ECON 251 (PNW) Chapter 20 Learnsmart

In the following figure, the area enclosed by abc, or orange triangle, represents

-a loss of production due to the tax -the efficiency or deadweight loss associated with the imposition of a tax

Opponents of tax increases claim that the imposition of a tax on goods and services creates a deadweight loss or efficiency loss. Specifically, they are referring to which of the following occurring?

-a reduction in consumption below the levels of economic efficiency -a reduction in production below the levels of economic efficiency

The following figure illustrates all of the following:

-an equal tax incidence between consumers and producers from a government-imposed tax of $2 on the producer -a decrease in supply because of the imposed tax, representing higher costs

As a teacher, Jonathan earns an annual income of $30,000, while Jose earns an annual income of $400,000 as an investment banker. On the one hand, low-income Jonathan spends all of his income on pure necessities of life and is unable to save. On the other hand, Jose spends $200,000 of his income and saves the balance. Suppose a 10% general sales tax applies to all the expenditures of Jonathan and Jose. We find that Jonathan pays $3000 in sales taxes and Jose pays $20,000 in sales taxes. Which of the following are true of this scenario?

-as a percent of income, Jose only pays 5% in sales tax, whereas Jonathan pays the full 10% -this sales tax is a regressive tax

Identify those products that exhibit negligible effects on sales despite price increases to cover excise taxes:

-cigarettes -alcohol -gasoline

A sales tax tends to be shifted in its entirety from producers to consumers because

-consumers cannot reallocate their expenditures to untaxed, lower-priced products -there is little chance for consumers to avoid the price boosts that sales taxes entail -it covers a wider range of products than an excise tax

The incidence of a tax would be entirely on consumers when

-demand for a product is perfectly inelastic -supply for a product is perfectly elastic

Examples of government purchases include:

-fire protection -missiles

The benefits-received principle and the ability-to-pay principle refer to alternative methods on:

-how to apportion the economy's tax burden -the distribution of income

Which of the following contribute toward a discussion of how workers may indirectly bear part of the corporate income tax, particularly over long periods of time?

-if the corporate income tax reduces the growth of labor productivity, then labor demand and wages rise less rapidly -the growth of labor productivity is the main reason labor demand grows over time

Which of the following describe redistributive tax goals?

-imposing progressive taxes as a way to redistribute income -causing the benefits from the redistribution effects of the tax to exceed the efficiency losses -an excise tax on luxury goods

A tax on production due to a negative externality would have which of the following effects:

-improves allocative efficiency -reduces output -reduces the negative externality

Which of the following are true about regressive tax?

-it claims a smaller proportion of income as income rises -it may claim a larger absolute or dollar amount of income as income rises -the average rate declines as income increases

Select the products on which revenue-seeking politicians place heavy excise taxes because their price elasticity of demand is considered to be inelastic

-liquor -cigarettes

The basic revenue sources for the federal government include

-personal income tax -payroll tax -corporate income tax

The levying of corporate income taxes results in

-reductions on return on investment -the slowing of accumulation of capital -the possible slowing of the growth in labor productivity -the possible relocation of firms to countries with lower tax rates

Examples of regressive tax

-sales tax -property tax -payroll tax

The primary sources of state revenue are:

-sales taxes -excise taxes

States vary dramatically in the areas of revenue sources and expenditures. Examples of state revenue sources include

-state-owned utilities -federal grants -liquor stores -lotteries

Which of the following sources of funds are used to pay for government purchases and transfers?

-taxes -borrowed funds through the sale of bonds -proprietary income

Recipients of the "pensions and income security" category of government spending include

-the disabled -the retired -the elderly

If federal payroll taxes, excise taxes, and state and local tax structures are regressive, how is it that the overall U.S. tax system still manages to be progressive?

-the federal tax system is progressive -higher income households carry a slightly larger tax burden, as a percentage of income, than do lower-income households

Which of the following summarizes the two generalizations about elasticities and the incidence of tax?

-the more elastic the demand, the more a tax is borne by producers, whereas the more elastic the supply, the more a tax is borne by consumers -the more inelastic the demand, the more a tax is borne by the consumers, whereas the more inelastic the supply, the more tax is borne by the producers

A larger portion of a tax is shifted to consumers

-the more inelastic the demand for a product -the more elastic the supply for a product

Choose those reasons why part of the employer portion of the payroll tax gets shifted to workers

-the payroll tax makes it costly to hire workers, thus reducing the quantity demanded for labor -the market wage that employers pay their workers is reduced by all or some of the payroll tax

Which of the following help explain why property taxes are regressive?

-the poor must spend a larger percentage of their incomes for housing than do high-income families -if a property is rented, property owners add the tax to the rents that are charged

A larger portion of the tax is borne by producers when

-the price elasticity of supply is more inelastic -the price elasticity of demand is more elastic

Which of the following represent tax goals that may be as important, or in some cases even more important, than minimizing efficiency losses from taxes?

-the redistribution of income -reducing externalities

Which of the following are true as a result of a government-imposed tax on producers?

-the supply curve shifts upward because of higher operating costs -the incidence of the tax may be shared in some proportion between the producer and the consumer -equilibrium output will fall and equilibrium price will rise

In the following figure, area efac represents

-the tax revenue -the tax borne both by consumers and producers

Examples of products on which excise taxes are levied include:

-tobacco -gasoline -alcoholic beverages

Examples of transfer payments include:

-welfare payments -social security benefits -unemployment compensation

Rank the following expenditures in order of largest percentage of state spending to least in most states

1. Education 2. Public welfare 3. Health and hospitals 4. Public safety

Example of progressive tax

federal income tax

Which of the following explains why some products exhibit smaller effects on sales despite modest price increases to cover an excise tax?

fewer substitute products from which to choose

In the circular flow diagram, which of the following flows illustrates that government makes purchases in both product and resource markets?

flows 5-8

In the circular flow diagram, which of the following flows represent government purchases of resources?

flows 7 and 8

The following figure helps to illustrate that with a relatively inelastic supply the burden of a tax would fall more heavily on producers of which of the following products?

gold

Other things equal, the _______ the elasticities of supple and demand, the greater the efficiency loss of particular tax

greater

Progressive taxes are those that fall relatively more heavily on people with ________ (high/low) incomes and regressive taxes are those that fall relatively more heavily on people with ________ (high/low) incomes

high; low

The imposition of a tax _______ (increases/decreases) the equilibrium amount of the good or service produced and consumed

decreases

The personal income tax is levied on the incomes of households and unincorporated businesses after exemptions and ________ are taken into account

deductions

An increase in the marginal cost of a firm's product will result from

a government-imposed tax on the firm

Suppose the rate structure is such that a household with an annual taxable income of less than $15,000 pays 10% income taxes; a household with annual taxable income of $15,000 to $30,000 pays 20%; and a household with annual taxable income of $30,000 to $60,000 pays 30% in income taxes. What type of tax does this exemplify?

a progressive tax

________ would be better off bearing all or a large portion of an excise tax when a higher price to cover the tax results in a decline in sales

a seller

When the price elasticity of demand is inelastic, the portion of the tax borne by consumers is that area enclosed by _________, whereas the tax borne by producers is that area enclosed by __________.

a-P1-b; c-P1-b

Sales taxes tend to be shifted in their entirety from ________ (producers/consumers) to ___________ (producers/consumers)

producers; consumers

Government buys products from the _________ market and employs resources from the ________ market

product; resource

A tax is ________ if its average rate increases as income increases

progressive

The federal personal income tax is a(n) __________ tax. This is achieved by having households with higher levels of income pay higher marginal tax rates

progressive

The primary source of revenue for local government is the _______ tax

property

A tax is _________ if its average rate remains the same regardless of the size of income

proportional

The amount of tax revenue raised by the government through a tax

should minimize the efficiency loss of the tax

Four areas of government spending that account for the majority of the government's budget are pensions, health, interest on the public debt, and national _________

defense

The tax levied on a small, selected list of commodities is known as a(n) __________

excise tax

Government purchases are _________, which means the products purchased directly absorb resources and are part of domestic output

exhaustive

The following figure illustrates the efficiency loss of a tax as area abc when supply is elastic. As supply becomes more inelastic, the efficiency loss of a tax _______ (falls/rises)

falls

Sales taxes are usually ______, whereas excise taxes are often ______.

transparent; hidden

In the following figure, suppose the government imposes a tax that is to be borne equally on consumers and producers. Assume that the quantity demanded falls to 12.5 million bottles. Calculate the tax revenue that the government incurs from this tax

$25 million

Federal, state, and local governments together spent _______ in 2015

$5879 billion

As cited in McConnell the percentage of federal spending on national defense was _____%

16

The corporate income tax rate for most corporation is ______%

35

In 2016, employers and employees each paid ____ in FICA taxes

7.65%

As cited in McConnell, personal income tax and payroll tax accounted for approximately ______% of federal tax revenues

80

Which of the following describes the reduction of negative externalities as a tax goal?

A tax on production can improve the allocative efficiency by reducing output and thus lessening the negative externality

When the price elasticity of demand is inelastic, the portion of the tax borne by consumers can be calculated as _______, whereas the tax borne by producers can be calculated as ________

P1-P1; P1-Pb

When demand is elastic, the per unit portion of the tax borne by consumers can be calculated as _______, whereas the per unit tax borne by producers can be calculated as _______.

P2-P1; P1-P3

When supply is inelastic, the portion of the tax borne by consumers is that area enclosed by _______, whereas the tax borne by producers is that area enclosed by ___________

P5-P4*P5a; P4-P6*P6c

Example of proportional tax

corporate tax

Government spending that is financed by borrowing is often referred to as:

deficit spending

Revenue-seeking legislatures place heavy excise taxes on certain goods because

demand for certain products is relatively inelastic so the tax does not reduce sales by much and tax revenue stays high

The corporate income tax is levied on corporate _________

earnings

The following figure illustrates the efficiency loss of a tax for area abc when demand is elastic. As demand becomes more inelastic, the:

efficiency loss of a tax decreases

If demand is ______ in the relevant price range, price rises modestly when an excise tax is imposed, thus the producer bears most of the tax burden

elastic

A seller would be better off bearing all or a large portion of an excise tax when the demand for its product is

elastic because an increase in price to cover the excise tax might cause consumers to substitute alternative types of products

When supply is _______, an excise tax results in a large increase in ________ and the burden of the tax falls mainly on consumers

elastic; price

The final resting place of a tax, meaning who actually ends up paying a government imposed tax is called the tax _______

incidence

Although minimizing the efficiency loss of a tax should be a priority for government, the redistribution of _________ and reducing _______ may be more important

income; externalities

The incidence of the personal income tax generally is on the _______ because there is little chance for shifting it

individual

Given a specific amount of supply, the more _________ the demand for the product, the larger is the portion of a tax shifted to consumers

inelastic

If supply is _______, an excise tax on a product results in a small increase in price and the producers bears most of the tax burden

inelastic

Which of the following represented approximately 6 percent of total federal expenditures?

interest on the public debt

The government's flexibility to borrow during an economic downturn is useful because

it can use borrowed funds to maintain high levels of spending despite decrease in government revenues

The government's opportunity cost of borrowing when the economy is doing well may be high because:

it crowds-out private-sector investment

Which of the following is true of the payroll tax?

like income tax, payroll taxes cannot be shifted

In the _____ run, workers may bear a significant part of higher corporate income taxes in the form of lower _______ growth

long; wage

Part of the employer portion of payroll taxes gets shifted to workers in the form of ________ "before-tax" wages

lower

A(n) ________ tax rate is the rate at which the tax is paid on each additional unit of taxable income

marginal

Progressive taxation is achieved by applying higher ______ tax rates

marginal

________ is a health program for the poor

medicaid

Payroll taxes used to finance Social Security and __________

medicare

Spending on health includes both Medicaid and ________

medicare

________ is a health program for the retired

medicare

The transfer of money from consumers and producers to government as a result of taxes involves

no loss of well-being to society

Transfer payments are ________, which means they do not directly absorb resources or create output

nonexhaustive

Transfer payments make no current contribution to domestic output, and therefore do not use resources. For this reason, transfer payments are said to be _________

nonexhaustive

Which of the following can be determined from the figure provided?

other things equal, the greater the elasticity of demand the greater the efficiency or deadweight loss associated with a tax

Individuals and unincorporated businesses pay the _________ income tax

personal

A tax is ________ if its average rate declines as income increases

regressive

If demand is inelastic, a significant price ______ shifts the burden of a tax on the product to ______

rise; buyers

A progressive tax is one where the average tax rate _________ (rises/falls) with an increase in income

rises

Payroll taxes are based on wages and ______

salaries

Excise taxes and the ________ tax are those taxes levied on commodities and on purchases

sales

The primary sources of local government revenue are the property tax, excise tax, and ________ tax

sales

A _______ is a general excise tax levied on a full range of consumer goods and services, whereas a specific ______ is one levied only on a particular product

sales tax; excise tax

A government-imposed tax on _______ is viewed as an increase to the marginal cost of the product

sellers

When supply is inelastic, the portion of the tax borne by consumers is ______, whereas the tax borne by producers is ________

smaller; greater

While the federal government does not levy a general sales tax, this is the primary revenue source of most _______ governments

state

Sales taxes are primary source of revenue for:

state governments

In the short run, the incidence of the corporate income tax falls on the company's ________, who bear the burden of the tax through lower dividends or smaller amounts of retained corporate earnings

stockholders

The government uses _____ revenue to provide public goods and service

tax

The total costs that taxes impose on society is called the _______ _________

tax burden

Over a meeting on tax reform, a congressman proclaims that the excise tax on gas should stand as the model for a new tax structure. In response, another congressman expresses his concerns over the first congressman's views, arguing that the proper tax structure should be one based on the diminishing marginal utility of each additional dollar of income spent. What could these two congressmen be referring to, respectively?

the benefits-received principle of taxation versus the ability-to-pay principle of taxation

Apportioning the tax burden refers to

the decision-making process the addresses how taxes in society are levied among citizens

In raising any specific dollar amount of tax revenue:

the government should reduce the efficiency loss of the tax

Which of the following describes the relationship between elastic supply and the burden of a tax on a product?

the more elastic the supply of a product, the more the burden of a tax on the product falls on consumers

Redistributive tax goals refers to:

the redistribution of income in society so that the disparity between the rich and the poor is reduced

Taxes, proprietary income and borrowed funds from bond issuance are:

the sources of government funds to finance expenditures

Which of the following products would be significantly affected by an increase in price due to an excise tax?

theater tickets

Social Security benefits, welfare payments, and veterans' benefits are all examples of government _________ _______, a type of federal expenditure

transfer payments

The size of government's economic role is understood by examining the amount of goods and services the government purchases and its spending on

transfer payments

Individuals, namely ______ bear the full burden of the Social Security payroll tax and Medicare tax levied on them as they cannot shift these taxes to someone else

workers

In the short run, the incidence of the corporate income tax falls on the company's stockholders, because the profit-maximizing combination of price and output

yielding the greatest profit will still yield the greatest profit after a fixed percentage of the firm's profit is removed by an income tax