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3168 The Design of the Tax System
12. “Income security” programs comprised 33 percent of the federal government’s spending in 2011.
Give a few examples of the programs included in this category.
13. What are the two main sources of tax revenues for state and local governments?
14. What are the characteristic(s) of an efficient tax system?
The Design of the Tax System 3169
15. What are the three categories of the costs of taxes to taxpayers?
16. Define the deadweight loss of a tax.
17. Briefly describe why taxes create deadweight loss.
3170 The Design of the Tax System
18. Suppose that Deon places a $150 value on a new MP-3 player, and Juanita places a $140 value
on it. The cost of the MP-3 player is $130. Suppose the government levies a $15 tax on MP-3
players, which raises the price to $145. What is the deadweight loss created by the tax?
19. List several examples of the administrative burden of the U.S. income tax system.
20. Define the marginal tax rate.
The Design of the Tax System 3171
21. Define the average tax rate.
22. What is the most efficient tax and why?
23. Briefly evaluate the advantages and disadvantages of a lump-sum tax.
3172 The Design of the Tax System
24. What are the two types of costs that a well-designed tax policy tries to avoid or minimize?
25. Suppose that Kara values a hot fudge sundae at $6 and Stacia values one at $5. The pretax price
of a hot fudge sundae is $3. The government imposes a $1 tax on hot fudge sundaes, which raises
the price to $4. What is the deadweight loss from the tax?
The Design of the Tax System 3173
26. Suppose that Christine values a baseball hat at $20, and Mark values one at $18. The pretax price
of a baseball hat is $14. The government imposes a $5 tax on baseball hats, which raises the price
to $19. What is the deadweight loss from the tax?
27. Briefly describe why some economists prefer a value-added tax (VAT) to an income tax.
28. Time spent filling out tax forms, time spent keeping tax records, and government resources spent
to enforce tax laws are examples of the of the U.S. income tax system.
3174 The Design of the Tax System
29. Give an example of a tax system where the marginal tax rate would equal the average tax rate.
30. Suppose the government taxes 10 percent of the first $30,000 in income and 20 percent of all
income over $30,000.
Calculate the marginal tax rate and the average tax rate for a person who earns $70,000.
31. Suppose the government taxes 10 percent of the first $30,000 in income, 20 percent of the next
$20,000 in income, and 30 percent of all income over $50,000. Calculate the marginal tax rate
and the average tax rate for a person who earns $70,000.
The Design of the Tax System 3175
32. Suppose the government taxes 10 percent of the first $20,000 in income, 20 percent of the next
$20,000 in income, and 30 percent of all income over $40,000. Calculate the marginal tax rate
and the average tax rate for a person who earns $100,000.
33. Calculate the marginal tax rate and the average tax rate of a lump-sum tax of $5,000.
3176 The Design of the Tax System
34. Briefly describe the tradeoff between equity and efficiency of tax systems using a few examples.
35. If tax revenues from a tax on wine, beer, and hard liquor are used to pay for healthcare expenses
related to liver damage, the alcohol tax could be justified using the .
36. If tax revenues from a tax on fried foods are used to pay for healthcare expenses related to
cardio-vascular diseases, the fried foods tax could be justified using the .
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37. How can a proportional tax achieve vertical equity?
38. If tax revenues from a cigarette tax are used to pay for healthcare expenses related to lung
cancer, the cigarette tax could be justified using the .
39. Which of the following types of taxes achieves vertical equity: a proportional tax, regressive tax,
and/or progressive tax?
3178 The Design of the Tax System
40. Define horizontal equity and briefly describe some features of the U.S. federal income tax
system that may interfere with achieving it.
Table 12-24
Income
Amount of Tax
$50,000
$5,000
$60,000
$5,500
$70,000
$6,000
41. Refer to Table 12-24. The tax system is an example of a tax.
42. Refer to Table 12-24. Does the tax system achieve vertical equity?
The Design of the Tax System 3179
43. Refer to Table 12-24. Would the tax system be justified due to the benefits principle?
Table 12-25
Plan A
Plan B
Plan C
Income
Amount of Tax
Income
Amount of Tax
Income
Amount of Tax
$40,000
$6,000
$40,000
$6,000
$40,000
$6,000
$60,000
$6,000
$60,000
$9,000
$60,000
$12,000
$80,000
$6,000
$80,000
$12,000
$80,000
$18,000
44. Refer to Table 12-25. Which plan illustrates a regressive tax?
3180 The Design of the Tax System
45. Refer to Table 12-25. Which plan illustrates a proportional tax?
46. Refer to Table 12-25. Which plan illustrates a progressive tax?
47. Refer to Table 12-25. Do any of the plans achieve vertical equity?
The Design of the Tax System 3181
48. Refer to Table 12-25. Which plan represents the best tax?
