The Design of the Tax System 3011
54. Refer to Scenario 12-3. How much total consumer surplus do Regina and Roger collectively
receive from consuming cheesecake?
a. $3
b. $6
c. $9
d. $13
55. Refer to Scenario 12-3. Assume that the government places a $4 tax on each slice of
cheesecake and that the new equilibrium price is $9. What is Regina’s consumer surplus from
cheesecake?
a. zero
b. $2
c. $3
d. $6
3012 The Design of the Tax System
56. Refer to Scenario 12-3. Assume that the government places a $4 tax on each slice of
cheesecake and that the new equilibrium price is $9. What is the deadweight loss of the tax?
a. $3
b. $6
c. $8
d. $9
57. Refer to Scenario 12-3. Assume that the government places a $4 tax on each slice of
cheesecake and that the new equilibrium price is $9. How much tax revenue will be generated
from sales to Regina and Roger?
a. zero
b. $4
c. $8
d. $12
The Design of the Tax System 3013
58. Refer to Scenario 12-3. Assume that the government places a $2 tax on each slice of
cheesecake and that the new equilibrium price is $7. What is the deadweight loss of the tax?
a. zero
b. $3
c. $6
d. $8
59. Refer to Scenario 12-3. Assume that the government places a $4 tax on each slice of
cheesecake and that the new equilibrium price is $9. Which of the following statements is correct?
a. Roger will bear the full burden of the deadweight loss.
b. Regina will bear the full burden of the deadweight loss.
c. Both Regina and Roger will share the burden of the deadweight loss.
d. There will be no deadweight loss.
3014 The Design of the Tax System
Table 12-1
Weekend Ski Trip
Value to Anna
$150
Value to Brian
$90
Value to Clem
$75
Value to Dave
$50
60. Refer to Table 12-1. Assume that the price of a weekend ski pass is $45 and that the price
reflects the actual unit cost of providing a weekend of skiing. What is the value of the surplus that
accrues to all four skiers from their weekend trip?
a. $75
b. $105
c. $185
d. $215
61. Refer to Table 12-1. Assume that the price of a weekend ski pass is $45 and that the price
reflects the actual unit cost of providing a weekend of skiing. How much consumer surplus
accrues to Anna and Clem individually?
a. $125 and $20 respectively
b. $105 and $30 respectively
c. $85 and $40 respectively
d. $65 and $50 respectively
The Design of the Tax System 3015
62. Refer to Table 12-1. Assume that the price of a weekend ski pass is $45 and that the price
reflects the actual unit cost of providing a weekend of skiing. Suppose the government imposes a
tax of $12 on skiing, which raises the price of a weekend ski pass to $57. What is the value of the
surplus that accrues to all four skiers from their weekend trip?
a. $41.
b. $95.
c. $144.
d. $185.
63. Refer to Table 12-1. Assume that the price of a weekend ski pass is $45 and that the price
reflects the actual unit cost of providing a weekend of skiing. Suppose the government imposes a
tax of $12 on skiing, which raises the price of a weekend ski pass to $57. How much tax revenue
is collected from these four skiers?
a. $0.
b. $12.
c. $36.
d. $48.
3016 The Design of the Tax System
64. Refer to Table 12-1. Assume that the price of a weekend ski pass is $45 and that the price
reflects the actual unit cost of providing a weekend of skiing. Suppose the government imposes a
tax of $12 on skiing, which raises the price of a weekend ski pass to $57. The deadweight loss
associated with the tax is
a. $5.
b. $12.
c. $36.
d. $41.
Table 12-2
Hot Fudge Brownie Delight
Value to Ricky
$9.00
Value to Lucy
$5.00
65. Refer to Table 12-2. Suppose that the government imposes a $2 tax on delights, causing the
price to increase from $4.00 to $6.00. Total consumer surplus
a. falls by less than the tax revenue generated.
b. falls by more than the tax revenue generated.
c. falls by the same amount as the tax revenue generated.
d. will not fall since Jennifer will no longer be in the market.
The Design of the Tax System 3017
66. Refer to Table 12-2. Suppose that the government imposes a $2 tax on delights, causing the
price to increase from $4.00 to $6.00. Deadweight loss arises because
a. Lucy will pay more tax as a percentage of her value of delights than Ricky.
b. Ricky must pay the $2.00 tax from his consumer surplus.
c. Ricky will have to pay a higher price for delights.
d. Lucy will leave the market.
67. Refer to Table 12-2. Suppose that the government imposes a $2 tax on delights, causing the
price to increase from $4.00 to $6.00. Total consumer surplus will fall from
a. $6 to $3.
b. $7 to $4.
c. $6 to $2.
d. $5 to $3.
3018 The Design of the Tax System
68. The deadweight loss associated with a tax on a commodity is generated by
a. the consumers who still choose to consume the commodity but pay a higher price that reflects
the tax.
b. the consumers who choose to not consume the commodity that is taxed.
c. all citizens who are able to use services provided by government.
d. the consumers who are unable to avoid paying the tax.
69. Many economists believe that the U.S. tax system would be made more efficient if the basis of
taxation were changed so that people paid taxes, more so than they do now, based on their
a. saving rather than their income.
b. spending rather than their income.
c. income rather than their wealth.
d. wealth rather than their spending.
The Design of the Tax System 3019
70. European countries tend to rely on which type of tax more so than the United States does?
a. an income tax
b. a lump–sum tax
c. a value-added tax
d. a corrective tax
71. Why do some policymakers support a consumption tax rather than an earnings tax?
a. The average tax rate would be lower under a consumption tax.
b. A consumption tax would encourage people to save earned income.
c. A consumption tax would raise more revenues than an income tax.
d. The marginal tax rate would be higher under an earnings tax.
72. A value-added tax or VAT is a tax on
a. retail purchases only.
b. wholesale purchases only.
c. pollution.
d. all stages of production of a good.
3020 The Design of the Tax System
73. A tax imposed at every stage of production is a
a. value-added tax.
b. lump sum tax.
c. corrective tax.
d. regressive tax.
74. The U.S. income tax
a. discourages saving.
b. encourages saving.
c. has no effect on saving.
d. will reduce the administrative burden of taxation.
The Design of the Tax System 3021
75. A tax on all forms of income will
a. lower the effective rate of interest on savings.
b. have no effect on savings.
c. enhance social welfare because the benefits will outweigh the costs.
d. enhance the incentives to save.
76. Changing the basis of taxation from income earned to amount spent will
a. necessarily reduce tax revenues.
b. lower effective interest rates on savings.
c. distort incentives to earn income.
d. eliminate disincentives to save.
77. When interest income from savings is taxed, people will save
a. more to make up for what is lost in taxes.
b. the same amount as they would have without the tax.
c. less than they would without the tax.
d. None of the above is correct since the government would not tax interest on savings.
3022 The Design of the Tax System
78. A consumption tax is a tax on
a. goods but not on services.
b. the amount of income that people spend.
c. the amount of income that people earn.
d. the amount of income that people save.
79. An advantage of a consumption tax over the present tax system is that a consumption tax
a. raises more revenues.
b. would save the government millions in administrative costs.
c. places more of the tax burden on the wealthy.
d. does not discourage saving.
80. Incentives to work and save are reduced when
a. income taxes are higher.
b. consumption taxes replace income taxes.
c. corrective taxes are implemented.
d. All of the above are correct.
The Design of the Tax System 3023
81. Individual Retirement Accounts and 401(k) plans make the current U.S. tax system
a. less like European tax systems than it otherwise would be.
b. more like a payroll tax than it otherwise would be.
c. more like an income tax than it otherwise would be.
d. more like a consumption tax than it otherwise would be.
82. Individual Retirement Accounts and 401(k) plans make the current U.S. tax system
a. more like a consumption tax and so more like the tax system of many European countries.
b. more like a consumption tax and so less like the tax system of many European countries.
c. less like a consumption tax and so more like the tax system of many European countries.
d. less like a consumption tax and so less like the tax system of many European countries.
3024 The Design of the Tax System
83. Alan Greenspan, former Chairman of the Federal Reserve, discussed the advantages of which
kind of tax system, “particularly if one were designing a tax system from scratch”?
a. a progressive tax system
b. a regressive tax system
c. a consumption tax
d. a lump–sum tax
84. Part of the administrative burden of a tax is
a. the money people pay to the government in taxes.
b. reducing the size of the market because of the tax.
c. the hassle of filling out tax forms that is imposed on taxpayers who comply with the tax.
d. the cost of administering programs that use tax revenue.
The Design of the Tax System 3025
85. Tax evasion is
a. facilitated by legal deductions to taxable income.
b. the same as tax avoidance.
c. recommended by the American Accounting Association.
d. illegal.
86. Which of the following statements is correct?
a. Both tax avoidance and tax evasion are legal.
b. Both tax avoidance and tax evasion are illegal.
c. Tax avoidance is legal, whereas tax evasion is illegal.
d. Tax avoidance is illegal, whereas tax evasion is legal.
87. A mortgage interest deduction would be considered
a. tax evasion.
b. a subsidy to the poor.
c. a deduction that benefits all members of society equally.
d. a tax loophole.
3026 The Design of the Tax System
88. In many cases, tax loopholes are designed by Congress to
a. give special treatment to specific types of behavior.
b. reduce the overall administrative burden of the tax system.
c. raise revenues for special projects.
d. All of the above are correct.
89. Special tax treatment given to specific types of behavior are called
a. tax avoidance.
b. tax evasion.
c. tax loopholes.
d. tax burden.
The Design of the Tax System 3027
90. Which of the following describes a situation where tax laws give preferential treatment to specific
types of behavior?
a. tax evasion
b. a political payoff
c. a tax loophole
d. compensation for the benefit of society
91. ‘The U.S. tax code gives preferential treatment to investors in municipal bonds. This is an
example of
a. a tax loophole.
b. tax evasion.
c. an administrative burden.
d. tax enforcement.
3028 The Design of the Tax System
92. Tax systems that impose recordkeeping requirements on taxpayers are said to have a(n)
a. auditing burden.
b. lower incidence of compliance.
c. administrative burden.
d. certification requirement.
93. As tax laws become more complex,
a. the administrative burden of taxes will increase.
b. compliance costs are likely to decrease.
c. the government will collect more in tax revenue.
d. the amount of tax revenue lost to tax evasion will decrease.
94. Which of the following is not an administrative burden of our tax system?
a. government resources used to enforce tax laws
b. keeping tax records throughout the year
c. paying the taxes owed
d. time spent in April filling out forms
The Design of the Tax System 3029
95. A person’s marginal tax rate equals
a. her tax obligation divided by her average tax rate.
b. the increase in taxes she would pay as a percentage of the rise in her income.
c. her tax obligation divided by her income.
d. the increase in taxes if her average tax rate were to rise by 1percent.
96. In the United States, the marginal tax rate on individual federal income tax
a. decreases as income increases.
b. increases as income increases.
c. is constant at all income levels.
d. applies only to payroll taxes.
3030 The Design of the Tax System
97. Because the marginal tax rate rises as income rises,
a. higher income families, in general, pay a larger percentage of their income in taxes.
b. lower income families, in general, pay a larger percentage of their income in taxes.
c. a disproportionately large share of the tax burden falls upon the poor.
d. higher income families pay the same percentage of their income in taxes as lower-income
families.
Scenario 12-4
A taxpayer faces the following tax rates on her income: 20 percent of the first $40,000 of her
income; 30 percent of all her income above $40,000.
98. Refer to Scenario 12-4. The taxpayer faces a marginal tax rate of
a. 20 percent when her income rises from $40,000 to $40,001.
b. 20 percent when her income rises from $30,000 to $30,001.
c. 0 percent when her income rises from $30,000 to $30,001.
d. 10 percent when her income rises from $40,000 to $40,001.