Income Inequality and Poverty 5101
43. Which of the following is not correct?
a. Welfare is a broad term that includes a variety of government programs designed to help poor
people.
b. Since the early 1970s, welfare benefits adjusted for inflation have increased, as has the
percentage of children living with only one parent.
c. Critics of welfare programs argue that they can create incentives for unmarried women to have
children.
d. Supporters argue that welfare doesn’t cause the decline of two-parent families.
Scenario 20-4
Suppose the government implemented a negative income tax and used the following formula to
compute a family’s tax liability:
Taxes owed = (1/5 of income) – $15,000
44. Refer to Scenario 20-4. A family earning $50,000 before taxes would have how much after–tax
income?
a. –$5,000
b. $40,000
c. $45,000
d. $55,000
5102 Income Inequality and Poverty
45. Refer to Scenario 20-4. A family earning $100,000 before taxes would have how much after-
tax income?
a. $50,000
b. $65,000
c. $80,000
d. $95,000
46. Refer to Scenario 20-4. This negative income tax would guarantee what minimum level of
income to every family?
a. $5,000
b. $10,000
c. $15,000
d. $50,000
Income Inequality and Poverty 5103
47. Refer to Scenario 20-4. Below what level of income would families start to receive a subsidy
from this negative income tax?
a. $5,000
b. $15,000
c. $50,000
d. $75,000
Scenario 20-5
Suppose the government implemented a negative income tax and used the following formula to
compute a family’s
tax liability:
Taxes owed = (1/4 of income) – $10,000
48. Refer to Scenario 20-5. A family earning $70,000 before taxes would have how much after–tax
income?
a. $7,500
b. $52,500
c. $62,500
d. $77,500
5104 Income Inequality and Poverty
49. Refer to Scenario 20-5. A family earning $110,000 before taxes would have how much after-
tax income?
a. $82,500
b. $92,500
c. $100,000
d. $127,500
50. Refer to Scenario 20-5. This negative income tax would guarantee what minimum level of
income to every family?
a. $5,000
b. $10,000
c. $15,000
d. $25,000
Income Inequality and Poverty 5105
51. Refer to Scenario 20-5. Below what level of income would families start to receive a subsidy
from this negative income tax?
a. $10,000
b. $25,000
c. $40,000
d. $50,000
52. A negative income tax system is designed to
a. provide in-kind benefits to the poor.
b. provide a minimum income to the poor.
c. reduce taxes on the rich when their incomes surpass the maximum income tax bracket.
d. subsidize food consumption in poor families.
5106 Income Inequality and Poverty
53. A tax provision that works much like a negative income tax is the
a. Earned Income Tax Credit (EITC).
b. Temporary Assistance for Needy Families (TANF).
c. deduction for charitable contributions.
d. mortgage interest rate deduction.
54. A negative income tax system would
a. make taxes more regressive.
b. sever the link between tax policy and income distribution.
c. collect from high–income households and give transfers to low-income households.
d. eliminate progressive tax rates.
55. The only qualification to receive government assistance under a negative income tax is
a. pre-school children.
b. to be enrolled in job training.
c. a working head-of–household.
d. a low income.
Income Inequality and Poverty 5107
56. Which of the following formulas is most representative of a negative income tax proposal?
a. Taxes Owed = (1/4 of Income) $2
b. Taxes Owed = (1/2 of Income) 3/4
c. Taxes Owed = (1/2 of Income) + $10,000
d. Taxes Owed = (1/3 of Income) – $10,000
57. Assume that the government proposes a negative income tax that calculates the taxes owed as
follows: Taxes Owed = (1/3 Income) – 10,000. If a family doesn’t earn any income, how does
the negative income tax affect it?
a. It will receive an income subsidy of $1,000.
b. It will receive an income subsidy of $3,000.
c. It will receive an income subsidy of $10,000.
d. It will not be affected at all, since the negative income tax requires a family to earn income.
5108 Income Inequality and Poverty
58. Assume that the government proposes a negative income tax that calculates the taxes owed as
follows: taxes owed equal 30% of income less 12,000. A family that earns an income of $60,000
will
a. pay $6,000 in taxes.
b. receive an income subsidy of $6,000.
c. receive an income subsidy of $12,000.
d. have an after–tax income of $48,000.
59. Assume that the government proposes a negative income tax that calculates the taxes owed as
follows: taxes owed equal 30% of income less $12,000. A family that earns an income of $40,000
will
a. neither pay taxes nor receive an income subsidy.
b. receive an income subsidy of $3,600.
c. pay $3,600 in taxes.
d. pay $12,000 in taxes.
Income Inequality and Poverty 5109
60. Which of the following is not a characteristic of the Earned Income Tax Credit (EITC)?
a. It does not discourage recipients from working.
b. It is less distortionary than other anti-poverty programs.
c. It helps the disabled who cannot work.
d. It applies only to the working poor.
61. Which of the following is not correct?
a. A negative income tax only applies to working people, so it encourages people to get full-time
work.
b. Supporters advocate the use of the Earned Income Tax Credit as a way to help the working
poor.
c. A negative income tax subsidizes the incomes of poor people.
d. An advantage of a negative income tax is that it is not based on the number of children, so it
does not provide incentives for unmarried women to have children.
5110 Income Inequality and Poverty
62. Which of the following is not an example of in-kind transfers?
a. food stamps
b. Medicaid
c. the Earned Income Tax Credit
d. housing vouchers
63. Medicaid and food stamps are
a. available only to the elderly.
b. forms of in-kind assistance.
c. forms of cash assistance.
d. transfer payments.
64. In-kind transfers are politically popular because
a. they provide high quality food and shelter.
b. they provide cash.
c. allow resale of food stamps for cash, if needed.
d. the public believes that the aid is not going to support alcohol and drug addiction.
65. Which of the following is an advantage of an in-kind transfer in comparison to a cash payment?
a. In–kind transfers cost less to administer than cash transfers.
b. In-kind transfers restrict the use of the benefit; thus, recipients receive necessities such as food
and health care.
c. In-kind transfers are more efficient than cash transfers.
d. In-kind transfers give the recipient more utility than cash transfers.
5112 Income Inequality and Poverty
66. Relative to direct cash payments, in-kind transfers have the advantage of being
a. more politically popular.
b. more efficient.
c. more respectful of the poor.
d. of a higher dollar value than cash payments.
67. An example of an in-kind transfer to the poor is
a. the negative income tax.
b. the Earned Income Tax Credit (EITC).
c. Medicaid.
d. Temporary Assistance for Needy Families (TANF).
Income Inequality and Poverty 5113
68. Which of the following is not correct?
a. Toys for Tots, a program that collects new toys to distribute to poor children at Christmas, is an
example of an in–kind transfer.
b. Supporters advocate the use of in-kind transfers because they restrict the ability of recipients
to purchase alcohol and drugs.
c. Critics argue that in-kind transfers are inefficient and disrespectful.
d. For a program to qualify as an in-kind transfer, it must have government approval.
69. If the imposition of a binding minimum wage results in much higher unemployment among workers
seeking minimum wage jobs,
a. firms will respond by demanding more labor.
b. those workers who are employed will be worse off than before the minimum wage law.
c. labor demand is relatively elastic.
d. labor demand is relatively inelastic.
5114 Income Inequality and Poverty
70. Suppose the government used the following formula to compute a family’s tax liability: Taxes
owed = 28% of income – $8,000. How much would a family that earned $150,000 owe?
a. $34,000
b. $42,000
c. $50,000
d. $68,000
71. Suppose the government used the following formula to compute a family’s tax liability: Taxes
owed = 28% of income – $8,000. How much would a family that earned $20,000 owe?
a. –$8,000
b. –$2,400
c. $0
d. $2,400
Income Inequality and Poverty 5115
72. Suppose the government used the following formula to compute a family’s tax liability: Taxes
owed = 28% of income – $8,000. How much would a family have to earn to owe $0 in taxes?
a. $8,000
b. $16,283
c. $28,571
d. $30,694
Scenario 20-6
Zooey is a single mother of two young children whose husband died in a tragic car accident. She
earns $20,000 per year working as a cashier at a grocery store. The government uses a negative
income tax system in which Taxes owed = (1/4 of income) – $15,000.
73. Refer to Scenario 20-6. How much does Zooey owe or receive from the government?
a. She receives $10,000.
b. She owes $10,000.
c. She receives $15,000.
d. She owes $5,000
5116 Income Inequality and Poverty
74. Refer to Scenario 20-6. If Zooey decides to quit her job and earns $0 in income annually, how
much more or less money will she have compared to continuing to work as a cashier?
a. If she quits her job, she will have $10,000 less per year.
b. If she quits her job, she will have $15,000 less per year.
c. If she quits her job, she will have $10,000 more per year.
d. If she quits her job, she will have $15,000 more per year.
75. If the government decided that each family needs a minimum income of $25,000 and promised to
make up the difference between whatever a family earned and $25,000, which of the following is
correct?
a. The government is effectively taxing every dollar earned up to $25,000 at a rate of 100%.
b. This program would reduce the incentive to work to earn any wage up to $25,000.
c. If workers are discouraged from working due to this program, they will miss any on–the-job
training that would have otherwise occurred, limiting their ability to improve their skills.
d. All of the above are correct.
Income Inequality and Poverty 5117
76. When the government provides poor families with antipoverty programs such as welfare,
Medicaid, food stamps, and the Earned Income Tax Credit which are all tied to income,
a. the government creates an egalitarian distribution of income.
b. the recipients can usually receive benefits for an unlimited amount of time.
c. it is common for families to face very high effective marginal tax rates.
d. the incentive to work and earn more income remains unchanged.
Multiple Choice – Section 04: Conclusion
1. The ancient Greek philosopher, Plato, concluded that in an ideal society the income of the richest
person
a. would be equal to the income of the poorest person.
b. would be no more than four times the income of the poorest person.
c. would be reflective of the effort put forth by that person.
d. would be taxed at a higher rate than the income of the poorest person.
5118 Income Inequality and Poverty
True/False and Short Answer
1. The invisible hand of the marketplace acts to allocate resources efficiently, but it does not
necessarily ensure that resources are allocated fairly.
a. True
b. False
2. When the government enacts policies to make the distribution of income more equitable, it distorts
incentives, alters behavior, and makes the allocation of resources less efficient.
a. True
b. False
3. The United States has more income inequality than Japan, Germany, and France.
a. True
b. False
Income Inequality and Poverty 5119
4. The United States has more income inequality than Brazil and South Africa.
a. True
b. False
5. The United States has a more unequal income distribution than many other developed countries
such as Japan and Germany.
a. True
b. False
6. The United States has a more equal income distribution than many developing economies such as
Mexico, South Africa, and Brazil.
a. True
b. False
5120 Income Inequality and Poverty
7. Among all countries in the world, the United States has the most income inequality.
a. True
b. False
8. In the United States in 2011, the bottom fifth of the income distribution had incomes below $27,218.
a. True
b. False
9. The top 5 percent of U.S. annual family income in 2011 was $205,200 or more.
a. True
b. False