Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
The marginal income tax rate is equal to
1)
A)
the percent of total income that goes to taxes.
B)
the total tax payment divided by total income.
C)
the change in the tax payment divided by the change in income.
D)
the average tax payment divided by the total tax payment.
2)
The reason a corporation has retained earnings is to
2)
A)
make investments that will increase the value of the stock.
B)
avoid the double taxation of corporate profits.
C)
be able to make unemployment payments.
D)
pay unemployment taxes.
3)
Which of the following statements is TRUE of static tax analysis?
3)
A)
A government cannot change it tax revenues by changing the tax rate.
B)
A government receives lower tax revenues by raising the tax rate.
C)
A government receives higher tax revenues by raising the tax rate.
D)
A change in the tax rate can raise or lower tax revenues, depending on other factors.
4)
What happens when the government imposes a unit excise tax on a good?
4)
A)
The demand for the newly taxed good decreases.
B)
The newly taxed good’s supply curve shifts vertically upward by the amount of the per–unit
tax being levied.
C)
The amount of the tax is added to the current equilibrium price.
D)
That good’s supply curve shifts down by the amount of the tax.
5)
The tax that brings in the most revenue in the United States is the
5)
A)
personal income tax.
B)
Social Security tax.
C)
corporate income tax.
D)
capital gains tax.
6)
Corporate profits are taxed twice because
6)
A)
it is economically efficient to reduce the amount of retained earnings.
B)
capital gains are not indexed to the rate of inflation.
C)
taxes are collected on profits before profits are distributed to shareholders.
D)
the government wants to minimize the amount of tax paid on capital gains.
7)
Suppose the capital gains tax is 28 percent and you purchased a house ten years ago for $80,000. If
you sold the house today you would get $140,000. Your tax liability would be
7)
A)
$16,800.
B)
indeterminate without knowing the inflation rate.
C)
indeterminate without knowing the personal income tax rate.
D)
$39,200.
8)
Mr. Johnson earns $100,000 per year. Each year he spends $70,000 and saves $30,000. He pays a 5
percent sales tax on all of his spending. Assuming this is the only tax he pays, his average tax rate
out of his income is
8)
A)
5.0 percent.
B)
2.5 percent.
C)
3.5 percent.
D)
1.5 percent.
9)
The marginal tax rate is
9)
A)
the average tax rate paid by both individuals and corporations.
B)
the total taxes paid as a percentage of total income.
C)
the increase in taxes as a percentage of the increase in income.
D)
the sum of all individual tax rates.
10)
If the government wishes to maximize its tax revenue, it should
10)
A)
engage in static tax analysis.
B)
recognize that an increase in the tax rate will lead to an increase in tax revenues.
C)
use only flat taxes.
D)
recognize that too high of a tax rate can decrease the tax base.
D
11)
Of the following, which is the largest source of government funds?
11)
A)
government borrowing
B)
government transfers
C)
taxation
D)
user fees
C
12)
Which of the following are considered ad valorem taxes?
12)
A)
taxes assessed by charging a rate equal to a percentage of an item’s price
B)
taxes based on the amount of debt that the government must repay
C)
taxes assessed by charging a flat amount per unit purchased
D)
taxes based on the amount of spending the government will undertake
A
C
13)
Using the above figure, which of the lines in the above diagram represents a proportional tax?
13)
A)
A
B)
B
C)
C
D)
none of them
14)
Dynamic tax analysis assumes
14)
A)
changes in the tax rates have no effect on tax revenue.
B)
changes in the tax rates have no effect on the tax base.
C)
all of the present tax rates will be in place for a minimum of twenty years.
D)
changes in the tax rates will change the tax base.
15)
The value of goods, services, incomes or wealth subject to taxation is
15)
A)
a unit tax.
B)
the tax base.
C)
the collected tax revenue.
D)
a sales tax.
16)
A capital gain is defined as
16)
A)
the tax paid when one sells an asset.
B)
the positive difference between the sale price and the purchase price of an asset.
C)
an unanticipated increase in income.
D)
the tax rate one pays when one moves into a higher tax bracket.
17)
Using the above table, a unit tax of $2 is imposed on the product. The equilibrium price of this
product after the tax is imposed is
17)
A)
$2.
B)
$3.
C)
$4.
D)
$5.
18)
The largest share of federal government tax receipts is derived from
18)
A)
social insurance contributions.
B)
corporate income taxes.
C)
excise taxes.
D)
individual income taxes.
19)
Using the fiscal year 2009 estimates, the largest component of state and local revenue is the
19)
A)
individual income tax.
B)
corporate income tax.
C)
sales, excise, and gross receipts taxes.
D)
revenue from the federal government.
20)
Social Security taxes are
20)
A)
proportional because everyone is charged the same percentage tax rate.
B)
progressive because all workers pay the tax.
C)
regressive because higher income workers pay taxes on a smaller percentage of their income.
D)
regressive because higher income workers don‘t pay the tax.
21)
In what type of analysis will an increase in the tax rate always lead to an increase in tax revenues?
21)
A)
Dynamic tax analysis
B)
Ad valorem taxation
C)
Excise taxation
D)
Static tax analysis
D
22)
If you were to face a marginal tax rate of 15 percent, how much would your income have increased
if your tax bill increased by $300?
22)
A)
$300
B)
$2,000
C)
$45
D)
$4,500
B
23)
Which of the following forms of taxation accounts for the largest share of taxes received by state
and local governments?
23)
A)
personal and corporate income taxes
B)
sales, excise, and gross receipts taxes
C)
property taxes
D)
license and permit fees
B
24)
If a new unit excise tax is levied on bottles of wine, the
24)
A)
demand for wine shifts to the left.
B)
supply of wine shifts to the right.
C)
demand for wine shifts to the right.
D)
supply of wine shifts to the left.
D
C
25)
Suppose you purchased 100 shares of stock in 2000 for $25 a share and you sell them today for $50
a share. If the capital gains tax is 28 percent, your tax liability is
25)
A)
$70.
B)
$700.
C)
$2500.
D)
indeterminate without knowing the inflation rate.
26)
According to the government budget constraint, any excess of public expenditures and transfers
over taxes and user fees must be funded by
26)
A)
Federal Reserve money creation.
B)
U.S. Treasury money creation.
C)
private borrowing.
D)
government borrowing.
27)
How would the market for coffee be affected if the government charged an excise tax of $1.00 on
each unit of coffee sold?
27)
A)
The demand for coffee would decrease.
B)
There would be a shortage of coffee.
C)
The supply curve would shift up vertically by $1.00.
D)
The demand for coffee would increase.
28)
Refer to the above figures. A unit tax of $2 has been levied on a good. Which of the panels depict
the effect of the taxes?
28)
A)
Panel 1.
B)
Panel 2.
C)
Panel 3.
D)
None of the diagrams reflect the effect of the tax.
29)
Local government expenditures depend on which taxes?
29)
A)
Social Security taxes
B)
Capital gains taxes
C)
Revenues from licenses and permits
D)
Local property, sales, and excise taxes
30)
The federal income tax code of the United States is
30)
A)
progressive.
B)
progressive for individuals but proportional for married couples.
C)
regressive.
D)
proportional.
31)
Imposing a unit excise tax on the final sale of a good or service can be displayed graphically as
31)
A)
a vertical shift upward of the demand curve.
B)
a vertical shift downward of the demand curve.
C)
a vertical shift downward of the supply curve.
D)
a vertical shift upward of the supply curve.
32)
The earnings that a corporation saves for investment in other productive activities are
32)
A)
tax incidence.
B)
capital gains.
C)
transfers in kind.
D)
retained earnings.
33)
When income is $15,000, the amount of income taxes owed is $2,000; when income increases to
$20,000, the amount owed increases to $3,000. The average income tax rate when a person earns
$15,000 is
33)
A)
15 percent.
B)
13.3 percent.
C)
20 percent.
D)
75 percent.
34)
Sales taxes are routinely collected by
34)
A)
the Internal Revenue Service.
B)
the Federal Trade Commission.
C)
the Department of Commerce.
D)
the merchants selling the good or services.
35)
Using the above table, a unit tax of $2 is imposed on the product. How much of the tax is paid by
the consumer?
35)
A)
$1.
B)
$3.
C)
$2.
D)
unable to determine.
36)
The tax base is
36)
A)
the value of all goods, services, incomes, or wealth subject to taxation.
B)
the minimum amount of tax revenue that government must collect each year.
C)
the sum of all incomes earned in the United States.
D)
the maximum amount of tax revenue that government must collect each year.
37)
Suppose you are making $50,000 per year and paying $5,000 per year in income taxes. You get a
$10,000 per year raise and your income taxes are now $6,000 per year. Based on this information,
the income tax system is
37)
A)
regressive.
B)
bracketed.
C)
progressive.
D)
proportional.
38)
One criticism of the corporate income tax is that
38)
A)
it is too flat.
B)
it is too regressive.
C)
it is so complex to administer that corporate income taxes are rarely collected by the Internal
Revenue Service.
D)
a portion of the corporations’ tax burden is passed on to consumers via higher prices for
goods and services and to workers via lower wages.
39)
Static tax analysis assumes that
39)
A)
an increase in a tax rate will lead to an increase in the tax base.
B)
an increase in a tax rate will leave the tax base unchanged.
C)
the tax base will always remain unchanged.
D)
an increase in a tax rate may lead to a decrease in the tax base.
40)
If a tax system is progressive, then
40)
A)
the average tax rate is constant, but the dollar amount paid in taxes increases as income
increases.
B)
the marginal tax rate is greater than the average tax rate as income rises.
C)
the marginal tax rate is lower than the average tax rate as income rises.
D)
the average and the marginal tax rates are equal.
41)
Jamal earns $160,000 per year and Josephina earns $80,000 per year. They both pay the same price
to buy the identical automobile and each pays $1,600 in sales tax. In relation to their relative
incomes, this is an example of a
41)
A)
marginal tax.
B)
progressive tax.
C)
proportional tax.
D)
regressive tax.
42)
Suppose the income tax rate schedule is 0 percent on the first $10,000; 10 percent on the next
$20,000; 20 percent on the next $20,000; 30 percent on the next $20,000; and 40 percent on any
income over $70,000. Family A earns $28,000 a year and Family B earns $65,000 a year. Both receive
a ten percent raise. What is the marginal tax rate of each and what is the extra tax paid by each after
the raise?
42)
A)
Family A: 20 percent marginal tax rate and $360 in extra taxes; Family B40 percent marginal
tax rate and $2100 in extra taxes.
B)
Family A: 20 percent marginal tax rate and $560 in extra taxes. Family B40 percent marginal
tax rate and $2600 in extra taxes.
C)
Family A: 10 percent marginal tax rate and $280 in extra taxes; Family B30 percent marginal
tax rate and $1950 in extra taxes.
D)
Family A: 10 percent marginal tax rate and $420 in extra taxes; Family B30 percent marginal
tax rate and $2275 in extra taxes.
43)
Using the above figure, which of the lines in the above diagram represents a progressive tax?
43)
A)
A
B)
B
C)
C
D)
none of them
44)
The U.S. Social Security tax is an example of a
44)
A)
regressive tax.
B)
proportional tax.
C)
premium tax.
D)
progressive tax.
45)
The marginal tax rate can be calculated by which of the following formulas?
45)
A)
total taxable income divided by total taxes due
B)
total taxes due divided by total taxable income
C)
the change in taxable income divided by the change in taxes due
D)
the change in taxes due divided by the change in taxable income
46)
The Mayor of Stuckeyville is considering increasing the tax on bowling. He is confident that tax
revenues will increase but recognizes the possibility that they may decrease. The mayor is engaging
in
46)
A)
static tax analysis.
B)
a policy that will cause the tax base to increase.
C)
dynamic tax analysis.
D)
a policy that will cause the tax base to remain unchanged.
47)
Some economists argue that corporate income taxes are typically not paid by firms, but by
47)
A)
the board of directors of the firm.
B)
bond holders.
C)
the government.
D)
stockholders, employees, and consumers.
D
48)
Reduction or elimination of dividend taxes is designed, in part, to
48)
A)
make rich people richer.
B)
reduce inefficiencies in the production process.
C)
increase corporate tax levels.
D)
reduce the double taxation burden on individuals.
D
49)
The marginal income tax rate applies to
49)
A)
the income received by people above the national average.
B)
the income in the highest tax bracket reached.
C)
all income earned by a family.
D)
the income of the highest income U.S. taxpayers.
B
C
50)
Governments have to rely on taxes for financing because
50)
A)
they cannot borrow unlimited amounts.
B)
they are not allowed to sell bonds.
C)
they usually spend all of the gold reserves.
D)
gold prices have fallen steadily over the years.
51)
A government wishing to maximize its tax revenues should
51)
A)
always assess the highest possible tax rate.
B)
always assess the lowest possible tax rate.
C)
push tax rates up to the point where revenues peak, but raise the tax rate no farther.
D)
determine the highest possible tax rate and then back it down by exactly 4 percentage points.
52)
When the purchase price of an asset is less than its sale price, then there is a
52)
A)
corporate income tax.
B)
budget deficit.
C)
capital gain.
D)
capital loss.
53)
In a progressive tax system,
53)
A)
the marginal tax rate and the average tax rate increase as income levels increase and the
marginal tax rate exceeds the average tax rate.
B)
the marginal tax rate and the average tax rate decrease as income levels increase and the
marginal tax rate is less than the average tax rate.
C)
the marginal tax rate increase as income increases but the average tax rate does not change as
income increases.
D)
the marginal tax rate and the average tax rate are the same for every income level and the
same as income increases.
54)
The government imposes a unit excise tax on bubble gum. What happens as a result?
54)
A)
At the original market price, there will be a bubble gum shortage.
B)
The equilibrium quantity of bubble gum increases.
C)
At the original market price, there is a bubble gum shortage and so price rises.
D)
There will be no change in either the market price or equilibrium quantity as long as the
excise tax rate is 5 percent or less.
55)
Dynamic tax analysis generally predicts
55)
A)
that lower tax rates will always and continuously lead to increased tax revenues.
B)
that the higher the tax rate is, the higher the tax revenue will continue to be into the future.
C)
that lower tax rates are always going to lead to decreased tax revenues.
D)
that the higher tax rates lead to higher revenues only to a point at which revenues will begin
to decrease due to a diminishing tax base.
56)
Refer to the above figures. Which panel represents the expected relationship between tax revenue
and the sales tax rate if dynamic tax analysis is used?
56)
A)
Panel 1
B)
Panel 2
C)
Panel 3
D)
Panel 4
57)
The responsibility of paying for the Social Security benefits for currently retired individuals falls on
57)
A)
only working people over 50 years of age.
B)
current and future workers.
C)
the retired people themselves.
D)
no one, since the government prints the money.
58)
Ultimately, the real burden of paying for Social Security benefits will be paid for by
58)
A)
a new tax levied on businesses.
B)
Social Security trust fund bonds.
C)
taxes levied on workers.
D)
new federally issued Treasury bills.
59)
The distribution of tax burdens among various groups in society is referred to as
59)
A)
tax incidence.
B)
sectioning.
C)
zero–base budgeting.
D)
regressive placement.
60)
The average tax rate can be calculated by which of the following formulas?
60)
A)
Total taxable income divided by total taxes due
B)
The change in taxable income divided by the change in taxes due
C)
The change in taxes due divided by the change in taxable income
D)
Total taxes due divided by total taxable income
D
61)
Assume that Mr. Smith’s income increased from $40,000 last year to $45,000 this year and that he
paid an additional $2,000 in taxes. This would indicate that his marginal tax rate is
61)
A)
10 percent.
B)
30 percent.
C)
25 percent.
D)
40 percent.
D
62)
The corporate income tax in the United States
62)
A)
does not apply to profits earned on exports.
B)
excludes dividends paid out.
C)
only taxes retained earnings.
D)
results in individuals’ being doubly taxed on corporate earnings.
D
63)
According to dynamic tax analysis, continually increasing the tax rate will eventually
63)
A)
cause a decrease in the tax base.
B)
cause an increase in the tax base.
C)
result in an initial decrease in the tax base followed ultimately by a rise in the tax base.
D)
have no impact on the tax base.
A
A
Explanation: