Chapter 19

Assume that the marginal tax rate is 10 percent for the first $10,000 of income, 20 percent for income between $10,000 and $40,000, and 30 percent for any income over $40,000. If Aaron has taxable income equal to $60,000 for the year, what is his tax bill?

$13,000. Aaron pays $1,000 on his first $10,000 in income, plus $6,000 on his next $30,000 in income, plus $6,000 on his last $20,000 in income.

Figure 33.2 illustrates Lorenz curves for four different economies. For which economy would the lowest 20 percent of families receive the smallest share of total income?

A. In economy A, the Lorenz curve is lower than all the others in the cumulative 20 percent portion, indicating that the families in the lower 20 percent of income earners in that economy receive the least income.

Exemptions and deductions included in the tax laws

Are designed to encourage specific economic activities.

Figure 33.2 illustrates Lorenz curves for four different economies. For which economy would lower-income families receive the largest share of total income?

D. The straight line represents the line of perfect equality that results in all families receiving equal incomes.

If the area between the diagonal line of absolute equality and the Lorenz curve is greater for China than for the United States, we can conclude that the

Distribution of income in China is less equal than in the United States.

A mathematical summary of inequality based on the Lorenz curve is known as the

Gini coefficient.

How income is distributed is typically measured using

Personal income. The distribution of income represents the percentage of total personal income received by each income class.

The U.S. tax system as a whole is basically

Proportional.

The poverty rate is

The percentage of the population that is counted as poor.

The richest fifth of U.S. households get nearly half of all U.S. income.

True

Which of the following is a payroll tax?

social security

nominal tax rate

(b) The nominal tax rate is tax paid divided by taxable income.Tax paid is calculated as follows: $9,075 x 0.10 = $907.50 $27,825 x 0.15 = $4,173.75 $52,450 x 0.25 = $13,112.50 $97,000 x 0.28 = $27,160.00 $13,650 x 0.33 = $4,504.50 Tax paid = $49,858.25 In this case, tax paid is $49,858.25 and taxable income is $200,000, so the nominal tax rate is therefore 25% (= $49,858.25 / $200,000).

According to official U.S. statistics, the U.S. poverty rate has been approximately _____ percent for the last 40 years.

11 to 15

Which of the following is true about a payroll tax?

It reduces the net wage to employees.

Wealth refers to

The market value of assets people own.

Check all the options that are possible explanations for why inequality in the US has increased since the 1970s

declining union membership rates return on capital exceeds the growth rate of wages

If a tax system has no deductions, exemptions, or other loopholes, then the effective tax rate will be

equal to the nominal tax rate. Total income will equal taxable income with the absence of deductions that typically create a wedge between total and taxable income.

If Luis makes $50,000 per year as a computer programmer and pays $6,000 in taxes while Hector makes $50,000 per year as a roofing contractor and pays $7,000 in taxes, this is an example of

horizontal inequity. When two taxpayers with equal incomes do not pay an equal amount of taxes, the principle of horizontal equity is violated.

In Figure 33.1, suppose that the Gini coefficient for Omega is 0.55. The Gini coefficient for Alpha must be

less than 0.55. Gini coefficient for Alpha will be less than 0.55 because in Alpha the income distribution is more equal than in Omega.

According to the standard theory of distribution, wages should be equal to:

productivity

Personal Income

the income received by a household before payment of personal taxes. the income an individual receives from all sources less the Social Security taxes the individual must pay

Size distribution of income

Tells how personal income is divided up among households or income classes.

As the ________ becomes larger, the distance between the line of absolute equality and the ________ becomes greater.

Gini coefficient; Lorenz curve

As exemptions are raised and allowable deductions are increased, there is

Greater vertical inequity. Less vertical equity occurs when high-income earners pay less tax than low-income earners due to the deductions and exemptions they are legally entitled to claim.

If a greater portion of income is distributed to those in the highest income quintile, the

Lorenz curve sags below the diagonal line of absolute equality.

To make a tax system more progressive, policy makers could

Raise marginal tax rates for higher incomes.

A tax is progressive if it takes a

Smaller fraction of income as income falls. A progressive income tax system taxes those who earn more at higher marginal tax rates.

T/F The principle of horizontal equity is violated if two people who earn the same amount of income actually pay a different amount in taxes.

True.

T/F: The values of the Gini coefficient range from zero to +1.

True. Zero and 1 are the extreme points of absolute equality and absolute inequality; any value in between is more likely and shows greater inequality the higher the value.

A tax that is designed to be progressive will improve

Vertical equity. Those who earn more, pay more.

In Figure 33.4, what is the cost of labor to the firm after the imposition of the payroll tax, and how many workers will be hired?

W5 and L1.

regressive tax

(d) A regressive tax is a tax system in which tax rates fall as wages rise. In the case of the Social Security payroll tax, as wages rise (particularly above $117,000), the tax rate falls.