The Design of the Tax System 2971
75. When government receipts exceed total government spending during a fiscal year, the difference
is
a. a budget surplus.
b. a budget deficit.
c. the national debt.
d. automatically refunded.
76. Suppose that in 2020 the average citizen’s federal tax bill is $14,888 per person, and total federal
spending is $13,997 per person. In 2020, the federal government will have
a. a per person budget surplus of $891.
b. a per person budget deficit of $891.
c. horizontal equity.
d. vertical equity.
2972 The Design of the Tax System
77. Suppose that in 2020 the average citizen‘s federal tax bill is $11,987, and total federal spending is
$12,294 per person. In 2020, the federal government will have
a. a budget surplus.
b. a budget deficit.
c. horizontal equity.
d. vertical equity.
78. As the economy’s income has grown, the government has
a. grown at about the same pace.
b. grown at a faster pace.
c. grown at a slower pace.
d. shrunk.
The Design of the Tax System 2973
79. Most analysts expect the largest federal spending category to continue to grow in importance for
many years into the future. What category of spending is this?
a. national defense
b. education
c. income security
d. farm support programs
80. The most common explanation for Social Security payments accounting for a larger share of
federal government expenditures is
a. increases in life expectancy.
b. people becoming eligible for Social Security benefits at an earlier age.
c. increases in birth rates among teenagers and the poor.
d. falling payroll tax receipts.
2974 The Design of the Tax System
81. Which of the following is an important reason for the projected increase in government spending
as a percentage of GDP over the next several decades?
a. the increase in life expectancy resulting from advances in healthcare
b. an increase in the average number of children per family.
c. the increase in the number of jobs lost each year to foreign countries as a result of outsourcing
d. the reduction in the number of high-cost medical procedures
82. The largest category of federal government spending is growing because
a. the U.S. must spend more on national defense due to the war against terror.
b. the elderly population is increasing due to rising life expectancies.
c. expenditures on space exploration have increased dramatically.
d. expenditures on school voucher programs have increased dramatically.
The Design of the Tax System 2975
83. Which of the following statements is correct?
a. National defense and health are the two largest spending categories for the federal
government.
b. Welfare programs and highways are the two largest spending categories for state and local
governments.
c. Sales taxes and property taxes are the two most important revenue sources for state and local
governments.
d. Corporate income taxes are the largest source of revenue for the federal government.
84. Which of the following statements is not correct?
a. All states have state income taxes, but the percentages vary widely.
b. Sales taxes and property taxes are important revenue sources for state and local governments.
c. Medicare spending has increased because the percentage of the population that is elderly and
the cost of healthcare have both increased.
d. A budget deficit occurs when government spending exceeds government receipts.
2976 The Design of the Tax System
85. Which of the following statements about state income taxes is correct?
a. Some states do not tax income at all.
b. If states tax income, they must follow federal guidelines for designing the tax structure.
c. States are not allowed to have a higher marginal tax rate than the federal marginal tax rate.
d. All of the above are correct.
86. The two types of taxes that are most important to state and local governments as sources of
revenue are
a. individual income taxes and corporate income taxes.
b. sales taxes and individual income taxes.
c. sales taxes and property taxes.
d. social insurance taxes and property taxes.
The Design of the Tax System 2977
87. The tax that generates the most revenue for state and local government is the
a. corporate income tax.
b. individual income tax.
c. property tax.
d. sales tax.
88. State and local governments receive the largest portion of their tax revenues from
a. sales taxes and income taxes.
b. income taxes and property taxes.
c. payroll taxes and income taxes.
d. property taxes and sales taxes.
89. When a state levies a sales tax, the tax
a. is paid only by the state’s residents.
b. occasionally excludes items that are deemed to be necessities.
c. is commonly levied on labor services.
d. applies to wholesale purchases but not retail purchases.
2978 The Design of the Tax System
90. For state and local governments, in 2011, sales taxes and property taxes made up approximately
a. 10 percent of all receipts.
b. 22 percent of all receipts.
c. 33 percent of all receipts.
d. 43 percent of all receipts.
91. State and local governments
a. are funded entirely by their own tax base.
b. receive the majority of their tax revenues from corporate income taxes.
c. are generally not responsible for collecting sales taxes.
d. receive some of their funds from the federal government.
The Design of the Tax System 2979
92. State and local governments
a. use a mix of taxes and fees to generate revenue.
b. are required by federal mandate to levy income taxes.
c. are required to tax property at a standard rate set by the federal government.
d. must tax wages more heavily than interest and dividend income.
93. State and local governments generate revenue from all of the following sources except
a. sales taxes.
b. the federal government.
c. corporate income taxes.
d. customs duties.
2980 The Design of the Tax System
94. A tax levied on the total amount spent in retail stores is called
a. a sales tax.
b. an excise tax.
c. a retail tax.
d. an income tax.
95. The largest budgetary expense for a typical state or local government is
a. education.
b. Medicare.
c. highways.
d. income security.
The Design of the Tax System 2981
96. The largest budgetary expense for a typical state or local government is
a. public order and safety.
b. welfare.
c. highways.
d. education.
97. The single largest expenditure by state and local governments is on
a. highways.
b. police.
c. public welfare.
d. education.
2982 The Design of the Tax System
98. The typical state spends the most on
a. education.
b. Medicare and Social Security.
c. highways.
d. defense.
99. Public schools, which educate most students through high school, are paid for primarily by
a. state governments.
b. local governments.
c. the federal government.
d. taxpayers directly.
The Design of the Tax System 2983
100. For state and local governments, in 2011, education accounted for approximately what
percentage of spending?
a. 25 percent
b. 34 percent
c. 50 percent
d. 75 percent
101. Rank the following state and local government expenditure categories from largest to smallest.
a. education, health, highways
b. education, highways, income security
c. highways, education, public order and safety
d. public order and safety, highways, health
2984 The Design of the Tax System
102. Rank the following state and local government expenditure categories from smallest to largest.
a. education, health, highways
b. education, highways, health
c. highways, health, education
d. health, education, highways.
Multiple Choice – Section 02: Taxes and Efficiency
1. In designing a tax system, policymakers have two objectives that are often conflicting. They are
a. maximizing revenue and minimizing costs to taxpayers.
b. efficiency and minimizing costs to taxpayers.
c. efficiency and equity.
d. maximizing revenue and reducing the national debt.
The Design of the Tax System 2985
2. Most people agree that the tax system
a. should be both efficient and equitable.
b. cannot raise enough revenue to cover government expenditures.
c. would raise more revenue if tax rates were lowered.
d. should be rewritten to require everyone to pay the same percentage of income in taxes.
3. Most Americans agree that our tax system should
(i) be fair.
(ii) be efficient.
(iii) impose as small a cost on society as possible.
(iv) use a value-added tax (VAT) instead of an income tax.
a. (ii) only
b. (ii) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv)
2986 The Design of the Tax System
4. One tax system is less efficient than another if it
a. places a lower tax burden on lower-income families than on higher–income families.
b. places a higher tax burden on lower-income families than on higher-income families.
c. raises the same amount of revenue at a higher cost to taxpayers.
d. raises less revenue at a lower cost to taxpayers.
5. Which of the following is not a cost of taxes to taxpayers?
a. the tax payment itself
b. deadweight losses
c. administrative burdens
d. goods and services provided by the government
The Design of the Tax System 2987
6. In addition to tax payments, the two other primary costs that a tax system inevitably imposes on
taxpayers are
a. deadweight losses and administrative burdens.
b. deadweight losses and frustration with the political system.
c. administrative burdens and tax-preparation costs.
d. administrative burdens and the risk of punishment for failure to comply with tax laws.
7. Country A’s tax system is more efficient than Country B’s tax system if
a. Country A collects less tax revenue than Country B, and the cost to taxpayers is the same in
both countries.
b. Country A collects more tax revenue than Country B, even though the cost to taxpayers is
greater in Country A than in Country B.
c. the same amount of revenue is raised in both countries, but the cost to taxpayers is smaller in
Country A than in Country B.
d. the same amount of revenue is raised in both countries, but the taxes are collected in a shorter
amount of time in Country A than in Country B.
2988 The Design of the Tax System
8. Suppose the country of Mankiwland has a new king, King Gregory. For the purpose of efficiency
King Gregory’s chief economic advisor would encourage him to design his country’s tax system to
minimize
(i) deadweight losses from taxes.
(ii) administrative burdens from taxes.
(iii) the tax payments themselves.
(iv) government expenditures to correct for market failures.
a. (i) only
b. (i) and (ii) only
c. (iii) and (iv) only
d. (i), (ii), (iii), and (iv)
9. A tax system with little deadweight loss and a small administrative burden would be described as
a. equitable.
b. communistic.
c. capitalistic.
d. efficient.
The Design of the Tax System 2989
10. An efficient tax system is one that imposes small
a. deadweight losses and administrative burdens.
b. marginal rates and deadweight losses.
c. administrative burdens and transfers of money.
d. marginal rates and transfers of money.
11. An efficient tax system is one that
(i) maximizes tax revenues.
(ii) minimizes deadweight losses from taxes.
(iii) minimizes administrative burdens from taxes.
(iv) promotes equity across taxpayers.
a. (i) only
b. (ii) and (iii) only
c. (i), (ii), and (iii) only
d. (i), (ii), (iii), and (iv)
2990 The Design of the Tax System
12. Which of the following is a characteristic of a more efficient tax system?
a. The system minimizes deadweight loss.
b. The system raises the same amount of revenue at a lower cost.
c. The system minimizes administrative burdens.
d. All of the above are correct.
13. Part of the deadweight loss from taxing labor earnings is that people
a. will work more.
b. will be reluctant to hire accountants to file their tax returns.
c. with low tax liabilities will universally be worse off than under some other tax policy.
d. will work less.