61
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67) Suppose the supply of labor is more inelastic than the demand for labor. Then, a social
security tax imposed on employers
A) shifts the demand curve for labor leftward.
B) lowers the wage rate received by workers.
C) leads to the workers paying more of the tax than the employers.
D) Only answers B and C are correct.
E) Answers A, B, and C are correct.
Skill: Level 4: Applying models
Section: Checkpoint 8.2
Author: SA
AACSB: Analytical reasoning
68) Consider a social security tax on workers versus a social security tax on 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) workers receive the same take-home wage when the tax is imposed on workers as when the
tax is imposed on employers.
C) employers pay a lower total wage when the tax is imposed on workers.
D) employment decreases by more when the tax is imposed on employers than when the tax is
imposed on workers.
E) employment decreases by more when the tax is imposed on workers than when the tax is
imposed on employers.
Skill: Level 3: Using models
Section: Checkpoint 8.2
Author: CD
AACSB: Reflective thinking
62
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69) If Congress wanted to change the social security tax so that firms paid most of the tax, they
would need to
A) change the tax laws so that all of the social security tax was imposed on firms.
B) change the tax laws so that all of the social security tax was imposed on workers.
C) change the tax laws so that more than 50 percent of the social security tax was imposed on
firms.
D) change the tax laws so that more than 50 percent of the social security tax was imposed on
workers.
E) None of the above because the incidence of the social security tax does not depend on the tax
laws but instead depends on the elasticities of the demand for labor and the supply of labor.
Skill: Level 4: Applying models
Section: Checkpoint 8.2
Author: SB
AACSB: Analytical reasoning
70) In 2009, Social Security taxes of over 11 percent were imposed on all income up to $98,000.
For income that exceeded $104,000, no Social Security tax was imposed. Hence the Social
Security tax is a
A) progressive tax.
B) proportional tax.
C) regressive tax.
D) fair-incidence tax.
E) type of tax that is impossible to determine without more information.
Skill: Level 4: Applying models
Section: Checkpoint 8.2
Author: TS
AACSB: Analytical reasoning
71) The percentage of an additional dollar of income that is paid in tax is the
A) sales tax.
B) capital tax.
C) marginal tax rate.
D) personal income tax.
E) regressive tax.
Skill: Level 1: Definition
Section: Checkpoint 8.2
Author: STUDY GUIDE
AACSB: Reflective thinking
63
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72) If the average tax rate is constant as income increases, then the tax is called
A) regressive.
B) progressive.
C) proportional.
D) an average tax.
E) efficient.
Skill: Level 1: Definition
Section: Checkpoint 8.2
Author: STUDY GUIDE
AACSB: Reflective thinking
73) A tax on labor income
A) increases the quantity employed because the demand for labor increases.
B) decreases the quantity employed because the supply of labor decreases.
C) increases the quantity employed because the supply of labor increases.
D) decreases the quantity employed because the demand for labor increases.
E) does not change the quantity employed because people must have jobs in order to earn any
income.
Skill: Level 2: Using definitions
Section: Checkpoint 8.2
Author: STUDY GUIDE
AACSB: Reflective thinking
74) The incidence of an income tax on labor income is generally that the tax is
A) paid by only workers.
B) paid by only employers.
C) shared equally between workers and employers.
D) shared but not necessarily equally between workers and employers.
E) funded by the deadweight loss.
Skill: Level 3: Using models
Section: Checkpoint 8.2
Author: STUDY GUIDE
AACSB: Reflective thinking
64
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75) In the labor market shown in the graph, the government introduces a 10 percent income tax.
The employer pays ________ cents of the tax and the employee pays ________ cents of the tax.
A) 45; 50
B) 95; 0
C) 0; 95
D) 50; 45
E) 42.5; 42.5
Skill: Level 3: Using models
Section: Checkpoint 8.2
Author: MyEconLab Web Site
AACSB: Analytical reasoning
76) When governments tax capital income, the equilibrium quantity of capital
A) increases because of the international mobility of capital.
B) does not change because the supply of capital is perfectly elastic.
C) decreases.
D) does not change because the supply of capital is perfectly inelastic.
E) might increase or decrease depending on whether the demand for capital is inelastic or elastic.
Skill: Level 3: Using models
Section: Checkpoint 8.2
Author: STUDY GUIDE
AACSB: Reflective thinking
65
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77) If the supply of capital is perfectly elastic, the incidence of a tax on capital income is
A) paid entirely by the suppliers of capital.
B) paid entirely by firms that demand capital.
C) shared equally between firms that demand capital and the suppliers of capital.
D) shared but not equally between firms that demand capital and the suppliers of capital.
E) unknown.
Skill: Level 3: Using models
Section: Checkpoint 8.2
Author: STUDY GUIDE
AACSB: Reflective thinking
78) A tax on income from land in Montana is borne entirely by landowners because the
A) demand for land is perfectly inelastic.
B) supply of land is perfectly inelastic.
C) supply of land is perfectly elastic.
D) demand for land is perfectly elastic.
E) deadweight loss from the tax would otherwise be infinite.
Skill: Level 1: Definition
Section: Checkpoint 8.2
Author: STUDY GUIDE
AACSB: Reflective thinking
79) When a social security tax is imposed on workers, employment ________ and when a social
security tax is is imposed on employers, employment ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) decreases; does not change
Skill: Level 3: Using models
Section: Checkpoint 8.2
Author: STUDY GUIDE
AACSB: Analytical reasoning
66
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8.3 Fairness and the Big Tradeoff
1) Consider the two principles regarding fair taxation. The benefits principle and the ability-to-
pay principle
A) both state that people should pay taxes according to the benefits they receive from public
services.
B) both state that people should pay taxes according to how easy they can bear the burden.
C) are both based on horizontal equity.
D) present conflicting ideas on the fairness of taxes.
E) are both based on vertical equity.
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Author: CD
AACSB: Ethical reasoning
2) The benefits principle of fair taxation means that people
A) pay taxes according to the level of benefits they receive.
B) pay taxes according to their ability to pay.
C) with the same ability pay the same taxes.
D) with a greater ability to pay, pay more taxes.
E) Answers B, C, and D are correct.
Skill: Level 1: Definition
Section: Checkpoint 8.3
Author: WM
AACSB: Ethical reasoning
3) The proposition that people should pay taxes equal to the benefits they receive from public
services is known as the
A) ability-to-pay principle.
B) progressive tax principle.
C) fairness principle.
D) benefits principle.
E) “he or she who gets, pays” principle.
Skill: Level 1: Definition
Section: Checkpoint 8.3
Author: JC
AACSB: Reflective thinking
67
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4) The benefits principle of fair taxation
A) can be used to justify the progressive income tax.
B) can be used to justify high fuel taxes to pay for public schools.
C) is the proposition that people should pay taxes equal to the benefits they receive.
D) Both answers A and B are correct.
E) Both answers B and C are correct.
Skill: Level 1: Definition
Section: Checkpoint 8.3
Author: SA
AACSB: Ethical reasoning
5) The benefits principle of tax fairness argues that
A) everyone receives equal benefits from public services so taxes should be the same for all.
B) highly paid people should pay lower taxes because they work harder.
C) taxes should be related to the amount of income earned.
D) people should pay taxes equal to the benefits from public services received.
E) the benefits people get from the government should not be related to their taxes.
Skill: Level 1: Definition
Section: Checkpoint 8.3
Author: TS
AACSB: Reflective thinking
6) The benefits principle of fairness of taxes is the proposition that
A) taxes should only be used to correct market failures.
B) people should pay taxes according to how easily they can bear the burden.
C) tax systems can only be fair if all people agree on them.
D) people should pay taxes equal to their benefit from public services.
E) the incidence of taxes should be equal across households.
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Author: SB
AACSB: Reflective thinking
68
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7) Which of the following is an example of a tax following the benefits principle?
i. sales taxes on gasoline are used to fund road maintenance projects
ii. federal income tax used to fund food stamps for poorer households
iii. property taxes used to finance public education
A) i only
B) ii only
C) iii only
D) ii and iii
E) i, ii, and iii
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Author: TS
AACSB: Reflective thinking
8) The argument that those who use the highways the most should pay most of the cost of
providing them, is an example of
A) the benefits principle of fair taxes.
B) the ability-to-pay principle of fair taxes.
C) a progressive tax system.
D) a proportional tax system.
E) the “fairest incidence of tax benefits” principle.
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Author: SB
AACSB: Reflective thinking
9) Which of the following taxes best illustrate the benefits principle of tax fairness?
A) Roads and highways are built and maintained through a tax on gasoline.
B) The local library is funded through property taxes levied on all homeowners.
C) The WIC program provides food to low income mothers and is funded through the federal
income tax.
D) A sales tax on food pays for local police and fire protection.
E) City parks are maintained through local excise taxes.
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Author: KG
AACSB: Reflective thinking
69
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10) Which of the following taxes best illustrate the benefits principle of tax fairness?
A) A property tax that is proportional to the value of a home is used to fund K-12 education.
B) The local library is funded through property taxes levied on all homeowners.
C) The WIC program provides food to low income mothers and is funded through the federal
income tax.
D) A sales tax on food pays for local police and fire protection.
E) The local youth sports leagues are financed by fees collected from participants by the city.
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Author: KG
AACSB: Reflective thinking
11) Using fuel taxes to pay for maintaining public highways is an example of
A) the benefits principle of fair taxation.
B) horizontal equity approach to taxation.
C) vertical equity approach to taxation.
D) the ability-to-pay principle of taxation.
E) the excess burden from taxes.
Skill: Level 3: Using models
Section: Checkpoint 8.3
Author: CD
AACSB: Reflective thinking
12) The idea that taxpayers with the same ability to pay a tax should pay the same taxes is called
A) progressive taxes.
B) regressive taxes.
C) horizontal equity.
D) vertical equity.
E) fair-incidence principle.
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Author: SB
AACSB: Reflective thinking
70
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13) The ability-to-pay principle of tax fairness is equivalent to which of the following?
A) collect taxes from those who benefit the most from provision of public services
B) more taxes should be collected from people who can more easily bear the burden
C) a regressive income tax structure
D) a proportional income tax structure
E) concern about only horizontal equity and no concern about vertical equity
Skill: Level 1: Definition
Section: Checkpoint 8.3
Author: TS
AACSB: Reflective thinking
14) Which of the following taxes best illustrates the ability to pay principle?
A) sales tax
B) state property tax
C) federal income tax
D) cigarette tax
E) marriage tax
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Author: PH
AACSB: Reflective thinking
15) Which of the following taxes best illustrate the ability-to-pay principle of tax fairness?
A) Roads and highways are built and maintained through a tax on gasoline.
B) The local library is funded through flat $10 tax levied on all homeowners.
C) A sales tax on food pays for local police and fire protection.
D) The WIC program provides food to low income mothers and is funded through the
progressive federal income tax.
E) State parks are maintained through the state lottery.
Skill: Level 2: Using definitions
Section: Checkpoint 8.3
Author: KG
AACSB: Reflective thinking