The Design of the Tax System 3091
6. Suppose New York City passes a local “big gulp” tax that taxes carbonated beverages larger than
20 ounces if they contain sugar or high fructose corn syrup. If the revenue from the “big gulp” tax
is earmarked for diabetes research, the “big gulp” tax may be justified
a. on the basis of the ability-to–pay principle.
b. because it is an example of a lump-sum tax and thus is the most efficient tax.
c. on the basis of the benefits principle.
d. because it is an example of a progressive tax and thus is the most equitable tax.
7. The theory that the wealthy should contribute more to police protection than the poor because they
have more to protect is based on
a. the ability–to–pay principle.
b. a consumption tax plan.
c. the benefits principle.
d. property tax assessments.
3092 The Design of the Tax System
8. When a tax is justified on the basis that the taxpayers who pay the tax receive specific government
services from payment of the tax, the tax
a. is considered horizontally equitable.
b. burden is minimized.
c. satisfies the benefits principle.
d. is considered vertically equitable.
9. Suppose the government levies a “fat tax” on naturally-sweetened carbonated beverages to try to
reduce the number of overweight children. If the tax revenues pay for the health problems of
overweight children, the tax would satisfy the
a. ability–to–pay principle.
b. benefits principle.
c. vertical-equity principle.
d. horizontal-equity principle.
The Design of the Tax System 3093
10. The benefits principle of taxation can be used to argue that wealthy citizens should pay higher
taxes than poorer ones on the basis that
a. police services are more frequently used in poor neighborhoods.
b. the wealthy benefit more from services provided by government than the poor.
c. the poor are more active in political processes.
d. the poor receive welfare payments.
11. If a poor family has three children in public school and a rich family has two children in private
school, the benefits principle would suggest that
a. the poor family should pay more in taxes to pay for public education than the rich family.
b. the rich family should pay more in taxes to pay for public education than the poor family.
c. the benefits of private school exceed those of public school.
d. public schools should be financed by property taxes.
3094 The Design of the Tax System
12. Some colleges charge all students the same “activity fee.” Suppose that students differ by how
many campus activities they engage in. This charge is most like
a. an excise tax which conforms to the benefits principle.
b. an excise tax which violates the benefits principle.
c. a lump–sum tax which conforms to the benefits principle.
d. a lump-sum tax which violates the benefits principle.
13. Some colleges charge all students the same fee for access to campus computing services.
Suppose that students differ by how many hours of campus computing services they use. For
example, some students print all their papers and assignment in the campus computer labs, while
others use their own printers in their apartments. The computing services fee is most like a(n)
a. excise tax that conforms to the benefits principle.
b. excise tax that violates the benefits principle.
c. lump-sum tax that conforms to the benefits principle.
d. lump-sum tax that violates the benefits principle.
The Design of the Tax System 3095
14. Some colleges charge all students the same fee for a weekly dining services meal plan. Suppose
that students differ by how much food they consume each week. For example, members of the
women’s swimming team consume, on average, twice as much food as the average female
college student, and the average male college student consumes 20 percent more food than the
average female college student. The dining services fee is most like a(n)
a. excise tax that conforms to the benefits principle.
b. excise tax that violates the benefits principle.
c. lump-sum tax that conforms to the benefits principle.
d. lump-sum tax that violates the benefits principle.
15. Suppose an excise tax is imposed on luxury boats and yachts. Economists argue that such a tax
a. is sure to be vertically equitable, since buyers of luxury boats and yachts are wealthy.
b. entails no deadweight loss as long as buyers of boats and yachts can easily substitute one
luxury good for another.
c. violates the benefits principle of taxation.
d. may burden workers in the luxury-boat-and-yacht industry more than it burdens the buyers of
luxury boats and yachts.
3096 The Design of the Tax System
16. If a poor family has three children in public school and a rich family has two children in private
school, the ability–to– pay principle would suggest that
a. the poor family should pay more in taxes to pay for public education than the rich family.
b. the rich family should pay more in taxes to pay for public education than the poor family.
c. the benefits of private school exceed those of public school.
d. public schools should be financed by property taxes.
17. The argument that each person should pay taxes according to how well the individual can
shoulder the burden is called
a. the ability–to–pay principle.
b. the equity principle.
c. the benefits principle.
d. regressive.
The Design of the Tax System 3097
18. “A $1,000 tax paid by a poor person may be a larger sacrifice than a $10,000 tax paid by a
wealthy person” is an argument in favor of
a. the horizontal equity principle.
b. the benefits principle.
c. a regressive tax argument.
d. the ability–to–pay principle.
19. Vertical equity and horizontal equity are associated with
a. the benefits principle of taxation.
b. the ability-to–pay principle of taxation.
c. taxes that have no deadweight losses.
d. falling marginal tax rates.
3098 The Design of the Tax System
20. The claim that all citizens should make an “equal sacrifice“ to support government programs is
usually associated with
a. the ability–to–pay principle.
b. the benefits principle.
c. efficiency arguments.
d. regressive tax arguments.
21. A tax system based on the ability–to–pay principle claims that all citizens should
a. pay taxes based on the benefits they receive from government services.
b. pay the same amount in taxes.
c. pay taxes based on consumption rather than income.
d. make an equal sacrifice.
The Design of the Tax System 3099
22. The ability–to–pay principle claims that a person should pay taxes according to
a. the level of public education that the person has received throughout his lifetime.
b. how many government services that person will receive.
c. how well that person can shoulder the tax burden.
d. the level of debt that the person has.
23. Vertical equity in taxation refers to the idea that people
a. in unequal conditions should be treated differently.
b. in equal conditions should pay equal taxes.
c. should pay taxes based on the benefits they receive from the government.
d. should pay a proportional tax rather than a progressive tax.
3100 The Design of the Tax System
24. Vertical equity states that taxpayers with a greater ability to pay taxes should
a. contribute a decreasing proportion of each increment in income to taxes.
b. contribute a larger amount than those with a lesser ability to pay.
c. be less subject to administrative burdens of a tax.
d. be less subject to tax distortions that lead to deadweight losses.
25. In the 1980s, President Ronald Reagan argued that high tax rates distorted economic incentives to
work and save. In the 1990s, President Bill Clinton argued that the rich were not paying their fair
share of taxes. Which of the following statements best summarizes the economic theories behind
the differing philosophies?
a. President Reagan was concerned about vertical equity, whereas President Clinton was
concerned about horizontal equity.
b. President Reagan was concerned about average tax rates, whereas President Clinton was
concerned about horizontal equity.
c. President Reagan was concerned about marginal tax rates, whereas President Clinton was
concerned about vertical equity.
d. None of the above is correct.
The Design of the Tax System 3101
26. Which of the following tax systems could not be structured to satisfy conditions of vertical equity?
a. a proportional tax
b. a regressive tax
c. a progressive tax
d. a lump-sum tax
27. In which of the following tax systems do taxes increase as income increases?
a. both proportional and progressive
b. proportional but not progressive
c. progressive but not proportional
d. neither proportional nor progressive
28. The notion that similar taxpayers should pay similar amounts of taxes is known as
a. vertical equity.
b. the benefits principle.
c. horizontal equity.
d. taxpayer efficiency.
3102 The Design of the Tax System
29. Horizontal equity in taxation refers to the idea that people
a. in unequal conditions should be treated differently.
b. in equal conditions should pay equal taxes.
c. should be taxed according to their ability to pay.
d. should receive government benefits according to how much they have been taxed.
30. The idea that people in equal conditions should pay equal taxes is referred to as
a. horizontal equity.
b. vertical equity.
c. the ability–to–pay principle.
d. the marriage tax.
The Design of the Tax System 3103
31. Two families who live in Plains, GA have identical incomes. The Smiths deduct $5,000 from their
taxable income for mortgage interest paid during the year. The Jones family lives in an apartment
and is not eligible for a mortgage- interest deduction. This situation exemplifies
a. an application of the benefits principle of taxation.
b. a violation of horizontal equity.
c. a violation of vertical equity.
d. an application of egalitarian tax rules.
32. A tax that is higher for men than for women violates the criterion of
a. horizontal equity.
b. vertical equity.
c. the ability–to–pay principle.
d. the marriage tax.
3104 The Design of the Tax System
33. One of the most difficult issues associated with trying to structure a tax policy to satisfy horizontal
equity is determining
a. whether or not a taxpayer falls within the highest income quintile.
b. the level of transfer payments made to low-income groups.
c. the source of income for taxpayers.
d. what differences are relevant to a family’s ability to pay.
34. Which of the following statements is not correct?
a. A gasoline tax can be an example of a tax that uses the benefits principle.
b. A progressive tax attempts to achieve vertical equity.
c. A progressive tax can be an example of the ability-to–pay principle.
d. A regressive tax attempts to achieve vertical equity.
The Design of the Tax System 3105
Scenario 12-5
Senator Filch argues that a tax must be paid by people who benefit from government services.
Senator Fudge argues that a tax must be paid in accordance with a person’s ability to bear the tax
burden. Senator Malfoy argues that people with a greater ability to pay a tax should pay a larger
amount. Senator Moody argues that taxpayers with similar abilities to pay should contribute the
same amount.
35. Refer to Scenario 12–5. Which Senator is advocating taxes based on the benefits principle?
a. Senator Filch
b. Senator Fudge
c. Senator Malfoy
d. Senator Moody
36. Refer to Scenario 12-5. Which Senator is advocating taxes based on a person’s ability to pay?
a. Senator Filch only
b. Senator Moody only
c. Senators Fudge and Malfoy only
d. Senators Malfoy and Moody only
3106 The Design of the Tax System
37. Refer to Scenario 12–5. Which Senator is advocating for taxes based on horizontal equity?
a. Senator Filch
b. Senator Fudge
c. Senator Malfoy
d. Senator Moody
Table 12–13
The table below provides information on the 4 households that make up a small economy and how
much they would pay in taxes under 3 types of taxes.
Household
Ability to Pay
Tax A
Tax B
Tax C
A
low and same as B
100
30
40
B
low and same as A
100
30
50
C
high and same as D
100
40
60
D
high and same as C
100
40
70
38. Refer to Table 12–13. In this economy Tax A exhibits
a. horizontal and vertical equity.
b. horizontal equity but not vertical equity.
c. vertical equity but not horizontal equity.
d. neither horizontal nor vertical equity.
The Design of the Tax System 3107
39. Refer to Table 12–13. In this economy Tax B exhibits
a. horizontal and vertical equity.
b. horizontal equity but not vertical equity.
c. vertical equity but not horizontal equity.
d. neither horizontal nor vertical equity.
40. Refer to Table 12–13. In this economy Tax C exhibits
a. horizontal and vertical equity.
b. horizontal equity but not vertical equity.
c. vertical equity but not horizontal equity.
d. neither horizontal nor vertical equity.
41. Tax incidence refers to
a. what product or service the tax is levied on.
b. who bears the tax burden.
c. what sector of the economy is most affected by the tax.
d. the dollar value of the tax revenues.
3108 The Design of the Tax System
42. In order to determine tax incidence, one must
a. consider issues of equity.
b. also determine the legal liability of the tax.
c. evaluate where the tax burden eventually falls.
d. use the “flypaper theory” of taxation.
43. In order to construct a more complete picture of the economic burden of government across
income classes, economists usually
a. include tax payments as well as transfer payments received.
b. focus only on the tax payments of wealthy tax payers.
c. limit their analysis to taxes based on the ability–to–pay principle.
d. focus their analysis on issues of tax efficiency.
The Design of the Tax System 3109
44. If transfer payments are included when evaluating tax burdens, then the average tax rate of the
poorest quintile of taxpayers would be approximately
a. negative 30 percent.
b. negative 10 percent.
c. positive 1 percent.
d. positive 8 percent.
45. Which tax system requires all taxpayers to pay the same percentage of their income in taxes?
a. a regressive tax
b. a proportional tax
c. a progressive tax
d. a horizontal equity tax
3110 The Design of the Tax System
46. If a tax takes a constant fraction of income as income rises, it is
a. regressive.
b. proportional.
c. progressive.
d. based on the ability-to–pay principle.
47. An income tax in which the average tax rate is the same for all taxpayers would be considered a
a. progressive tax.
b. regressive tax.
c. distortion-free tax.
d. proportional tax.