Chapter 8 - Application: The Cost of Taxation

If the tax on a good is increased from $1 per unit to $4 per unit, the deadweight loss from the tax increases by a factor of

16

Figure 8-24. The figure represents the relationship between the size of a tax and the tax revenue raised by that tax. Refer to Figure 8-24. Tax revenue would

All of the above (-decrease if the economy began at point B and then the tax rate was decreased. -increase if the economy began at point F and then the tax rate was decreased. -decrease if the economy began at point C and then the tax rate was increased.)

Refer to Figure 8-22. Suppose the government initially imposes a $3 per-unit tax on this good. Now suppose the government is deciding whether to lower the tax to $1.50 or raise it to $4.50. Which of the following statements is not correct?

Compared to the original tax, the larger tax will decrease tax revenue.

Refer to Figure 8-19. The original tax can be represented by the vertical distance AB. Suppose the government is deciding whether to lower the tax to CD or raise it to FG. Which of the following statements is not correct?

Compared to the original tax, the larger tax will increase tax revenue.

In the early 1980s, which of the following countries had a marginal tax rate of about 80 percent?

Sweden

Which of the following events always would increase the size of the deadweight loss that arises from the tax on gasoline?

The amount of the tax per gallon of gasoline increases

Which of the following statements correctly describes the relationship between the size of the deadweight loss and the amount of tax revenue as the size of a tax increases from a small tax to a medium tax and finally to a large tax?

The size of the deadweight loss increases, but the tax revenue first increases, then decreases.

In which of the following instances would the deadweight loss of the tax on cartons of cigarettes increase by a factor of 9?

The tax on cartons of cigarettes increases from $10 to $30.

Which of the following events is consistent with an increase in the deadweight loss of the gasoline tax from $30 million to $120 million?

The tax on gasoline increases from $0.30 per gallon to $0.60 per gallon

Which of the following scenarios is consistent with the Laffer curve?

The tax rate is 1 percent, and tax revenue is very low.

Refer to Figure 8-21. Suppose the market is represented by Demand 1 and Supply 1. At first the government places a $3 per-unit tax on this good. Then the government decides to raise the tax to $6 per unit. How would you characterize the decision to raise the tax rate from $3 to $6 per unit? The decision is

a bad one because it does not increase tax revenue yet increases the deadweight loss from the tax.

The graph that represents the amount of deadweight loss (measured on the vertical axis) as a function of the size of the tax (measured on the horizontal axis) looks like

an upward-sloping curve

Refer to Figure 8-22. Suppose the government changed the per-unit tax on this good from $3.00 to $1.50. Compared to the original tax rate, this lower tax rate would

decrease tax revenue and decrease the deadweight loss from the tax.

Refer to Figure 8-22. Suppose the government changed the per-unit tax from $3.00 to $4.50. Compared to the original tax rate, this higher tax rate would

increase tax revenue and increase the deadweight loss from the tax.

Refer to Figure 8-24. For an economy that is currently at point D on the curve, a decrease in the tax rate would

increase tax revenue.

In a 2012 Wall Street Journal column, economists Edward Prescott and Lee Ohanian claimed that, in order to promote faster economic growth, the government should

increase the after-tax benefits to successful entrepreneurship and risk-taking.

If the tax on a good is increased from $0.30 per unit to $0.90 per unit, the deadweight loss from the tax

increases by a factor of 9

If the size of a tax increases, tax revenue

raise economic well-being and perhaps even tax revenue

Ronald Reagan believed that reducing income tax rates would

raise economic well-being and perhaps even tax revenue.

Suppose the tax on automobile tires is increased so that the tax goes from being a "medium" tax to being a "large" tax. As a result, it is likely that

tax revenue decreases, and the deadweight loss increases.