Chapter Ten
Questions and Exercises
Examination Questions
1. Which of the following statements about American state sales taxes is not generally true?
2. Exemption of food purchases from a sales tax reduces regressivity because:
3. Which of the following might logically be reasons used in support of a value added tax
for the federal government?
4. Purchases of which of the following is most likely to be taxed by a state retail sales tax?
5. A firm buys $1,000 in inputs from other firms, pays $1,000 for labor services, and has
sales of $2,500 for a profit of $500. Under a value added tax, the firm’s tax base would
be:
6. An alternative approach to the food exemption to attack sales tax regressivity is:
a. the circuit breaker.
7. A common criticism of retail sales and excise taxes is:
8. In Europe, the sales tax that yields more revenue than any other is the:
9. The following statements about VAT are true except:
10. The Indiana legislature imposes a special excise tax on murder mysteries because such
books give people bad ideas. As a result, the wages of salespeople in bookstores selling
such books decline and prices of murder mysteries rise. Which of the following is
accurate?
11. Which of these problems is not associated with selective excise taxes?
12. Multistage sales taxes levied at a fixed rate on the gross receipts of transactions at each
stage of production are called:
13. Which of the following is a unit excise tax?
14. In the logic of consumption taxation, business purchases are exempt in retail sales
15. Under a “component part/physical ingredient” rule for determining the exemption of
business purchases under a state sales and use tax, which of the following purchases
would probably not be exempt from the sales tax?
USE THE INFORMATION FOR THE NEXT TWO QUESTIONS.
A state applies a 7 percent sales tax to consumer purchases of many items. These are data for a
typical family:
Annual Income $60,000
Family Size 2
Purchases of taxed items $30,000
16. What statutory rate does the family pay?
17. What average effective tax rate does the family pay?
USE THE FOLLOWING INFORMATION TO ANSWER THE FOLLOWING FOUR QUESTIONS.
Assume that the production chain for an economy is characterized by the following transactions:
Business Purchases Sales
Mine $ 0 $ 200
Steel Mill $ 200 $1,000
Car Maker $1,000 $5,000
Car Dealer $5,000 $11,000
Assume further that the only transaction where a non-business is involved is in the sales of cars
from car dealers to individuals.
18. If the mine is subject to a 10 percent value-added tax (VAT), how much would it pay in
taxes?
19. If the car dealer is subject to a 10 percent retail sales tax (RST), how much would it pay
in taxes?
20. If the car dealer is subject to a 10 percent VAT, how much would it pay in taxes?
21. How much more revenue does a 10 percent VAT collect as compared to a 5 percent
RST?