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67) Suppose the supply of labor is more inelastic than the demand for labor. Then, a social
security tax imposed on employers
A) shifts the demand curve for labor leftward.
B) lowers the wage rate received by workers.
C) leads to the workers paying more of the tax than the employers.
D) Only answers B and C are correct.
E) Answers A, B, and C are correct.
68) Consider a social security tax on workers versus a social security tax on employers. In
comparing the outcomes of each type of tax, we see that
A) workers receive a higher take-home wage when the tax is imposed on employers than when
the tax is imposed on workers.
B) workers receive the same take-home wage when the tax is imposed on workers as when the
tax is imposed on employers.
C) employers pay a lower total wage when the tax is imposed on workers.
D) employment decreases by more when the tax is imposed on employers than when the tax is
imposed on workers.
E) employment decreases by more when the tax is imposed on workers than when the tax is
imposed on employers.
69) If Congress wanted to change the social security tax so that firms paid most of the tax, they
would need to
A) change the tax laws so that all of the social security tax was imposed on firms.
B) change the tax laws so that all of the social security tax was imposed on workers.
C) change the tax laws so that more than 50 percent of the social security tax was imposed on
firms.
D) change the tax laws so that more than 50 percent of the social security tax was imposed on
workers.
E) None of the above because the incidence of the social security tax does not depend on the tax
laws but instead depends on the elasticities of the demand for labor and the supply of labor.
70) In 2009, Social Security taxes of over 11 percent were imposed on all income up to $98,000.
For income that exceeded $104,000, no Social Security tax was imposed. Hence the Social
Security tax is a
A) progressive tax.
B) proportional tax.
C) regressive tax.
D) fair-incidence tax.
E) type of tax that is impossible to determine without more information.
71) The percentage of an additional dollar of income that is paid in tax is the
A) sales tax.
B) capital tax.
C) marginal tax rate.
D) personal income tax.
E) regressive tax.
72) If the average tax rate is constant as income increases, then the tax is called
A) regressive.
B) progressive.
C) proportional.
D) an average tax.
E) efficient.
73) A tax on labor income
A) increases the quantity employed because the demand for labor increases.
B) decreases the quantity employed because the supply of labor decreases.
C) increases the quantity employed because the supply of labor increases.
D) decreases the quantity employed because the demand for labor increases.
E) does not change the quantity employed because people must have jobs in order to earn any
income.
74) The incidence of an income tax on labor income is generally that the tax is
A) paid by only workers.
B) paid by only employers.
C) shared equally between workers and employers.
D) shared but not necessarily equally between workers and employers.
E) funded by the deadweight loss.
75) In the labor market shown in the graph, the government introduces a 10 percent income tax.
The employer pays ________ cents of the tax and the employee pays ________ cents of the tax.
A) 45; 50
B) 95; 0
C) 0; 95
D) 50; 45
E) 42.5; 42.5
76) When governments tax capital income, the equilibrium quantity of capital
A) increases because of the international mobility of capital.
B) does not change because the supply of capital is perfectly elastic.
C) decreases.
D) does not change because the supply of capital is perfectly inelastic.
E) might increase or decrease depending on whether the demand for capital is inelastic or elastic.
77) If the supply of capital is perfectly elastic, the incidence of a tax on capital income is
A) paid entirely by the suppliers of capital.
B) paid entirely by firms that demand capital.
C) shared equally between firms that demand capital and the suppliers of capital.
D) shared but not equally between firms that demand capital and the suppliers of capital.
E) unknown.
78) A tax on income from land in Montana is borne entirely by landowners because the
A) demand for land is perfectly inelastic.
B) supply of land is perfectly inelastic.
C) supply of land is perfectly elastic.
D) demand for land is perfectly elastic.
E) deadweight loss from the tax would otherwise be infinite.
79) When a social security tax is imposed on workers, employment ________ and when a social
security tax is is imposed on employers, employment ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
E) decreases; does not change
8.3 Fairness and the Big Tradeoff
1) Consider the two principles regarding fair taxation. The benefits principle and the ability-to-
pay principle
A) both state that people should pay taxes according to the benefits they receive from public
services.
B) both state that people should pay taxes according to how easy they can bear the burden.
C) are both based on horizontal equity.
D) present conflicting ideas on the fairness of taxes.
E) are both based on vertical equity.
2) The benefits principle of fair taxation means that people
A) pay taxes according to the level of benefits they receive.
B) pay taxes according to their ability to pay.
C) with the same ability pay the same taxes.
D) with a greater ability to pay, pay more taxes.
E) Answers B, C, and D are correct.
3) The proposition that people should pay taxes equal to the benefits they receive from public
services is known as the
A) ability-to-pay principle.
B) progressive tax principle.
C) fairness principle.
D) benefits principle.
E) "he or she who gets, pays" principle.
4) The benefits principle of fair taxation
A) can be used to justify the progressive income tax.
B) can be used to justify high fuel taxes to pay for public schools.
C) is the proposition that people should pay taxes equal to the benefits they receive.
D) Both answers A and B are correct.
E) Both answers B and C are correct.
5) The benefits principle of tax fairness argues that
A) everyone receives equal benefits from public services so taxes should be the same for all.
B) highly paid people should pay lower taxes because they work harder.
C) taxes should be related to the amount of income earned.
D) people should pay taxes equal to the benefits from public services received.
E) the benefits people get from the government should not be related to their taxes.
6) The benefits principle of fairness of taxes is the proposition that
A) taxes should only be used to correct market failures.
B) people should pay taxes according to how easily they can bear the burden.
C) tax systems can only be fair if all people agree on them.
D) people should pay taxes equal to their benefit from public services.
E) the incidence of taxes should be equal across households.
7) Which of the following is an example of a tax following the benefits principle?
i. sales taxes on gasoline are used to fund road maintenance projects
ii. federal income tax used to fund food stamps for poorer households
iii. property taxes used to finance public education
A) i only
B) ii only
C) iii only
D) ii and iii
E) i, ii, and iii
8) The argument that those who use the highways the most should pay most of the cost of
providing them, is an example of
A) the benefits principle of fair taxes.
B) the ability-to-pay principle of fair taxes.
C) a progressive tax system.
D) a proportional tax system.
E) the "fairest incidence of tax benefits" principle.
9) Which of the following taxes best illustrate the benefits principle of tax fairness?
A) Roads and highways are built and maintained through a tax on gasoline.
B) The local library is funded through property taxes levied on all homeowners.
C) The WIC program provides food to low income mothers and is funded through the federal
income tax.
D) A sales tax on food pays for local police and fire protection.
E) City parks are maintained through local excise taxes.
10) Which of the following taxes best illustrate the benefits principle of tax fairness?
A) A property tax that is proportional to the value of a home is used to fund K-12 education.
B) The local library is funded through property taxes levied on all homeowners.
C) The WIC program provides food to low income mothers and is funded through the federal
income tax.
D) A sales tax on food pays for local police and fire protection.
E) The local youth sports leagues are financed by fees collected from participants by the city.
11) Using fuel taxes to pay for maintaining public highways is an example of
A) the benefits principle of fair taxation.
B) horizontal equity approach to taxation.
C) vertical equity approach to taxation.
D) the ability-to-pay principle of taxation.
E) the excess burden from taxes.
12) The idea that taxpayers with the same ability to pay a tax should pay the same taxes is called
A) progressive taxes.
B) regressive taxes.
C) horizontal equity.
D) vertical equity.
E) fair-incidence principle.
13) The ability-to-pay principle of tax fairness is equivalent to which of the following?
A) collect taxes from those who benefit the most from provision of public services
B) more taxes should be collected from people who can more easily bear the burden
C) a regressive income tax structure
D) a proportional income tax structure
E) concern about only horizontal equity and no concern about vertical equity
14) Which of the following taxes best illustrates the ability to pay principle?
A) sales tax
B) state property tax
C) federal income tax
D) cigarette tax
E) marriage tax
15) Which of the following taxes best illustrate the ability-to-pay principle of tax fairness?
A) Roads and highways are built and maintained through a tax on gasoline.
B) The local library is funded through flat $10 tax levied on all homeowners.
C) A sales tax on food pays for local police and fire protection.
D) The WIC program provides food to low income mothers and is funded through the
progressive federal income tax.
E) State parks are maintained through the state lottery.
16) Which of the following taxes best illustrate the ability-to-pay principle of tax fairness?
A) Tuition at public universities is lower for in-state residents than for out-of-state residents.
B) The library is funded through flat $10 tax levied on all homeowners.
C) A property tax that is proportional to the value of a home is used to fund K-12 education.
D) Free cholesterol check clinics are funded through a $0.20 tax on all prescriptions.
E) A sales tax on food pays for local police and fire protection.
17) When it comes to taxes, horizontal equity means that
A) people with lower incomes bear a smaller tax burden.
B) people with the same incomes pay the same amount of taxes.
C) progressive taxes must be imposed.
D) regressive taxes must be imposed.
E) only proportional taxes are fair.
18) The assertion that people with the same ability to pay taxes should pay the same amount in
taxes best represents the idea of
A) horizontal equity.
B) vertical equity.
C) the benefits principle of tax fairness.
D) fairness principle of taxation.
E) benefits paid principle of taxation.
19) If taxes are collected on the basis of ability-to-pay and there are two taxpayers with the same
income who also are identical in all other respects, which of the following is correct?
A) Vertical equity is impossible between these two taxpayers.
B) Vertical equity exists.
C) Horizontal equity exists.
D) The tax must be proportional.
E) The fair-incidence principle is potentially being violated.
20) Suppose that Anthony and Melissa both earn $30,000 and are otherwise the same. If they
both pay 10 percent of their income as taxes, then
A) the income tax is regressive.
B) the benefits principle of fairness has been achieved.
C) horizontal equity has been achieved.
D) proportional equity has been achieved.
E) vertical equity has been achieved.
21) Vertical equity is the idea that
A) taxpayers with a greater ability to pay should bear a greater share of the taxes.
B) people should pay taxes equal to the benefits they receive from public benefits.
C) as income rises, taxes should be efficient, not equitable.
D) the marriage tax is equitable.
E) taxes must be fairest to people with the largest incomes.
22) Progressive taxes can be justified as fair based on which of the following?
A) horizontal equity
B) vertical equity
C) benefits received
D) index of fairness principle
E) None of the above answers is correct.
23) The assertion that Bill Gates and Paris Hilton should pay more taxes than Average Joe best
represents the idea of
A) horizontal equity.
B) vertical equity.
C) the benefits principle of tax fairness.
D) fairness principle of taxation.
E) benefits paid principle of taxation.
24) The marriage tax problem in the United States is a
A) vertical equity problem because married people pay less than similar single people.
B) horizontal equity problem because married people pay more than similar single people.
C) benefits principle problem because who benefit more pay less.
D) vertical equity problem because married people pay more than similar single people.
E) horizontal equity problem because married people pay less than similar single people.
25) The marriage tax problem in the U.S. tax code is a problem involving which of the
following?
A) benefits received principle
B) the ability-to-pay principle
C) a conflict between horizontal and vertical equity
D) vertical equity
E) incidence of fairness principle
26) Trying to achieve vertical equity by using a progressive income tax structure can create
problems with which of the following?
A) horizontal equity
B) vertical equity
C) benefits received
D) tax incidence
E) regressive equality
27) Which of the following taxes best illustrates the benefits principle of taxation?
A) sales tax on clothing used to fund food stamps
B) state income tax used to fund state universities
C) medicare tax imposed on all workers used to fund medical care for the elderly
D) gasoline tax used to fund road repairs
E) federal income tax used to fund NASA spending
28) The proposition that people should pay taxes according to how easily they can bear the
burden is known as the ________ principle.
A) regressive tax
B) benefits
C) ability-to-pay
D) fairness
E) incidence of fairness
29) The government once imposed a luxury tax on very expensive jewelry. This tax followed the
________ principle.
A) benefits
B) ability-to-pay
C) vertical equity
D) horizontal equity
E) fair-tax incidence
30) The proposition that taxpayers with the same ability to pay should pay the same taxes is
called
A) the benefits principle.
B) the ability-to-pay imperative.
C) vertical equity.
D) horizontal equity.
E) the fair-tax incidence principle.
31) Vertical equity implies that
i. tax rates should be equal for all tax payers.
ii. people with higher income should pay more in taxes.
iii. people with higher incomes should pay a lower average tax rate.
A) i only
B) ii only
C) iii only
D) i and ii
E) ii and iii
32) Joan's income is $60,000 and she pays $6,000 in taxes. Juan's income is $40,000 and he pays
$7,000 in taxes. This situation violates
A) the benefits principle.
B) the big tradeoff.
C) vertical equity.
D) horizontal equity.
E) the fair-tax incidence principle.
33) Because the U.S. income tax is a progressive tax, taxing married couples as two single
persons can violate
A) the benefits principle.
B) the ability-to-pay imperative.
C) vertical equity.
D) horizontal equity.
E) the government's need for more revenue.
34) Compared to taxes on labor income, taxes on capital income generate ________ deadweight
loss and are paid by people who generally have the ________ ability to pay.
A) a larger; most
B) a larger; least
C) a smaller; most
D) a smaller; least
E) no; least
8.4 Chapter Figures
The figure above shows the market for MP3 players, where S is the supply curve and D is the
demand curve before any tax. The government imposes a $10 per unit tax on buyers of MP3
players.
1) After the tax is imposed, the price (including the tax) paid by the buyer is ________ per MP3
player.
A) $105
B) $100
C) $95
D) $110
E) $90
2) After the tax is imposed, the price received by the seller is ________ per MP3 player.
A) $105
B) $100
C) $95
D) $110
E) $90
3) The tax ________ the price paid by the buyer by ________ per MP3 player.
A) raises; $5
B) lowers; $5
C) raises; $10
D) lowers; $10
E) raises; $7.50
4) The tax ________ the price received by the seller by ________ per MP3 player.
A) raises; $5
B) lowers; $5
C) raises; $10
D) lowers; $10
E) lowers; $2.50
5) After the tax is imposed, the government collects tax revenue of ________ a week.
A) $20,000
B) $10,000
C) $50,000
D) $60,000
E) $40,000
6) Based on the figure above, the burden of the tax
A) is split equally between the buyer and the seller.
B) falls mostly on buyers.
C) falls mostly on sellers.
D) falls entirely on buyers.
E) falls entirely on sellers.
