. b. the healthcare system will suffer in quality. c. some resources spent on healthcare could be spent more efficiently elsewhere. d. the system will feature lower marginal costs and marginal benefits.

c. some resources spent on healthcare could be spent more efficiently elsewhere.

1. According to the benefit principle of taxation: a. taxes should be distributed according to peoples' ability to pay. b. the progressive income tax represents the ideal way of distributing taxes among a nation's citizens. c. user charges are an ideal source of finance for government-produced goods and services. d. flat-rate taxes are the only fair type, since all citizens benefit equally from provision of public goods.

c. user charges are an ideal source of finance for government-produced goods and services.

What two taxes are involved in the 'double taxation' of corporate income?

corporate profits are taxed; when some of the after-tax earnings are paid as dividends, the investors who own them pay tax on dividends at their marginal rate

35. Which of the following is true about the economic effects of the corporate income tax? a) Its incidence is likely to fall entirely on workers. b) Its incidence is likely to fall entirely on corporate owners (shareholders). c) Its incidence is likely to fall entirely on consumers of corporations' products. d) Its incidence is likely to be shared among workers, owners, and consumers.

d) Its incidence is likely to be shared among workers, owners, and consumers.

36. Imposing business income tax directly on the owners of the business (as described in lecture) would improve economic efficiency by: a) avoiding double taxation of dividends. b) reducing the incentive for businesses to retain excessive amounts of their earnings. c) inducing businesses to stop paying dividends. d) a) and b) are both correct.

d) a) and b) are both correct.

21. Assuming the same total tax is raised, a shift to a flat rate personal income tax from the current progressive income tax rate structure would: a) reduce the tax burden on upper income groups. b) increase the tax burden on upper income groups. c) increase the share of taxes paid by lower income groups. d) both a) and c) are correct.

d) both a) and c) are correct.

33. Wealth is: a) a flow concept. b) a stock concept. c) the market value of accumulated assets d) both b) and c) are correct.

d) both b) and c) are correct.

29. Which of the following would not be included in a comprehensive wealth tax base? a) real estate b) tangible personal property c) intangible personal property. d) corporate profits distributed as dividends.

d) corporate profits distributed as dividends.

30. Since Bill Clinton left office in January of 2001, the United States has: a) run budget surpluses in about half of the fiscal years. b) run budget surpluses in every year except during the Great Recession (2007-2010). c) run budget deficits in every year except the first two. d) not run a budget surplus in any fiscal year.

d) not run a budget surplus in any fiscal year.

42. The local property tax in the United States is levied primarily on: a) personal property. b) intangible property. c) business property. d) real estate.

d) real estate.

Most of today's health care policies combine insurance, i.e., protection against catastrophic expenses, with cost diversion, i.e., pre-paying for routine and preventative health care through a monthly premium. Which of these is an example of cost diversion? a. A health policy covering that covers 100% of the costs of open-heart surgery following a heart attack. b. A health policy that covers 80% of the cost of marriage counseling as a part of mental health benefits. c. A health policy that covers 50% of the cost of hair replacement surgery, offered to combat male pattern baldness. d. A health policy that covers 100% of the cost for an annual medical examination.

d. A health policy that covers 100% of the cost for an annual medical examination.

Why is it that our government does not tax unrealized capital gains, whether for stocks and bonds, for real property, or for other durable stores of wealth?

difficult or impossible to assess current value of all wealth except for real property, much easier to value assets when bought or sold;

Provide two reasons why our government should not tax corporate income.

double taxation of dividends, which causes inappropriate retention of earnings AND shifts corporations to debt financing; these taxes discourage investment & reduce growth

Why would eliminating restrictions on immigration be a way to 'save' the Social Security system?

immigrants are much younger than the average worker in the US, so they will work for longer before receiving benefits; they are also more likely to be in full time employment than the average native-born American

demand for necessities like medical services is highly inelastic, while supply of those same services is fairly elastic. If a sales tax were imposed on emergency room visits, would the tax incidence fall mainly on buyers or on sellers? Explain.

incidence falls mainly on more inelastic economic actor; in this case, the incidence would fall mainly on buyers - those who need emergency services

Name two or three types of taxes businesses pay aside from the Federal income tax.

property tax on land & equipment; tax on inventory values in some states; sales tax for most _ __expense item purchases (although not for raw materials or components); Social Security and _ __Medicare tax for their employees; tax or premiums for unemployment compensation

Ownership has been defined as a 'bundle of sticks', i.e., a number of rights owners may have regarding a specific piece of tangible property. Name three or more of these 'sticks', i.e., rights of ownership

right of use, right of access/denial of access, right to lease or mortgage, alienability, heritability

Give two or more reasons why our federal government relies heavily on income taxes for raising revenue, while not imposing any national sales taxes.

sales taxes are very difficult to make progressive, they also create excess burdens not created by income taxes

Why might it make sense to fund some long-lived assets, like highways and bridges, through borrowing rather than through taxation?

the economic services generated by the assets will be realized over the life of the asset; it makes sense to pay for it gradually; fees or tolls can also pay for interest payments

Briefly explain why lump-sum taxes are considered to be non-distorting.

they just make us poorer - inward shift in budget line; doesn't affect relative prices, so there are no substitution effects

Why might it be a bad idea for a government to raises funds for current spending through general obligation bonds, rather than through taxation?

this practice encourages governments to over-spend; it may be difficult or impossible to pay these loans back, especially if population falls or economic welfare declines

Provide two reasons why delaying the Social Security retirement age (for full benefits) to 70 might be appropriate from the standpoint of benefits vs contributions.

today's workers can expect to collect benefits for a much longer time than those who have retired in the past as they will enjoy more retirement years; these workers are also starting to work later in their life, so they are contributing for fewer years prior to age 65 (or 70)