The Design of the Tax System 3151
40. Tax evasion is illegal, but tax avoidance is legal.
a. True
b. False
41. In practice, the U.S. income tax system is filled with special provisions that alter a family’s tax
based on its specific circumstances.
a. True
b. False
42. If Christopher earns $80,000 in taxable income and pays $20,000 in taxes, his average tax rate is
20 percent.
a. True
b. False
3152 The Design of the Tax System
43. If James earns $80,000 in taxable income and pays $20,000 in taxes, his average tax rate is 25
percent.
a. True
b. False
44. If Mary earns $80,000 in taxable income and pays $40,000 in taxes, her marginal tax rate must be
50 percent.
a. True
b. False
45. Many people consider lump-sum taxes to be unfair to low-income taxpayers.
a. True
b. False
The Design of the Tax System 3153
46. Lump-sum taxes are equitable but not efficient.
a. True
b. False
47. A lump-sum tax would take different amounts from the poor and the rich.
a. True
b. False
48. A lump–sum tax minimizes deadweight loss.
a. True
b. False
3154 The Design of the Tax System
49. Deadweight losses and administrative burdens are key factors considered when determining the
efficiency of the tax system.
a. True
b. False
50. When the total surplus lost as a result of a tax is less than the amount of tax revenue collected by
the government there is a deadweight loss.
a. True
b. False
51. The marginal tax rate serves as a measure of the extent to which the tax system discourages
people from working.
a. True
b. False
The Design of the Tax System 3155
52. Most economists believe that a corporate income tax affects the stockholders of a corporation but
not its employees or customers.
a. True
b. False
53. Antipoverty programs funded by taxes on the wealthy are sometimes advocated on the basis of
the benefits principle.
a. True
b. False
54. According to the benefits principle, it is fair for people to pay taxes based on the benefits they
receive from the government.
a. True
b. False
3156 The Design of the Tax System
55. According to the benefits principle, it is fair for people to pay taxes based on their ability to
shoulder the tax burden.
a. True
b. False
56. According to the ability-to–pay principle, it is fair for people to pay taxes based on the amount of
government services that they receive.
a. True
b. False
57. According to the ability–to–pay principle, it is fair for people to pay taxes based on their ability to
handle the financial burden.
a. True
b. False
The Design of the Tax System 3157
58. If all taxpayers pay the same percentage of income in taxes, the tax system is progressive.
a. True
b. False
59. If all taxpayers pay the same percentage of income in taxes, the tax system is proportional.
a. True
b. False
60. Vertical equity refers to a tax system in which individuals with higher incomes pay more in taxes
than individuals with lower incomes.
a. True
b. False
3158 The Design of the Tax System
61. Vertical equity refers to a tax system in which individuals with similar incomes pay similar taxes.
a. True
b. False
62. Vertical equity is not consistent with a regressive tax structure.
a. True
b. False
63. Horizontal equity refers to a tax system in which individuals with higher incomes pay more in
taxes than individuals with lower incomes.
a. True
b. False
The Design of the Tax System 3159
64. Horizontal equity refers to a tax system in which individuals with similar incomes pay similar
taxes.
a. True
b. False
65. Horizontal and vertical equity are the two primary measures of efficiency of a tax system.
a. True
b. False
66. A tax system exhibits vertical equity when taxpayers with similar abilities to pay contribute the
same amount.
a. True
b. False
3160 The Design of the Tax System
67. To fully understand the progressivity of government policies, one should only look at the proportion
of total income that individuals pay in taxes each year.
a. True
b. False
68. If the rich pay more in taxes than the poor, the tax system must be progressive.
a. True
b. False
69. Vertical and horizontal equity are widely accepted and applying them to evaluate a tax system is
always straightforward.
a. True
b. False
The Design of the Tax System 3161
70. A lump sum tax can never have horizontal equity.
a. True
b. False
71. Horizontal equity can be difficult to assess because it is difficult to compare the similarity of tax
payers.
a. True
b. False
72. Economics alone cannot determine the best way to balance the goals of efficiency and equity.
a. True
b. False
3162 The Design of the Tax System
73. List the three most important expenditure programs of the federal government. How do they
differ from the three most important expenditure programs of state and local governments?
Explain why it makes more sense for the federal government to purchase “national defense”
rather than state governments.
74. Suppose a recent increase in federal gasoline taxes is estimated to cause a $150 million reduction
in the total surplus (consumer plus producer surplus) in the gasoline market. If tax revenues
increased by $100 million, what is the deadweight loss associated with the tax? As a result of the
tax, 10,000 people sold their cars and started riding their bicycles to work. How much of the
burden of the deadweight loss is incurred by the bicycle riders?
The Design of the Tax System 3163
On Taxable Income
The Tax Rate Is
Up to $27,050
15.0%
From $27,051 to $65,550
27.5%
From $65,551 to $136,750
30.5%
From $136,751 to $297,350
35.5%
Over $297,350
39.1%
Taxpayer
Income
Average Tax Rate
John
$52,700
$11,111.25
Todd
$132,500
$35,064.75
Glen
$237,000
$71,949.75
Jake
$315,250
$100,372.90
75. Use Table A to complete Table B.
TABLE A
TABLE B
Taxpayer
Income
Tax Amount
Average Tax Rate
John
$52,700
Todd
$132,500
Glen
$237,000
Jake
$315,250
Problems
1. Most people in the United States believe that our tax system should be both and .
3164 The Design of the Tax System
2. What has been the relationship over the past century between the U.S. economy’s income and the
percentage of that income that the government collects in revenues?
3. Of all the taxes collected in the U.S. economy, what percentage is collected by the federal
government?
4. What are the two largest categories of federal tax receipts?
The Design of the Tax System 3165
5. What is the current, annual, approximate amount per person paid to the federal government in
individual income taxes, social insurance taxes, corporate income taxes, and other taxes?
6. As a person’s or family’s income rises, the marginal federal income tax rate .
7. The United States federal government has a large budget deficit. Long-term projections suggest
that under current law, taxes, as a percentage of GDP, will and government spending, as a
percentage of GDP, will
__________.
3166 The Design of the Tax System
8. Briefly describe some of the demographic trends that are predicted to increase the government’s
budget deficit.
9. The largest category of expenditures for state and local governments is .
The Design of the Tax System 3167
10. Over the past century in the U.S., what has been federal government revenue as a percentage of
GDP? What has been state and local government revenue as a percentage of GDP?
11. In 2011, what were the two largest sources of federal tax revenues, and what were the two
largest expenses of the federal government?