Ch12 The Design Of The Tax System Test Bank Answers - Principles of Microeconomics ANZ Edition Test Bank by Joshua Gans. DOCX document preview.
CHAPTER 12 – The design of the tax system
TRUE/FALSE
1. When a tax does not have a deadweight loss, the reduction in surplus is exactly offset by tax revenue collected by the government.
DIF: Easy TOP: Introduction
2. Income tax is a good example of a lump-sum tax.
DIF: Easy TOP: A financial overview of Australian government
3. Social security is an income support measure, designed primarily to maintain the living standards of the poor.
DIF: Easy TOP: Spending
4. A budget deficit is when a government owes money to overseas investors.
DIF: Easy TOP: Spending
5. Company income is taxed three times: first when the corporation earns profits; second when the bondholders pay tax on interest income; and third when individuals pay tax on company dividends.
DIF: Moderate TOP: Receipts
6. Complex tax laws result from political processes.
DIF: Easy TOP: Marginal tax rates versus average tax rates
7. An efficient tax system is one that generates a lot of revenue even if the administrative burden is high.
DIF: Moderate TOP: Taxes and efficiency: Administrative burden
8. Some welfare groups argue that the GST places a disproportionate tax burden on lower income earners.
DIF: Easy TOP: The Federal government: Receipts
9. After a tax is imposed some people change their behaviour. These changes cause a deadweight loss to be generated.
DIF: Easy TOP: Taxes and efficiency: Deadweight losses
10. Administrative burden and changes in behaviour are inefficiencies of any tax system.
DIF: Easy TOP: Taxes and efficiency
11. Lump-sum taxes are equitable but not efficient.
DIF: Easy TOP: Lump-sum taxes
12. Road construction funded by taxes on petrol is an example of the benefits principle applied to the equity of the tax burden.
DIF: Easy TOP: The benefits principle
13. Tax schemes that satisfy the benefits principle are always considered to be the most equitable.
DIF: Easy TOP: Taxes and equity
14. ‘Vertical equity’ refers to the idea that taxpayers with similar abilities to pay taxes should pay the same amount.
DIF: Easy TOP: The ability-to-pay principle
15. Resources devoted to complying with the tax laws constitute a type of deadweight loss.
DIF: Easy TOP: FYI: Tax avoidance and tax evasion
16. A progressive tax is a tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers.
DIF: Easy TOP: Vertical equity
17. To gauge the extent to which the tax system distorts incentives, the marginal tax rate is the appropriate tax rate to use.
DIF: Moderate TOP: Marginal tax rates versus average tax rates
18. The ability-to-pay principle states that people should pay taxes based on the benefits they receive from government services.
DIF: Easy TOP: The ability-to-pay principle
19. There is little disagreement among people about tax policy because most people attach the same weights to the goals of equity and efficiency.
DIF: Easy TOP: Conclusion: The trade-off between equity and efficiency
20. The most important taxes for state and local governments in Australia are individual and company income taxes.
DIF: Easy TOP: State and local governments
21. A lump-sum tax results in equality between average and marginal tax rates.
DIF: Difficult TOP: Lump-sum taxes
22. The marginal tax rate is the extra taxes paid on an additional dollar of income.
DIF: Easy TOP: Marginal tax rates versus average tax rates
23. The average tax rate is total taxes paid divided by total income.
DIF: Easy TOP: Marginal tax rates versus average tax rates
24. If higher income taxpayers pay a higher percentage of their income in taxes, then the tax system is classed as progressive.
DIF: Moderate TOP: The ability-to-pay principle
25. When the marginal tax rate exceeds the average tax rate, the tax is progressive.
DIF: Difficult TOP: The ability-to-pay principle
26. If the government imposes a tax of 20 per cent on the first $20 000 of income and 40 per cent on all incomes above $20 000, a person whose income is $30 000 would face a tax liability of $8000.
DIF: Moderate TOP: Marginal tax rates versus average tax rates
27. It is only if a taxpayer has a very low income that his average tax rate will equal his marginal tax rate.
DIF: Moderate TOP: Marginal tax rates versus average tax rates
28. Vertical equity states that taxpayers with a greater ability to pay taxes should contribute a decreasing proportion of each increment in income to taxes.
DIF: Moderate TOP: Vertical equity
29. The ‘poverty trap’ refers to the problem where low income earners are effectively taxed at a high marginal tax rate when they begin to work more, and consequently lose some of their government benefits.
DIF: Moderate TOP: Case study: Marginal tax rates and the poverty trap
30. Tax evasion is another term for tax avoidance.
DIF: Moderate TOP: FYI: Tax avoidance and tax evasion
31. Tax avoidance can occur unintentionally.
DIF: Moderate TOP: FYI: Tax avoidance and tax evasion
32. Tax evasion is when a person will try to minimise their marginal tax rate.
DIF: Moderate TOP: FYI: Tax avoidance and tax evasion
MULTIPLE CHOICE
1. The marginal tax rate is:
A. | how much every dollar earned is taxed |
B. | how much every dollar earned is taxed, on average |
C. | how much the first $18 200 earned is taxed |
D. | how much every extra dollar earned is taxed |
DIF: Moderate TOP: Marginal tax rates versus average tax rates
2. State and local governments:
A. | are funded entirely by their own tax base |
B. | receive the majority of their tax revenues from company income tax |
C. | are generally not responsible for collecting sales tax |
D. | receive some of their funds from the federal government |
DIF: Moderate TOP: State and local governments: Receipts
3. The largest source of revenue for state governments is:
A. | property tax |
B. | transfers from the federal government |
C. | individual income tax |
D. | tax on goods and services |
DIF: Easy TOP: Receipts
4. Governments tax company income primarily on the basis of:
A. | profit |
B. | its total revenue |
C. | pollution levels |
D. | all of the above |
DIF: Moderate TOP: Receipts
5. The GST can be described as a:
A. | payroll tax |
B. | excise tax |
C. | consumption tax |
D. | income tax |
DIF: Easy TOP: State and local governments: Receipts
6. The average tax rate of a taxpayer is only likely to equal the marginal tax rate when the taxpayer:
A. | collects a government salary |
B. | has a very high income |
C. | has a very low income |
D. | is a middle-income earner |
DIF: Moderate TOP: Marginal tax rates versus average tax rates
7. When a tax is levied as a percentage of the total amount spent in retail stores, this tax is called a:
A. | value-added tax |
B. | retail tax |
C. | commercial tax |
D. | sales tax |
DIF: Easy TOP: Case study: The goods and services tax
8. A ‘tax liability’ refers to:
A. | the fine incurred when a taxpayer is caught evading tax |
B. | the amount of tax a taxpayer owes at the end of the financial year |
C. | the taxpayer who is liable to pay the tax |
D. | the fine incurred when a taxpayer is caught avoiding tax |
DIF: Moderate TOP: Receipts
9. A poorly designed tax policy tends to be accompanied by which of the following costs?
A. | the transfer of money from the government to the taxpayer |
B. | marginal rates |
C. | large administrative costs |
D. | equity penalties |
DIF: Moderate TOP: Taxes and efficiency
10. One reason why deadweight losses are so difficult to avoid is that:
A. | administrative burden and deadweight loss reflect a clear trade-off to policymakers |
B. | income taxes are not paid by everyone |
C. | consumption taxes must be universally applied to all commodities |
D. | taxes affect the decisions that people make |
DIF: Moderate TOP: Taxes and efficiency: Deadweight losses
11. If the government imposes a $2 tax on pizza and so the price of pizza rises from $7 to $9, the deadweight loss will arise from:
A. | the pizza suppliers who lose $2 of revenue |
B. | the consumers who pay the tax |
C. | the government which pays $2 to the taxpayer |
D. | the consumers who change their behaviour because of the tax |
DIF: Moderate TOP: Taxes and efficiency: Deadweight losses
12. Deadweight losses from taxation are equal to:
A. | the reduction in revenue a supplier suffers from the imposition of the tax |
B. | taxes that target expenditures on social security |
C. | the reduction in consumer surplus resulting from the tax |
D. | the change in people’s behaviour as a result of the tax |
DIF: Easy TOP: Taxes and efficiency: Deadweight losses
13. The administrative burden of a tax includes:
A. | the amount of money people pay as income taxes |
B. | the reduction in the size of a market because of the tax |
C. | the time and effort of completing tax forms that is imposed on taxpayers |
D. | the cost of administering programs that use tax revenue |
DIF: Easy TOP: Taxes and efficiency: Administrative burden
14. Suppose a tax is imposed on cameras. The administrative burden of the tax comes from:
A. | those consumers who still choose to buy cameras, but pay a higher price |
B. | those consumers who choose not to buy the camera after the tax raises the price |
C. | those citizens who must include the camera tax in their tax returns |
D. | those consumers who are unable to avoid paying the tax on cameras |
DIF: Moderate TOP: Taxes and efficiency: Deadweight losses
15. The resource cost of tax compliance is:
A. | not considered in calculations of tax burden |
B. | solely a product of company income taxes |
C. | solely a product of property taxes |
D. | included in the administrative burden of a tax |
DIF: Easy TOP: Taxes and efficiency: Administrative burden
16. Attempts by taxpayers to illegally reduce their tax liability are termed:
A. | tax avoidance |
B. | tax evasion |
C. | a tax-return compensation plan |
D. | activities outside the intent of tax law |
DIF: Easy TOP: FYI: Tax avoidance and tax evasion
17. When tax laws give preferential treatment to specific types of behaviour, it is called:
A. | tax evasion |
B. | a political pay-off |
C. | a tax loophole |
D. | compensation for the benefit of society |
DIF: Easy TOP: In the news: Using the Internet to avoid taxes
18. If tax laws become simplified then:
A. | the administrative burden of taxes is decreased |
B. | compliance costs are most likely to increase |
C. | the government always collects less in tax revenue |
D. | the amount of tax revenue lost to tax evasion always increases |
DIF: Easy TOP: Administrative burden
19. A tax on all forms of income will:
A. | lower the effective rate of interest on savings |
B. | increase the potential income from saving |
C. | increase the amount of income received in the economy |
D. | enhance the incentives to save |
DIF: Easy TOP: Receipts
20. If your income is $80 000 and you paid $500 car registration, your:
A. | lump-sum tax is $500 |
B. | proportional tax $500 |
C. | average tax rate is six per cent |
D. | marginal tax rate is six per cent |
DIF: Moderate TOP: Marginal tax rates versus average tax rates
21. Amy’s marginal tax rate was 18 per cent last year. This means the amount she paid on the last dollar she earned in that year was:
A. | more than $0.18 |
B. | exactly $0.18 |
C. | more than 18 per cent |
D. | less than $0.18 |
DIF: Easy TOP: Marginal tax rates versus average tax rates
22. High marginal tax rates:
A. | are used to encourage saving behaviour |
B. | distort incentives to work |
C. | will invariably lead to lower average tax rates |
D. | are not associated with deadweight losses |
DIF: Easy TOP: Marginal tax rates versus average tax rates
23. If marginal tax rates decrease, the:
A. | deadweight loss from taxes is unaffected |
B. | deadweight loss from taxes will be reduced |
C. | deadweight loss from taxes will rise |
D. | average tax rate will be falling |
DIF: Moderate TOP: Marginal tax rates versus average tax rates
24. Lump-sum taxes:
A. | are most frequently used to tax real property |
B. | do not distort incentives |
C. | are the most distortionary taxes |
D. | are used in taxing sales |
DIF: Easy TOP: Lump-sum taxes
25. A lump-sum tax has a marginal tax rate that is:
A. | always positive |
B. | always negative |
C. | zero |
D. | greater than the prevailing average tax rate |
DIF: Moderate TOP: Lump-sum taxes
26. With a lump-sum tax, the:
A. | marginal tax rate is always less than the average tax rate |
B. | average tax rate is always less than the marginal tax rate |
C. | marginal tax rate falls as income rises |
D. | marginal tax rate rises as income rises |
DIF: Moderate TOP: Lump-sum taxes
27. One of the benefits from switching taxation away from income towards consumption is that:
A. | it will necessarily increase tax revenues |
B. | it is always administratively simpler |
C. | it distorts incentives to earn income |
D. | it eliminates disincentives to save |
DIF: Moderate TOP: Case study: The goods and services tax
28. Policymakers consider two main objectives when designing a taxation system:
A. | revenue and debt reduction |
B. | equity and efficiency |
C. | revenue and expenditures |
D. | expenditures and efficiency |
DIF: Easy TOP: Deadweight losses
29. One tax system is less efficient than another if it:
A. | places a lower tax burden on lower income families than on higher income families |
B. | places a higher tax burden on lower income families than on higher income families |
C. | raises the same amount of revenue at a higher cost to taxpayers |
D. | raises the same amount of revenue at a lower cost to taxpayers |
DIF: Moderate TOP: Deadweight losses
30. An efficient tax system has low:
A. | rates of marginal tax |
B. | deadweight losses |
C. | rates of average tax |
D. | transfers between the Commonwealth government and the States |
DIF: Moderate TOP: Taxes and efficiency
31. Large deadweight losses and large administrative burdens are characteristic of a tax system that is best defined as:
A. | equitable |
B. | efficient |
C. | inequitable |
D. | inefficient |
DIF: Moderate TOP: Deadweight losses
32. Which of the following statements is most correct?
A. | deadweight loss is the efficiency that a tax creates as people allocate resources according to market incentives |
B. | deadweight loss is the inefficiency that a tax creates as people allocate resources according to market incentives |
C. | deadweight loss is the inefficiency that a tax creates as people allocate resources according to the tax incentives |
D. | deadweight loss is the efficiency that a tax creates as people allocate resources according to the tax incentives |
DIF: Moderate TOP: Deadweight losses
33. The most appropriate measure of the sacrifice made by a taxpayer is the:
A. | average tax rate |
B. | marginal tax rate |
C. | lump-sum tax rate |
D. | sales tax rate |
DIF: Moderate TOP: Marginal tax rates versus average tax rates
34. The marginal tax rate is equal to:
A. | total sales taxes divided by total expenditures |
B. | extra taxes paid on each dollar of income |
C. | extra taxes paid divided by total income |
D. | total income divided by total taxes |
DIF: Easy TOP: Marginal tax rates versus average tax rates
35. The average tax rate measures the:
A. | fraction of spending paid in taxes |
B. | fraction of income paid in taxes |
C. | incremental rate of tax on income |
D. | average deadweight loss from all taxes |
DIF: Easy TOP: Marginal tax rates versus average tax rates
36. If we are trying to gauge how much the income tax system distorts incentives, then:
A. | the average tax rate is the most meaningful measure |
B. | the distortion is entirely captured in the administrative burden of the tax |
C. | total tax revenue collected is the most meaningful measure |
D. | the marginal tax rate is the most meaningful measure |
DIF: Moderate TOP: Marginal tax rates versus average tax rates
37. Suppose the government imposes a tax of 32 per cent on the first $40 000 of income, and 45 per cent on all income above $40 000, what is the marginal tax rate when income is $80 000?
A. | 20 per cent |
B. | 32 per cent |
C. | 77 per cent |
D. | 45 per cent |
DIF: Moderate TOP: Marginal tax rates versus average tax rates
38. Suppose the government imposes a tax of 10 per cent on the first $24 000 of income and
20 per cent on all incomes above $24 000, what are the tax liability and the average tax rate for a person whose income is $48 000?
A. | 10 per cent and 20 per cent, respectively |
B. | 10 per cent and $24 000, respectively |
C. | $7200 and 15 per cent, respectively |
D. | $7200 and 20 per cent, respectively |
DIF: Moderate TOP: Marginal tax rates versus average tax rates
39. Suppose the government imposes a tax of 15 per cent on the first $70 000 of income and
20 per cent on all incomes above $70 000, what are the tax liability and the marginal tax rate for a person whose income is $80 000?
A. | both are 15 per cent |
B. | 20 per cent and $10 500, respectively |
C. | $12 500 and 20 per cent, respectively |
D. | $10 500 and 15 per cent, respectively |
DIF: Moderate TOP: Marginal tax rates versus average tax rates
40. A lump-sum tax imposes a minimal administrative burden on taxpayers because:
A. | everyone can easily compute the amount of tax they owe |
B. | there is no benefit to hiring an accountant to do your taxes |
C. | everyone owes the same amount of tax, regardless of earnings |
D. | all of the above are true |
DIF: Moderate TOP: Lump-sum taxes
41. Lump-sum taxes are rarely used in the real world because:
A. | lump-sum taxes have low administrative burdens but high deadweight losses |
B. | lump-sum taxes have low deadweight losses but high administrative burdens |
C. | poor taxpayers must pay the same level of tax as rich taxpayers |
D. | lump-sum taxes have both high deadweight losses and high administrative burdens |
DIF: Moderate TOP: Lump-sum taxes
42. Australia’s tax system:
A. | is mainly made up of lump sum taxes |
B. | imposes no deadweight loss |
C. | satisfies the flypaper principle |
D. | is considered vertically equitable |
DIF: Moderate TOP: Vertical equity
43. The benefits principle of taxation can be used to argue that wealthy citizens should pay higher taxes than poorer ones on the basis that:
A. | police services are more frequently used in poor neighbourhoods |
B. | the wealthy benefit more from services provided by government than the poor |
C. | the poor are more active in political processes |
D. | there is more crime in rich neighbourhoods than poor neighbourhoods |
DIF: Moderate TOP: The benefits principle
44. Taxes have no deadweight loss when:
A. | they are equitable |
B. | they are equitable and efficient |
C. | they are efficient |
D. | it is very rare for a tax to have no deadweight loss |
DIF: Moderate TOP: Deadweight loss
45. When the marginal tax rate exceeds the average tax rate, the tax is:
A. | proportional |
B. | regressive |
C. | non-egalitarian |
D. | progressive |
DIF: Easy TOP: The ability-to-pay principle
46. When the marginal tax rate equals the average tax rate, the tax is:
A. | proportional |
B. | progressive |
C. | regressive |
D. | egalitarian |
DIF: Easy TOP: Vertical equity
47. Which of the following statements is most correct?
A. | a general sales tax on food is regressive when low-income taxpayers spend a larger proportion of their income on food than high-income taxpayers |
B. | a general sales tax on food is regressive when middle-income taxpayers spend a smaller proportion of their income on food than high-income taxpayers |
C. | a general sales tax on food is regressive when high-income taxpayers spend a larger proportion of their income on food than middle-income taxpayers |
D. | a general sales tax on food is regressive when high-income taxpayers spend a larger proportion of their income on food than low-income taxpayers |
DIF: Moderate TOP: Vertical equity
48. An income tax in which the average tax rate increases as taxpayer income increases would be considered a:
A. | progressive tax |
B. | regressive tax |
C. | distortion-free tax |
D. | proportional tax |
DIF: Easy TOP: Vertical equity
49. Two families, the Smiths and the Jones, live on the Gold Coast, Queensland, and have identical incomes. The Smiths deduct $5000 from their taxable income for mortgage interest paid during the year, while the Jones family lives in an apartment and is not eligible for a mortgage-interest deduction. This situation exemplifies:
A. | an application of the benefits principle of taxation |
B. | a violation of horizontal equity |
C. | a violation of vertical equity |
D. | an application of egalitarian tax rules |
DIF: Moderate TOP: Horizontal equity
50. Which of the following statements least accurately reflects concerns about tax equity?
A. | there is a lot of disagreement about what tax equity means |
B. | few people would be in agreement about the process used to judge equity |
C. | tax efficiency is a less contentious issue to policymakers than tax equity |
D. | tax efficiency addresses how the burden of taxes should be divided among the population |
DIF: Moderate TOP: Tax incidence and tax equity
51. Determination of the incidence of a tax:
A. | is not required when one is only interested in issues of equity |
B. | is identical to the determination of legal liability for a tax |
C. | requires one to evaluate where the tax burden eventually falls |
D. | is solely determined by conditions of the ‘flypaper theory’ of taxation |
DIF: Moderate TOP: Tax incidence and tax equity
52. The efficiency of the tax system refers to:
A. | how much revenue the government can raise from taxation |
B. | how many people are caught evading tax per year |
C. | the costs it imposes on taxpayers |
D. | the benefits taxpayers receive from their taxpayer-funded services |
DIF: Moderate TOP: Conclusion: The trade-off between equity and efficiency
53. If airline travellers are charged a departure tax to help maintain an airport, this tax is justified on the basis of:
A. | the benefits principle |
B. | the ability-to-pay principle |
C. | airports are expensive to maintain |
D. | horizontal equity |
DIF: Moderate TOP: The ability-to-pay principle
54. Taxes on the wealthy that are used exclusively for anti-poverty programs may be justified on the benefits principle if:
A. | the wealthy place a greater dollar value on anti-poverty programs than other classes of taxpayers |
B. | anti-poverty programs can be considered public goods |
C. | wealthy taxpayers received some personal benefit from anti-poverty programs |
D. | all of the above are true |
DIF: Moderate TOP: The ability-to-pay principle
55. If vertical equity is being used as the basis of a tax, then taxpayers with a lesser ability to pay should:
A. | contribute a smaller amount |
B. | contribute a larger amount |
C. | be less subject to administrative burdens of a tax |
D. | contribute the same amount as taxpayers with a greater ability to pay |
DIF: Moderate TOP: Vertical equity
56. The claim that all citizens should make an ‘equal sacrifice’ to support government programs is usually associated with:
A. | the ability-to-pay principle |
B. | the benefits principle |
C. | efficiency arguments |
D. | regressive tax arguments |
DIF: Moderate TOP: The ability-to-pay principle
57. In order to construct a more complete picture of the economic burden of government across income classes, economists usually:
A. | include both tax payments as well as transfer payments received |
B. | focus only on the tax payments of wealthy tax payers |
C. | limit their analysis to taxes based on the ability-to-pay principle |
D. | focus their analysis on issues of tax efficiency |
DIF: Moderate TOP: Taxes and equity
58. Suppose you were designing a tax based on horizontal equity, what aspect of assigning the tax would be the most difficult?
A. | whether or not a taxpayer belongs to a high-income group |
B. | the level of transfer payments made to low-income groups |
C. | the source of income for taxpayers |
D. | determining the differences relevant to a family’s ability to pay |
DIF: Moderate TOP: Horizontal equity
59. The argument that people should pay taxes according to how well everyone can shoulder the burden is called:
A. | the ability-to-pay principle |
B. | the equity principle |
C. | the benefits principle |
D. | regressive |
DIF: Easy TOP: The ability-to-pay principle
60. ‘A $1000 tax paid by a poor person may be a larger sacrifice than a $10 000 tax paid by a wealthy person’. This is an argument based on:
A. | the horizontal equity principle |
B. | the benefits principle |
C. | a regressive tax argument |
D. | the ability-to-pay principle |
DIF: Moderate TOP: The ability-to-pay principle
61. The indirect effects from taxation would include:
A. | the effect of the tax on equilibrium prices |
B. | the flypaper effect |
C. | the inability of buyers to change their buying habits in order to escape from paying a tax |
D. | all of the above |
DIF: Moderate TOP: Tax incidence and tax equity
62. A progressive tax system is one which satisfies the principle of:
A. | vertical equity |
B. | administrative efficiency |
C. | elimination of poverty |
D. | reduction in tax evasion |
DIF: Easy TOP: Vertical equity
63. Which of the following is a tax system in which all taxpayers pay the same percentage of their income in taxes?
A. | a regressive tax system |
B. | a proportional tax system |
C. | a progressive tax system |
D. | a tax system based on horizontal equity |
DIF: Easy TOP: Vertical equity
64. Which of the following is a tax system in which higher income taxpayers pay a higher percentage of their income in taxes?
A. | a progressive tax system |
B. | a proportional tax system |
C. | a regressive tax system |
D. | none of the above |
DIF: Easy TOP: Taxes and equity
65. Which of the following is a tax system in which higher income taxpayers have lower tax rates, even though they pay a larger amount of tax than lower income taxpayers?
A. | a proportional tax system |
B. | a progressive tax system |
C. | a regressive tax system |
D. | none of the above |
DIF: Easy TOP: Vertical equity
66. Which of the following examples would demonstrate the importance of indirect effects of taxation?
A. | a sales tax on expensive fur coats |
B. | a sales tax that excludes purchase made over the Internet |
C. | a tax that universities place on textbooks purchased through the university-owned bookstore |
D. | all of the above |
DIF: Moderate TOP: Tax incidence and tax equity
67. A tax on expensive speedboats that are purchased only by the wealthy is not likely to satisfy the condition of vertical equity on the basis that:
A. | wealthy buyers are most likely to be subject to the implications of the flypaper theory of tax incidence |
B. | horizontal equity is most associated with a tax on luxury items |
C. | buyers can easily substitute other luxuries for expensive speedboats |
D. | it is very unlikely that the burden of the tax will fall on workers who make the expensive speedboats |
DIF: Moderate TOP: Vertical equity
68. When the government levies a tax on a company:
A. | all the burden of the tax ultimately falls on owners |
B. | it is meeting all of the requirements for vertical equity |
C. | the company is more like a tax collector than a taxpayer |
D. | there are very few distortions to individual incentives |
DIF: Moderate TOP: Case study: Who pays company income tax?
69. Which of the following statements regarding the company income tax is most correct?
A. | equity considerations are more easily satisfied than efficiency considerations when company income is taxed |
B. | the company income tax does not distort the incentives of customers |
C. | the company income tax is the best example of why the flypaper theory of tax incidence is correct |
D. | many economists believe that workers and customers bear much of the burden of the company income tax |
DIF: Moderate TOP: Case study: Who pays company income tax?
70. Tax incidence is:
A. | the study of who bears the burden of taxes |
B. | the amount of tax that each taxpayer must pay |
C. | the amount by which a tax will alter people’s behaviour |
D. | the effect of a tax |
DIF: Moderate TOP: Tax incidence and tax equity
71. The government attempts to limit double-taxation of company profits by:
A. | taxing only the corporation’s stockholders |
B. | allowing people who receive dividend income to claim credit for tax already paid by the company |
C. | taxing only dividends |
D. | allowing people who receive income from the company to claim credit for tax already paid on dividends |
DIF: Difficult TOP: Receipts
72. Tax policy typically has the goals of efficiency and equity. These goals are frequently:
A. | met only by a lump-sum tax |
B. | consistent with the goals of vertical equity |
C. | unable to be both fulfilled simultaneously |
D. | achieved when company tax rates are very high |
DIF: Moderate TOP: Conclusion: The trade-off between equity and efficiency
73. Incentives to work and save are reduced when:
A. | Pigovian taxes are implemented |
B. | consumption taxes replace income taxes |
C. | income taxes are higher |
D. | all of the above are true |
DIF: Moderate TOP: Taxes and efficiency
74. While debate over tax policy is complex, economists do have an important role to play. This role is best defined as:
A. | arguing for policies that clearly lead to efficiency gains in the economy |
B. | shedding light on the trade-off between efficiency and equity in tax policy |
C. | articulating the importance of equity as the most important goal of tax policy |
D. | demonstrating that there are no trade-offs in tax policy; both efficiency and equity can be attained if the tax policy follows basic economic reasoning |
DIF: Difficult TOP: Conclusion: The trade-off between equity and efficiency
SHORT ANSWER
1. ‘Deadweight losses are only incurred when taxes distort incentives’. Evaluate this statement.
DIF: Moderate TOP: Deadweight losses
2. Use an example to demonstrate the difference between marginal and average tax rates. What useful information is conveyed by each of these measures?
DIF: Moderate TOP: Marginal tax rates versus average tax rates
3. Explain what the differences are behind a progressive, a regressive and a proportional tax income system.
DIF: Moderate TOP: Vertical equity
4. Describe the benefits principle of taxation. What might some of the difficulties of implementing a tax system based on this principle be?
DIF: Moderate TOP: The benefits principle
5. Explain the difference between vertical equity and horizontal equity.
DIF: Moderate TOP: Taxes and equity
6. Why was the introduction of the GST in Australia accompanied by a reduction in income tax for some taxpayers?
DIF: Difficult TOP: Case study: The goods and services tax
7. Suppose the government imposes a tax of 10 per cent on the first $20 000 of income, 20 % on income from $20 000 to $50 000, and 30 per cent on income from $50 000 or more. Amy has an income of $32 000 and Lee has an income of $60 000. What are the tax liabilities, the marginal tax rate and the average tax rate for Amy and Lee?
DIF: Moderate TOP: Marginal tax rates versus average tax rates
8. Many economists have suggested that workers and consumers bear much of the burden of company income tax. In the light of this suggestion, explain why the company income tax is so popular among voters. How does the ‘flypaper theory’ of tax incidence relate to the company income tax?
DIF: Difficult TOP: Tax incidence and tax equity
9. What is the difference between a consumption tax, an income tax and a tax on carbon? What are they each trying to achieve?
DIF: Difficult TOP: Conclusion: The trade-off between equity and efficiency
10. Explain why the New Zealand 15% GST is viewed as regressive.
DIF: Difficult TOP: Vertical equity