Chapter.8 Taxes Exam Questions - Microeconomics Australia 2e Complete Test Bank by Michael Parkin, Robin Bade. DOCX document preview.
Parkin&Bade, Microeconomics, 2nd edition
Chapter 8: Taxes
Multiple choice: Choose the one alternative that best completes the statement or answers the question.
A) division of the burden of a tax between the buyer and the seller.
B) burden buyers have to absorb from a tax on goods and services.
C) lost revenue the government endures from goods and services that are not taxed.
D) deadweight loss created by a tax.
E) burden sellers have to absorb from a tax on goods and services.
Standard/Graduate Attribute AACSB: Reflective thinking
2) If a $10 sales tax is imposed on a good and the equilibrium price increases by $10, the tax is
A) split between buyers and sellers, but not evenly.
B) split evenly between buyers and sellers.
E) perhaps split between buyers and sellers but it is impossible to determine the incidence without further information.
Standard/Graduate Attribute AACSB: Reflective thinking
3) Imposing a sales tax on sellers of a product has an effect that is similar to which of the following?
A) An increase in demand for the good.
B) A decrease in consumers' preferences for the good.
C) Anything that decreases the demand and shifts the demand curve leftward.
D) An increase in the costs of production.
E) A decrease in people's willingness to work.
Standard/Graduate Attribute AACSB: Reflective thinking
4) Suppose the government imposes a $1 per litre tax on sellers of petrol. As a result, the
A) supply curve shifts rightward.
B) demand and supply curves both shift leftward.
C) demand curve shifts rightward.
D) demand curve shifts leftward.
E) supply curve shifts leftward.
Standard/Graduate Attribute AACSB: Reflective thinking
5) Neither the demand nor the supply of petrol is perfectly elastic or inelastic. When the government increases the federal tax on petrol, the effect on buyers is that the price they pay
A) rises if the supply is inelastic and falls if the supply is elastic.
D) rises if the demand is inelastic and falls if the demand is elastic.
Standard/Graduate Attribute AACSB: Reflective thinking
6) The demand curve for pizza is downward sloping and the supply curve is upward sloping. If the government imposes a $2 tax on a pizza, ________ the tax.
C) both producers and consumers pay part of
E) neither producers nor consumers pay part of
Standard/Graduate Attribute AACSB: Reflective thinking
7) Neither the demand for petrol nor the supply of petrol is perfectly elastic or inelastic. If the federal government eliminated the 18.4 cents per litre petrol tax, the price paid by buyers would
B) decrease by less than 18.4 cents.
E) decrease by more than 18.4 cents.
Standard/Graduate Attribute AACSB: Reflective thinking
8) To calculate the revenue the government receives when a tax is imposed on a good, multiply the
A) after-tax equilibrium price by the after-tax quantity.
B) after-tax equilibrium price by the after-tax quantity and then subtract the pre-tax equilibrium price multiplied by the pre-tax quantity.
C) tax by the pre-tax quantity.
D) pre-tax equilibrium price by the pre-tax quantity.
E) tax by the after-tax quantity.
Standard/Graduate Attribute AACSB: Reflective thinking
9) In the figure above, suppose that the government imposes a tax of $4 per pizza. Then, the
A) shaded area is the deadweight loss from the tax.
B) buyers and sellers equally share the incidence of the tax.
C) shaded area is the tax revenue from the tax.
D) Both answers A and B are correct.
E) Both answers A and C are correct.
Standard/Graduate Attribute AACSB: Reflective thinking
10) In the figure above, suppose that the government imposes a tax of $4 per pizza. Then, the tax revenue collected by the government equals
Standard/Graduate Attribute AACSB: Reflective thinking
11) The above figure shows the market for gourmet ice cream. In an effort to reduce obesity, the government places a $2 tax per litre on suppliers in this market, shifting the supply curve from S0 to S1. The quantity of ice cream consumed before the tax is ________ litres and the quantity consumed after the tax is ________ litres.
Standard/Graduate Attribute AACSB: Reflective thinking
12) The above figure shows the market for gourmet ice cream. In an effort to reduce obesity, the government places a $2 tax per litre on suppliers in this market, shifting the supply curve from S0 to S1. The total tax revenue is equal to
E) More information is needed to determine the total tax revenue.
Standard/Graduate Attribute AACSB: Reflective thinking
13) The above figure shows the market for gourmet ice cream. In an effort to reduce obesity, the government places a $2 tax per litre on suppliers in this market, shifting the supply curve from S0 to S1. The tax incidence is
A) split equally between consumers and producers, each paying $2 per litre.
B) such that producers pay all of the tax.
C) such that consumers pay $1 per litre and producers pay $2 per litre.
D) split equally between consumers and producers, each paying $1 per litre.
E) such that consumers pay $2 per litre and producers pay $1 per litre.
Standard/Graduate Attribute AACSB: Reflective thinking
14) The figure above shows the market for tyres. The figure shows that the government has imposed a tax of ________ per tyre.
E) None of the above answers is correct.
Standard/Graduate Attribute AACSB: Reflective thinking
15) The figure above shows the market for tyres. The government has imposed a tax on tyres, and the buyers pay ________ of the tax.
Standard/Graduate Attribute AACSB: Reflective thinking
16) The figure above shows the market for tyres. The government has imposed a tax on tyres, and the sellers pay ________ of the tax.
Standard/Graduate Attribute AACSB: Reflective thinking
17) The figure above shows the market for tyres. According to the figure, the government collects ________ per month in total tax revenue.
E) None of the above answers is correct.
Standard/Graduate Attribute AACSB: Reflective thinking
18) The figure above shows the market for tyres. According to the figure, the price elasticity of demand is ________ the price elasticity of supply.
E) More information is needed to determine if the price elasticity of demand is greater than, equal to, less than, or comparable to the price elasticity of supply.
Standard/Graduate Attribute AACSB: Reflective thinking
19) If a tax is placed on suppliers of a good, then the incidence of the tax
A) falls more on the sellers if demand is elastic.
B) usually falls more on the buyers than the sellers.
C) is usually split equally between the buyers and the sellers.
D) usually falls more on the sellers than the buyers.
E) falls more on the sellers if demand is inelastic.
Standard/Graduate Attribute AACSB: Reflective thinking
20) The demand for insulin is quite inelastic. The demand for Pepsi is quite elastic. Suppose the elasticity of supply for insulin is the same as the elasticity of supply for Pepsi. If a $0.20 tax was imposed on each of these goods (holding everything else constant), which consumers would pay more of the tax?
A) There would be no difference in the amount of tax paid by the consumers.
C) More information is needed to determine which consumers pay more of the tax.
E) The premise of the question is wrong because the elasticity of demand and the incidence of a tax are not related.
Standard/Graduate Attribute AACSB: Reflective thinking
21) The buyers pay all of a tax when the demand is
C) more inelastic than the supply.
E) more elastic than the supply.
Standard/Graduate Attribute AACSB: Reflective thinking
22) Suppose the elasticity of demand for a product is 0 and elasticity of supply is 1. If the government imposes a tax on the product, then
A) buyers and sellers pay exactly the same share of the tax.
B) buyers pay a smaller share of the tax than sellers, but both buyers and sellers pay some of the tax.
C) sellers pay all of the tax.
E) because the elasticity of demand is zero, the government collects no revenue from this tax.
Standard/Graduate Attribute AACSB: Reflective thinking
23) If buyers pay more of a tax than the sellers,
A) supply is more elastic than demand.
B) the equilibrium price paid by buyers rises by less than half the amount of the tax.
C) demand is more elastic than supply.
D) the amount of tax revenue collected by the government is almost zero.
E) None of the above answers is correct.
Standard/Graduate Attribute AACSB: Reflective thinking
24) A $2.00 increase in the size of a tax on a good will only cause the price for buyers to increase by $2.00 if
A) demand is perfectly inelastic.
B) demand is perfectly elastic.
C) demand is elastic, but not perfectly elastic.
D) demand is inelastic, but not perfectly inelastic.
Standard/Graduate Attribute AACSB: Reflective thinking
25) For a given elasticity of demand, the less elastic the supply, the
A) larger the deadweight loss from a tax.
B) greater the burden on the government from a tax.
C) larger the share of a tax paid by the buyers.
D) greater is the excess burden from a tax.
E) larger the share of a tax paid by the sellers.
Standard/Graduate Attribute AACSB: Reflective thinking
26) Why do sellers pay all of a tax when supply is perfectly inelastic?
A) Because the government requires firms to collect the tax.
B) Because a perfectly inelastic supply means that the quantity supplied is quite sensitive to a change in price.
C) Because a perfectly inelastic supply means that suppliers will produce the same amount regardless of the price.
D) Because in this case the price of the good that suppliers receive and keep does not change.
E) Because a perfectly inelastic supply means that the demand is elastic.
Standard/Graduate Attribute AACSB: Reflective thinking
27) The supply of sand is perfectly inelastic and the demand curve for sand is downward sloping. Hence, if a tax on sand is imposed,
A) sand buyers pay the entire tax.
B) the tax is split evenly between the buyers and sellers.
C) sand sellers pay the entire tax.
D) the government pays the entire tax.
E) the government collects no tax revenue because the supply is perfectly inelastic.
Standard/Graduate Attribute AACSB: Reflective thinking
28) If the government eliminates a tax on a good with a perfectly elastic supply, who benefits most?
B) Buyers if the demand is also perfectly elastic, otherwise sellers
D) Buyers if the demand is unit elastic, otherwise sellers
E) Buyers and sellers benefit equally.
Standard/Graduate Attribute AACSB: Reflective thinking
29) The loss to society resulting from a tax includes the
A) consumer surplus paid to the government in the form of tax revenue.
C) deadweight loss minus the tax revenue collected by the government.
D) deadweight loss plus the consumer surplus and producer surplus paid to the government as tax revenue.
E) producer surplus paid to the government in the form of tax revenue.
Standard/Graduate Attribute AACSB: Reflective thinking
30) When a tax is imposed on a good, at the after-tax equilibrium the marginal benefit of the last unit produced ________ the marginal cost.
B) can be calculated but is not comparable to
E) The premise of the question is incorrect because after a tax is imposed, it becomes impossible to determine the marginal benefit and the marginal cost.
Standard/Graduate Attribute AACSB: Reflective thinking
31) If neither the demand nor supply of a good is perfectly elastic or inelastic, a tax on the good ________ consumer surplus and ________ producer surplus.
Standard/Graduate Attribute AACSB: Reflective thinking
32) The size of the deadweight loss, or excess burden, of a tax depends on the
A) number of demanders and the number of suppliers.
B) elasticities of demand and supply.
C) amount of producer surplus but not the amount of consumer surplus because it is the producers who send the tax revenues to the government.
Standard/Graduate Attribute AACSB: Reflective thinking
33) The excess burden of a tax refers to the fact that
A) taxes are split between buyers and sellers.
B) the benefits from a tax exceed the tax revenue.
C) marginal cost is greater than marginal benefit after the tax.
D) a tax creates a deadweight loss.
E) the deadweight loss from a tax exceeds the remaining consumer surplus.
Standard/Graduate Attribute AACSB: Reflective thinking
34) The deadweight loss of a tax
A) is greater than the total burden of a tax.
B) is the transfer of income from households to the government.
C) is part of the total burden of a tax.
D) determines the incidence of a tax.
E) equals the tax revenue collected by the government.
Standard/Graduate Attribute AACSB: Reflective thinking
35) Suppose the elasticity of demand for takeaway food is 3.00 and the elasticity of supply is 1.20. If the government imposes a sales tax on takeaway food to promote healthy eating, which of the following occurs?
i. Less takeaway food is purchased by buyers.
ii. Less takeaway food is produced by sellers.
iii. The government receives the excess burden as revenue.
iv. Both the consumer surplus and the producer surplus decrease.
Standard/Graduate Attribute AACSB: Reflective thinking
36) The above figure shows the demand curves in four different markets. If each of the markets has an identical upward-sloping supply curve and the same tax is levied on suppliers, which market would produce the smallest amount of deadweight loss?
Standard/Graduate Attribute AACSB: Reflective thinking
37) The above figure shows the demand curves in four different markets. If each of the markets has an identical upward-sloping supply curve and the same tax is levied on suppliers, which market would produce the largest amount of deadweight loss?
Standard/Graduate Attribute AACSB: Reflective thinking
38) If a $1 sales tax is imposed on the sale of a CD, and neither the demand nor the supply is perfectly elastic or perfectly inelastic, then the price of a CD paid by consumers will
A) increase by $1 and the same number of CDs will be bought.
B) increase by more than $1 and fewer CDs will be bought.
C) increase by $1 and fewer CDs will be bought.
D) not change and the same number of CDs will be bought.
E) increase by less than $1 and fewer CDs will be bought.
Standard/Graduate Attribute AACSB: Reflective thinking
39) The graph shows the market for textbooks. If the government introduces a tax of $20 a textbook, then the price paid by buyers
A) increases to $80 a textbook.
C) decreases to $60 a textbook.
E) does not change because the demand for textbooks is perfectly elastic.
Standard/Graduate Attribute AACSB: Reflective thinking
40) The demand for apple pies is perfectly elastic. If the government taxes pies at $1 a pie, then
A) the seller and the buyer split the tax but the seller pays more.
B) the seller and the buyer split the tax evenly.
C) the seller pays the entire tax.
D) the buyer pays the entire tax.
E) who pays the tax depends on whether the government imposes the tax on pie buyers or on pie sellers.
Standard/Graduate Attribute AACSB: Reflective thinking
41) At harvest time the supply of wheat is perfectly inelastic. If the government taxes wheat at $1 a tonne, then
A) the buyer pays the entire tax.
B) the seller and the buyer split the tax evenly.
C) the seller pays the entire tax.
D) the seller and the buyer split the tax but the seller pays more.
E) no one pays the tax because the wheat must be harvested or it will go to waste.
Standard/Graduate Attribute AACSB: Reflective thinking
42) The buyer will pay the entire tax levied on a good when the demand for the good is ________ or when the supply of the good is ________.
A) perfectly elastic; perfectly inelastic
C) perfectly elastic; perfectly elastic
D) perfectly inelastic; perfectly elastic
E) perfectly inelastic; perfectly inelastic
Standard/Graduate Attribute AACSB: Reflective thinking
43) If a tax is placed on tyres, then
i. the equilibrium quantity of tyres will decrease.
ii. a deadweight loss will be created.
iii. the producer surplus will decrease.
Standard/Graduate Attribute AACSB: Reflective thinking
44) The graph shows the market for cell phones. The government imposes a sales tax on cell phones at $10 a cell phone. The excess burden of the sales tax on cell phones is
Standard/Graduate Attribute AACSB: Reflective thinking
45) If we look at the percentage of total tax revenue collected by different taxes in Australia, we see that
A) personal income taxes are the largest.
B) sales taxes are the smallest.
C) excise taxes are second only to payroll taxes.
D) corporate income taxes are by far the largest.
E) payroll taxes are the largest.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
46) The percentage of an additional dollar that is paid in tax is called
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
47) The marginal tax rate equals 100 ×
A) (average tax rate × total income).
B) (change in tax ÷ change in income).
C) (change in tax ÷ total income).
D) (total tax ÷ change in income).
E) (total tax ÷ total income).
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
48) The marginal tax rate is the
A) percentage of an additional dollar of income paid in tax.
B) total amount of tax paid as a percentage of total income earned.
C) same as the average tax rate for a progressive tax.
D) average amount paid as taxes.
E) percentage of total income that is paid in tax.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
49) The average tax rate is the
A) percentage of income paid in tax.
B) percentage of an additional dollar of income paid in tax.
C) total amount of taxes paid by an individual.
D) same as the marginal tax rate for a progressive tax.
E) average of the rates at which income and taxes increase.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
50) Ann pays $3,850 in taxes on an income of $38,500. Therefore her
A) proportional tax rate is undefined.
B) marginal tax rate must be 10 per cent.
C) average tax rate must be 10 per cent.
D) personal exemption is 10 per cent.
E) taxes must be progressive in nature.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
51) If the average tax rate increases as income increases, the tax is
E) a decreasing marginal-rate tax.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
52) If the average tax rate increases as income increases, then the
B) income is tax exempt so that no tax needs to be paid on it.
E) marginal tax rate must be falling as income increases.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
53) A tax that has the same average rate at all levels is
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
54) If the average tax rate ________ as income increases, then the tax is a ________ tax.
B) does not change; regressive
C) does not change; proportional
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
55) If the average tax rate falls as income increases, the tax is
E) impossible to determine with the information given.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
56) Suppose everybody paid the same total amount of tax regardless of their income. This type of tax system would be
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
57) The Goods and Services Tax in Australia is 10.0 per cent. This tax is
A) an example of the benefit principle of taxation.
C) fair because everyone pays the same tax.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
58) If there is an income tax levied on labour income, the labour demand curve ________ and the labour supply curve ________.
A) shifts leftward; shifts leftward
B) does not shift; shifts rightward
C) does not shift; shifts leftward
D) shifts leftward; does not shift
E) shifts rightward; does not shift
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
59) What happens to the acceptable wage rate at each level of employment once an income tax is levied on labour income?
A) It increases by the amount of the tax that must be paid.
B) Because workers have to work more to make up for the tax, the acceptable wage rate falls by some amount that cannot be determined.
C) Workers and employers split the tax, so the acceptable wage increases by half the tax.
D) Because workers have to work more to make up for the tax, the acceptable wage rate falls by the precise amount of the tax that must be paid.
E) Nothing, it remains the same.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
60) A tax on labour income ________ a deadweight loss for low-wage workers and ________ a deadweight loss for high-wage workers.
E) does not create; does not create
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
61) The figure above shows the labour supply and labour demand curves for personal trainers in Victoria. The initial equilibrium hourly wage is $10. The government of Victoria institutes an additional income tax on the income of personal trainers of $6 an hour in order to fund school sports programs. With the tax in place, the labour supply curve will
D) change so that it becomes the same as LD.
E) None of the above answers is correct.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
62) The figure above shows the labour supply and labour demand curves for personal trainers in Victoria. The initial equilibrium hourly wage is $10. The government of Victoria institutes an additional income tax on the income of personal trainers of $6 an hour in order to fund school sports programs. How much of the tax is paid by employers?
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
63) The figure above shows the labour supply and labour demand curves for personal trainers in Victoria. The initial equilibrium hourly wage is $10. The government of Victoria institutes an additional income tax on the income of personal trainers of $6 an hour in order to fund school sports programs. How much of the tax is paid by employees?
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
64) The figure above shows the labour supply and labour demand curves for personal trainers in Victoria. The initial equilibrium hourly wage is $10. The government of Victoria institutes an additional income tax on the income of personal trainers of $6 an hour in order to fund school sports programs. The deadweight loss from this tax equals the region
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
65) The above figure shows the labour market for surveyors. The total amount collected as taxes equals
E) area B + area C + area E + area F.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
66) If the supply of capital is perfectly ________ end up paying the tax on capital income.
B) unit elastic, firms that demand capital
C) inelastic, firms that demand capital
D) elastic, firms that demand capital
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
67) As a result of the tax on capital income, labour productivity
E) might change but whether it increases, decreases or does not change depends on the magnitude of the tax.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
68) The above figure shows the market for capital. Without a tax on capital income, the interest rate is ________ and firms use ________ million of capital.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
69) The above figure shows the market for capital. With the tax on capital income, the interest rate is ________ and firms use ________ million of capital.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
70) The above figure shows the market for capital. With the tax on capital income, the deadweight loss is equal to
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
71) The above figure shows the market for capital. With the tax on capital income, the total tax paid is equal to
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
72) A tax on the income from land or other resource with a perfectly inelastic supply
A) is paid entirely by the owner.
B) is efficient because it does not decrease the equilibrium quantity.
D) Only answers A and B are correct.
E) Answers A, B and C are correct.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
73) Because the supply of land is perfectly inelastic, when governments tax land, the tax
A) creates no deadweight loss because the equilibrium quantity is the same as without the tax.
B) decreases both the demand for and the supply of land.
C) increases the supply of land because the landlord pays all of the tax.
D) decreases the supply of land because the landlord pays all of the tax.
E) creates a deadweight loss because the supply is fixed.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
74) If the payroll tax imposed on employers increases, then
A) firms' demand for labour does not change.
B) workers' supply of labour increases.
C) the equilibrium quantity of employment increases.
D) firms' demand for labour decreases.
E) firms' demand for labour increases.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
75) Suppose the supply of labour is more inelastic than the demand for labour. Then, a payroll tax imposed on employers
A) leads to the workers paying more of the tax than the employers.
B) lowers the wage rate received by workers.
C) shifts the demand curve for labour leftward.
D) Only answers B and C are correct.
E) Answers A, B and C are correct.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
76) Consider a payroll tax paid by workers versus a payroll tax paid by employers. In comparing the outcomes of each type of tax, we see that
A) workers receive a higher take-home wage when the tax is imposed on employers than when the tax is imposed on workers.
B) employers pay a lower total wage when the tax is imposed on workers.
C) employment decreases by more when the tax is imposed on employers than when the tax is imposed on workers.
D) workers receive the same take-home wage when the tax is imposed on workers and when the tax is imposed on employers.
E) employment decreases by more when the tax is imposed on workers than when the tax is imposed on employers.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
77) If the Queensland government reduced its payroll tax by 2 percentage points, this will likely cause
A) a decrease in the quantity of workers employed and an increase in deadweight loss.
B) a decrease in the quantity of workers employed and a decrease in deadweight loss.
C) an increase in the quantity of workers employed and a decrease in deadweight loss.
D) an increase in the quantity of workers employed and an increase in deadweight loss.
E) no change in the quantity of workers employed since the demand for labour is more elastic than the supply of labour.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
78) The percentage of an additional dollar of income that is paid in tax is the
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
A) decreases the quantity employed because the demand for labour increases.
B) increases the quantity employed because the supply of labour increases.
C) increases the quantity employed because the demand for labour increases.
D) decreases the quantity employed because the supply of labour decreases.
E) does not change the quantity employed because people must have jobs in order to earn any income.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
80) In the labour market shown in the above graph, the government introduces a 10 per cent income tax. The employer pays ________ cents of the tax and the employee pays ________ cents of the tax.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
81) If the supply of capital is perfectly elastic, the incidence of a tax on capital income is
A) shared, but not equally, between firms that demand capital and the suppliers of capital.
B) paid entirely by firms that demand capital.
C) paid entirely by the suppliers of capital.
D) shared equally between firms that demand capital and the suppliers of capital.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.2 Income Tax and Payroll Taxes
82) Consider the two principles of fair taxation, the benefits principle and the ability-to-pay principle.
A) Both are based on horizontal equity.
B) Both are based on vertical equity.
C) Both present conflicting ideas on the fairness of taxes.
D) Both state that people should pay taxes according to how easily they can bear the burden.
E) Both state that people should pay taxes according to the benefits they receive from public services.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.3 Fairness and the Big Tradeoff
83) The proposition that people should pay taxes equal to the benefits they receive from public services is known as the
B) 'he or she who gets, pays' principle.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.3 Fairness and the Big Tradeoff
84) The benefits principle of tax fairness argues that
A) people should pay taxes equal to the benefits from public services received.
B) highly paid people should pay lower taxes because they work harder.
C) the benefits people get from the government should not be related to their taxes.
D) everyone receives equal benefits from public services so taxes should be the same for all.
E) taxes should be related to the amount of income earned.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.3 Fairness and the Big Tradeoff
85) Which of the following is an example of a tax following the benefits principle?
i. Sales taxes on petrol used to fund road maintenance projects.
ii. Federal income tax used to provide income support for poorer households.
iii. Property taxes used to finance public education.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.3 Fairness and the Big Tradeoff
86) Which of the following taxes best illustrate the benefits principle of tax fairness?
A) Your local library is funded through property taxes levied on all homeowners.
B) Roads and highways are built and maintained through a tax on petrol.
C) Parks are maintained through local property taxes.
D) A sales tax on food pays for your police force and fire brigade.
E) The Aged Pension supports the income of old people and is funded through the federal income tax.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.3 Fairness and the Big Tradeoff
87) If a 10 per cent tax on indoor tanning services was levied by your state government, then this tax would reflect ________ if indoor tanning leads to higher usage of government paid health care services from skin cancer.
A) the benefits principle of taxation
D) the ability-to-pay principle of taxation
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.3 Fairness and the Big Tradeoff
88) The ability-to-pay principle of tax fairness is equivalent to which of the following?
A) A proportional income tax structure.
B) A regressive income tax structure.
C) Collecting more taxes from people who can more easily bear the burden.
D) Collecting taxes from those who benefit the most from the provision of public services.
E) Concern about only horizontal equity and no concern about vertical equity.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.3 Fairness and the Big Tradeoff
89) Which of the following taxes best illustrates the ability-to-pay principle of tax fairness?
A) Roads and highways are built and maintained through a tax on petrol.
B) Your local library is funded through a flat $10 tax levied on all homeowners.
C) National parks and reserves are maintained through a state lottery.
D) The Aged Pension supports the income of old people and is funded through the progressive federal income tax.
E) A sales tax on food pays for your police force and fire brigade.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.3 Fairness and the Big Tradeoff
90) In 1984 Medicare was introduced in Australia. This provided for universal funding for health care, paid for by a 2 per cent levy on incomes. In effect, income taxes were raised by 2 per cent to fund health care in Australia. The Medicare levy represents
A) the benefits principle, because high-income earners use more public health care services.
B) a regressive tax system, since high-income earners will pay a greater dollar amount in taxes.
C) the benefits principle, because high-income earners can more easily bear the burden of taxes.
D) the ability-to-pay principle, because high-income earners use more public health care services.
E) the ability-to-pay principle, because high-income earners can more easily bear the burden of taxes.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.3 Fairness and the Big Tradeoff
91) The assertion that people with the same ability to pay taxes should pay the same amount in taxes best represents the idea of
B) the benefits principle of tax fairness.
D) the benefits-paid principle of taxation.
E) the fairness principle of taxation.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.3 Fairness and the Big Tradeoff
92) Suppose that Anthony and Melissa both earn $30,000 and are otherwise the same. If they both pay 10 per cent of their income as taxes, then
A) the income tax is regressive.
B) proportional equity has been achieved.
C) vertical equity has been achieved.
D) the benefits principle of fairness has been achieved.
E) horizontal equity has been achieved.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.3 Fairness and the Big Tradeoff
93) Progressive taxes can be justified as fair based on which of the following?
A) The index-of-fairness principle
E) None of the above answers is correct.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.3 Fairness and the Big Tradeoff
94) In the United States single-income married couples can reduce the amount of income tax they pay by income splitting. This means they pay less income tax than a married couple who earn the same income as a result of both people being employed. Income splitting is an example of
A) a horizontal equity problem because married people with two incomes pay more than similar single-income married people.
B) a vertical equity problem because married people with two incomes pay less than similar single-income married people.
C) a horizontal equity problem because married people with two incomes pay less than similar single-income married people.
D) a vertical equity problem because married people with two incomes pay more than similar single-income married people.
E) a benefits principle problem because people who benefit more pay less.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.3 Fairness and the Big Tradeoff
95) Trying to achieve vertical equity by using a progressive income tax structure can create problems with which of the following?
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.3 Fairness and the Big Tradeoff
96) Which of the following taxes best illustrates the benefits principle of taxation?
A) State income tax used to fund state universities.
B) The Medicare levy imposed on all workers to fund health care.
C) Petrol taxes used to fund road repairs.
D) Sales tax on clothing used to fund food stamps.
E) Federal income tax used to fund defence spending.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.3 Fairness and the Big Tradeoff
97) The government once imposed a luxury tax on expensive new cars. This tax followed the ________ principle.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.3 Fairness and the Big Tradeoff
98) Joan's income is $60,000 and she pays $6,000 in taxes. Juan's income is $40,000 and he pays $7,000 in taxes. This situation violates
E) the fair-tax incidence principle.
Standard/Graduate Attribute AACSB: Reflective thinking
A-Head: 8.3 Fairness and the Big Tradeoff
99) Because Australian income tax is a progressive tax, taxing married couples as two single persons can violate
B) the government's need for more revenue.
E) the ability-to-pay imperative.
Standard/Graduate Attribute AACSB: Reflective thinking
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