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The Design of the Tax System 3131
88. In 2009, the top 1 percent of income earners
a. made about 13 percent of all income.
b. paid about 22 percent of all taxes.
c. made over 2.5 times the percentage of all income earned by the lowest quintile.
d. All of the above are correct.
89. In 2010, the co-chairmen of President Obama’s deficit reduction commission proposed curtailing
or eliminating the mortgage interest deduction that millions of homeowner taxpayers receive every
year. Economists who favor the proposal would argue that
(i) too much of the economy’s capital stock is tied up in residential housing.
(ii) too little of the economy’s capital stock is invested in corporate capital.
(iii) the misallocation of resources results in lower productivity and reduced real wages.
a. (i) only
b. (ii) only
c. (i) and (ii) only
d. (i), (ii), and (iii)
3132 The Design of the Tax System
90. In 2010, the co-chairmen of President Obama’s deficit reduction commission proposed curtailing
or eliminating many tax deductions such as the one for mortgage interest. Economists who favor
the proposal argue that it would
(i) correct a misallocation of resources because too much of the economy’s capital
stock is tied up in residential housing and too little is invested in corporate capital.
(ii) cut both spending and taxes.
(iii) encourage private philanthropy.
a. (i) only
b. (ii) only
c. (i) and (ii) only
d. (i), (ii), and (iii)
91. The flypaper theory of tax incidence
a. ignores the indirect effects of taxes.
b. assumes that most taxes should be "stuck on " the rich.
c. says that once a tax has been imposed, there is little chance of it changing, so in essence
people are stuck with it.
d. suggests that taxes are like flies because they are everywhere and will never go away.
The Design of the Tax System 3133
92. Who pays a corporate income tax?
a. owners of the corporation
b. customers of the corporation
c. workers of the corporation
d. All of the above are correct.
93. When the government levies a tax on a corporation,
a. all the burden of the tax ultimately falls on the corporation’s owners.
b. the corporation is more like a tax collector than a taxpayer.
c. output must increase to compensate for reduced profits.
d. less deadweight loss will occur since corporations are entities and not people who respond to
incentives.
3134 The Design of the Tax System
94. Many economists believe that
a. the corporate income tax satisfies the goal of horizontal equity.
b. the corporate income tax does not distort the incentives of customers.
c. the corporate income tax is more efficient than the personal income tax.
d. workers and customers bear much of the burden of the corporate income tax.
95. Which of the following is not a way that a corporate tax on the income of U.S. car companies
will affect markets?
a. The price of cars will rise.
b. The wages of auto workers will fall.
c. Owners of car companies (stockholders) will receive less profit.
d. Less deadweight loss will occur since corporations are entities and not people who respond to
incentives.
The Design of the Tax System 3135
Multiple Choice – Section 04: The Trade-off between Equity and Efficiency
1. Goals of efficiency and equity in tax policy are
a. complementary in most countries.
b. necessary for application of the ability-to-pay principle.
c. often in conflict with each other.
d. easier to achieve when tax codes are complex.
2. In choosing the form of a tax, there is often a tradeoff between
a. allocative and productive efficiency.
b. profits and revenues.
c. efficiency and fairness.
d. fairness and profits.
3136 The Design of the Tax System
3. Which of the following tax systems is the most fair?
a. proportional taxes
b. regressive taxes
c. progressive taxes
d. There is no objective way to assess fairness among the three systems.
4. Economists play an important role in the complex debates over tax policy by
a. identifying efficiency as the most important goal of tax policy.
b. identifying equity as the most important goal of tax policy.
c. shedding light on the tradeoff between efficiency and equity in tax policy.
d. None of the above is correct.
The Design of the Tax System 3137
5. The marginal tax rates on the richest Americans when Ronald Reagan was elected and when he
left office were
a. 28 percent and 50 percent, respectively.
b. 70 percent and 40 percent, respectively.
c. 40 percent and 70 percent, respectively.
d. 50 percent and 28 percent, respectively.
6. In general, Democrats tend to prefer
a. higher marginal tax rates to promote vertical equity, while Republicans tend to prefer lower
marginal tax rates to promote incentives to work and save.
b. lower marginal tax rates to promote vertical equity, while Republicans tend to prefer higher
marginal tax rates to promote incentives to work and save.
c. higher marginal tax rates to promote incentives to work and save, while Republicans tend to
prefer lower marginal tax rates to promote vertical equity.
d. lower marginal tax rates to promote incentives to work and save, while Republicans tend to
prefer higher marginal tax rates to promote vertical equity.
3138 The Design of the Tax System
True/False and Short Answer
1. The average American pays a higher percent of his income in taxes today than he would have in
the late 18th century.
a. True
b. False
2. The government raises revenue through taxation to pay for the services it provides.
a. True
b. False
3. Most people agree that taxes should impose as small a cost on society as possible and that the
burden of taxes should be distributed fairly.
a. True
b. False
The Design of the Tax System 3139
4. The U.S. tax burden is high compared to many European countries..
a. True
b. False
5. The U.S. federal government collects about one-half of the taxes in our economy.
a. True
b. False
6. Revenues from social insurance taxes are earmarked to pay for Social Security and Medicare.
a. True
b. False
3140 The Design of the Tax System
7. Government spending is projected to rise over the next few decades. Three of the most important
reasons are spending on Social Security, Medicare, and healthcare.
a. True
b. False
8. Individual income taxes and social insurance taxes generate the highest tax revenue for the federal
government.
a. True
b. False
9. A family’s tax liability is the amount of money it owes in taxes.
a. True
b. False
The Design of the Tax System 3141
10. In the United States, all families pay the same proportion of their income in taxes.
a. True
b. False
11. A payroll tax is also referred to as a social insurance tax.
a. True
b. False
12. Individual income taxes generate roughly 25% of the tax revenue for the federal government.
a. True
b. False
3142 The Design of the Tax System
13. Social Security is an income support program, designed primarily to maintain the living standards
of the poor.
a. True
b. False
14. Corporate income taxes are based on the amount of revenue a corporation earns.
a. True
b. False
15. An excise tax is a tax on a specific good, like gasoline.
a. True
b. False
The Design of the Tax System 3143
16. The largest category of federal spending is national defense.
a. True
b. False
17. A budget surplus occurs when government receipts fall short of government spending.
a. True
b. False
18. A budget surplus occurs when government receipts exceed government spending.
a. True
b. False
3144 The Design of the Tax System
19. A budget deficit occurs when government receipts exceed government spending.
a. True
b. False
20. A budget deficit occurs when government receipts fall short of government spending.
a. True
b. False
21. One reason for the projected increase, over the next several decades, in government spending as
a percentage of GDP is the projected increase in the size of the elderly population.
a. True
b. False
The Design of the Tax System 3145
22. In 2011, state and local government education spending was more than five times highway
spending.
a. True
b. False
23. In 2011, the largest source of receipts for state and local governments was individual income
taxes.
a. True
b. False
24. Income taxes and property taxes generate the highest tax revenue for state and local
governments.
a. True
b. False
3146 The Design of the Tax System
25. In 2011, the largest source of receipts for state and local governments was corporate income
taxes.
a. True
b. False
26. Sales taxes generate nearly 50% of the tax revenue for state and local governments.
a. True
b. False
27. Some states do not have a state income tax.
a. True
b. False
The Design of the Tax System 3147
28. By law, all states must have a state income tax.
a. True
b. False
29. The administrative burden of any tax system is part of the inefficiency it creates.
a. True
b. False
30. One characteristic of an efficient tax system is that it minimizes the costs associated with revenue
collection.
a. True
b. False
3148 The Design of the Tax System
31. The administrative burden of complying with tax laws is a cost to the government but not to
taxpayers.
a. True
b. False
32. The equity of a tax system concerns whether the tax burden is distributed equally among the
population.
a. True
b. False
33. An efficient tax system is one that imposes small deadweight losses and small administrative
burdens.
a. True
b. False
The Design of the Tax System 3149
34. Deadweight losses arise because a tax causes some individuals to change their behavior.
a. True
b. False
35. European countries tend to rely more on consumption taxes than does the United States.
a. True
b. False
36. If a tax generates a reduction in surplus that is exactly offset by the tax revenue collected by the
government, the tax does not have a deadweight loss.
a. True
b. False
3150 The Design of the Tax System
37. Resources devoted to complying with the tax laws are a type of deadweight loss.
a. True
b. False
38. An advantage of a consumption tax is that it does not distort the incentive to save.
a. True
b. False
39. Tax evasion is legal, but tax avoidance is illegal.
a. True
b. False
