Multiple Choice
Identify the
letter of the choice that best completes the statement or answers the question.
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| 1. | Most
people agree that the tax system a. | should be both efficient and
equitable. | b. | cannot raise enough revenue to cover government
expenditures. | c. | could raise more revenue if tax rates were
lowered. | d. | should be rewritten to require everyone to pay the same
percentage of their income to taxes. | | |
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| 2. | The
tax that generates the most revenue for state and local government is the a. | corporate income
tax. | b. | individual
income tax. | c. | property tax. | d. | sales
tax. | | |
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| 3. | A
person's tax liability refers to a. | the percentage of income that a person much pay in
taxes. | b. | the amount of tax a person owes to the
government. | c. | the amount of tax the government is required to refund each
person. | d. | deductions that can be legally subtracted from a person's
income each year. | | |
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| 4. | In
2001, total spending per person by the federal government amounted to a. | $4,750. | b. | $5,425. | c. | $6,540. | d. | $7,285. | | |
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| 5. | States are sometimes given the responsibility of administering federal programs under
federal guidelines. These types of programs usually fall into the category of a. | defense. | b. | Medicare. | c. | income
security. | d. | Social Security. | | |
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| 6. | The
government's health plan for the elderly is called a. | Medicaid. | b. | Medicare. | c. | Social
Security. | d. | TANF. | | |
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| 7. | State
and local government spending on public welfare includes a. | trash
removal. | b. | transfer payments to the poor. | c. | libraries. | d. | road repairs. | | |
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| 8. | Among
the major spending categories for state and local governments, which of the following statements is
correct? a. | The biggest
single expenditure is for education. | b. | The public welfare category does not include the costs of
administering some federal programs. | c. | As a general rule, spending on public schools and public
universities exceeds that spent on all other services combined. | d. | Local services
such as libraries, police, trash removal, fire protection, park maintenance, etc. collectively are a
very small share of expenditures. | | |
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| 9. | When
the government taxes labor earnings we can expect people to a. | work more so
they can keep the same standard of living. | b. | work less and enjoy more leisure. | c. | quit their
present job and find one that pays better. | d. | stop working altogether and go on welfare in
protest. | | |
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| 10. | When
interest income from savings is taxed, a. | more will be saved to make up for what is lost in
taxes. | b. | the same amount as without the tax. | c. | less will be
saved. | d. | None of the above are correct since the government would not
tax interest on savings. | | |
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| 11. | If
the government imposes a tax of $3,000 on everyone, this tax would best be described as
a(n) a. | income
tax. | b. | consumption
tax. | c. | lump-sum
tax. | d. | marginal
tax. | | |
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Table 12-7
Taxpayer | Income | Leslie | $40,000 | Tuggin | $30,000 | | |
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| 12. | Refer
to Table 12-7. If the government imposes a $2,000 lump-sum tax, the average tax rate for Leslie and
Tuggin respectively would be a. | 5 percent and 6.7 percent. | b. | 8 percent and 6
percent. | c. | 12 percent and 9 percent. | d. | 13 percent and
10 percent. | | |
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Use
this information to answer the following questions.
Scenario 12-1
Suppose Jim and
Joan receive great satisfaction from their consumption of cheesecake. Joan would be willing to
purchase only one slice and would pay up to $6 for it. Jim would be willing to pay $9 for his first
slice, $7 for his second slice, and $3 for his third slice. The current market price is $3 per
slice.
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| 13. | Refer
to Scenario 12-1. If a tax of $4 is levied on each slice of cheesecake, how much tax revenue will be
generated from sales to Jim and Joan?
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| 14. | 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. | | |
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| 15. | Which
of the following statements about people who do most of their saving through tax-deferred retirement
accounts is most correct? a. | Their tax bill will reflect a lower return on savings than
would otherwise be the case. | b. | Their tax bill is largely based on consumption rather than
income. | c. | Even though taxes are deferred to some later date, their
after-tax lifetime income is unchanged. | d. | Tax-deferred savings plans are designed to increase tax
equity. | | |
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| 16. | Suppose the government imposes a tax of 10 percent on the first $40,000 of income and
20 percent on all income above $40,000. What is the tax liability and the marginal tax rate for a
person whose income is $50,000? a. | 12 percent and 20 percent,
respectively | b. | 12 percent and $50,000, respectively | c. | $6,000 and 12
percent, respectively | d. | $6,000 and 20 percent, respectively | | |
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| 17. | Vertical equity states that taxpayers with a greater ability to pay taxes
should a. | contribute a
decreasing proportion of each increment in income to taxes. | b. | contribute a
larger amount. | c. | be less subject to administrative burdens of a
tax. | d. | be less subject
to tax distortions that lead to deadweight losses. | | |
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| 18. | A tax
system based on the ability-to-pay principle claims that all citizens should a. | pay taxes based
on the benefits they receive from government services. | b. | pay the same
amount in taxes. | c. | pay taxes on only the income spent. | d. | make an equal
sacrifice. | | |
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| 19. | Which
of the following statements regarding the corporate income tax is most correct? a. | Equity
considerations are more easily satisfied than efficiency considerations when corporate income is
taxed. | b. | The corporate income tax does not distort the incentives of
customers. | c. | The corporate 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 corporate income
tax. | | |
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| 20. | Sue
earns income of $80,000 per year. Her average tax rate is 30 percent. Sue paid 20 percent in taxes on
the first $30,000 she earned. What was the marginal tax rate on the rest of her
income? a. | 20
percent | b. | 24 percent | c. | 30
percent | d. | 36 percent | | |
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True/False
Indicate whether the sentence or statement is true
or false.
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| 21. | Poor
countries such as India and Pakistan usually have low tax burdens.
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| 22. | The
most important taxes for state and local governments are income taxes and property
taxes.
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Short Answer
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| | 23. | List
the three most important sources of tax revenue to the federal government. How do these differ from
the three most important sources of tax revenue to state and local governments? Why do you think that
these different government entities use different tax bases? Does it make sense?
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| | 24. | A
recent increase in federal gasoline taxes was estimated to cause a $150 million reduction in the
total (consumer plus producer) surplus in the gasoline market. If tax revenues increased by $100
million, what is the deadweight loss associated with the tax? As a result of the tax, 10,000 people
sold their cars and started riding their bicycles to work. How much of the burden of the deadweight
loss is incurred by the bicycle riders?
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| | 25. | Use
Table A to complete Table B.
TABLE A | | On Taxable
Income | The Tax Rate Is | Up to
$27,050 | 15.0% | From $27,050 to
$65,550 | 27.5% | From $65,550 to
$136,750 | 30.5% | From $136,750 to
$297,350 | 35.5% | Over
$297,350 | 39.1% | | |
TABLE B | | Taxpayer | Income | Tax
Amount | Average Tax Rate | John | $52,700 | | | Todd | $132,500 | | | Glen | $237,000 | | | Jake | $315,250 | | | | | | |
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