Application: The Costs of Taxation 2191
69.
In a 2012 Wall Street Journal column, economists Edward Prescott and Lee Ohanian claimed
that, in order to
promote faster economic growth, the government should
a.
increase tax rates on individuals with high incomes, and leave tax rates on other individuals
unchanged.
b.
equalize tax rates on all individuals, regardless of how much they earn.
c.
decrease tax rates on income and increase tax rates on consumption.
d.
increase the after–tax benefits to successful entrepreneurship and risk-taking.
Multiple Choice – Section 04: Conclusion
1.
When the government imposes taxes on buyers or sellers of a good, society
a.
loses some of the benefits of market efficiency.
b.
gains efficiency but loses equality.
c.
is better off because the government’s tax revenues exceed the deadweight loss.
d.
moves from an elastic supply curve to an inelastic supply curve.
2.
Taxes are costly to market participants because they
a.
transfer resources from market participants to the government.
b.
alter incentives.
c.
distort market outcomes.
d.
All of the above are correct.
3.
Taxes are of interest to
a.
microeconomists because they consider how to balance equality and efficiency.
b.
microeconomists because they consider how best to design a tax system.
c.
macroeconomists because they consider how policymakers can use the tax system to stabilize
economic
activity.
d.
All of the above are correct.
True/False and Short Answer
1.
Total surplus is always equal to the sum of consumer surplus and producer surplus.
a.
True
b.
False
2.
Total surplus in a market does not change when the government imposes a tax on that market
because the loss of
consumer surplus and producer surplus is equal to the gain of government
revenue.
a.
True
b.
False
3.
When a tax is imposed on buyers, consumer surplus and producer surplus both decrease.
a.
True
b.
False
4.
When a tax is imposed on buyers, consumer surplus decreases but producer surplus increases.
a.
True
b.
False
5.
When a tax is imposed on sellers, producer surplus decreases but consumer surplus increases.
a.
True
b.
False
6.
When a tax is imposed on sellers, consumer surplus and producer surplus both decrease.
a.
True
b.
False
7.
Taxes affect market participants by increasing the price paid by the buyer and received by the
seller.
a.
True
b.
False
8.
Taxes affect market participants by increasing the price paid by the buyer and decreasing the
price received by the
seller.
a.
True
b.
False
9.
A tax raises the price received by sellers and lowers the price paid by buyers.
a.
True
b.
False
10.
Normally, both buyers and sellers of a good become worse off when the good is taxed.
a.
True
b.
False
11.
When a good is taxed, the tax revenue collected by the government equals the decrease in the
welfare of buyers and
sellers caused by the tax.
a.
True
b.
False
12.
A tax places a wedge between the price buyers pay and the price sellers receive.
a.
True
b.
False
13.
A tax on a good causes the size of the market to increase.
a.
True
b.
False
14.
A tax on a good causes the size of the market to shrink.
a.
True
b.
False
15.
When a tax is imposed, the loss of consumer surplus and producer surplus as a result of the tax
exceeds the tax
revenue collected by the government.
a.
True
b.
False
16.
Economists use the government’s tax revenue to measure the public benefit from a tax.
a.
True
b.
False
17.
Because taxes distort incentives, they cause markets to allocate resources inefficiently.
a.
True
b.
False
18.
Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of
the gains from trade.
a.
True
b.
False
19.
If the government imposes a $3 tax in a market, the equilibrium price will rise by $3.
a.
True
b.
False
20.
If the government imposes a $3 tax in a market, the buyers and sellers will share an equal burden
of the tax.
a.
True
b.
False
21.
Taxes create deadweight losses.
a.
True
b.
False
22.
When a tax is imposed on a good, consumer surplus decreases and producer surplus remains
unchanged.
a.
True
b.
False
23.
When a tax is imposed on a good, the resulting decrease in consumer surplus is always larger than
the resulting
decrease in producer surplus.
a.
True
b.
False
24.
Taxes drive a wedge into the market by raising the price that sellers receive and lowering the
price that buyers pay.
a.
True
b.
False
25.
Tax revenue equals the size of the tax multiplied by the quantity sold in the market after the tax is
levied.
a.
True
b.
False
26.
As the price elasticities of supply and demand increase, the deadweight loss from a tax increases.
a.
True
b.
False
27.
The greater the elasticity of demand, the smaller the deadweight loss of a tax.
a.
True
b.
False
28.
The more inelastic are demand and supply, the greater is the deadweight loss of a tax.
a.
True
b.
False
29.
The elasticities of the supply and demand curves in the market for cigarettes affect how much a
tax distorts that
market.
a.
True
b.
False
30.
If a tax did not induce buyers or sellers to change their behavior, it would not cause a deadweight
loss.
a.
True
b.
False
31.
The most important tax in the U.S. economy is the tax on corporations’ profits.
a.
True
b.
False
32.
The Social Security tax, and to a large extent, the federal income tax, are labor taxes.
a.
True
b.
False
33.
Taxes on labor tend to increase the number of hours that people choose to work.
a.
True
b.
False
34.
Taxes on labor tend to encourage the elderly to retire early.
a.
True
b.
False
35.
Taxes on labor tend to encourage second earners to stay at home rather than work in the labor
force.
a.
True
b.
False
36.
Economists disagree on whether labor taxes have a small or large deadweight loss.
a.
True
b.
False
37.
The demand for bread is less elastic than the demand for donuts; hence, a tax on bread will create
a larger
deadweight loss than will the same tax on donuts, other things equal.
a.
True
b.
False
38.
The larger the deadweight loss from taxation, the larger the cost of government programs.
a.
True
b.
False
39.
A tax on insulin is likely to cause a very large deadweight loss to society.
a.
True
b.
False
40.
When demand is relatively elastic, the deadweight loss of a tax is larger than when demand is
relatively inelastic.
a.
True
b.
False
41.
The more elastic the supply, the larger the deadweight loss from a tax, all else equal.
a.
True
b.
False
42.
The demand for beer is more elastic than the demand for milk, so a tax on beer would have a
smaller deadweight
loss than an equivalent tax on milk, all else equal.
a.
True
b.
False
43.
The Social Security tax is a labor tax.
a.
True
b.
False
44.
When a good is taxed, the deadweight loss is larger the more elastic are demand and supply.
a.
True
b.
False
45.
The deadweight loss of a tax rises even more rapidly than the size of the tax.
a.
True
b.
False
46.
As the size of a tax increases, the government’s tax revenue rises, then falls.
a.
True
b.
False
47.
Tax revenues increase in direct proportion to increases in the size of the tax.
a.
True
b.
False
48.
If the size of a tax doubles, the deadweight loss doubles.
a.
True
b.
False
49.
If the size of a tax triples, the deadweight loss increases by a factor of six.
a.
True
b.
False
50.
Economist Arthur Laffer made the argument that tax rates in the United States were so high that
reducing the rates
would increase tax revenue.
a.
True
b.
False
51.
The Laffer curve is the curve showing how tax revenue varies as the size of the tax varies.
a.
True
b.
False
52.
The result of the large tax cuts in the first Reagan Administration demonstrated very convincingly
that Arthur Laffer
was correct when he asserted that cuts in tax rates would increase tax
revenue.
a.
True
b.
False
53.
The idea that tax cuts would increase the quantity of labor supplied, thus increasing tax revenue,
became known as
supply-side economics.
a.
True
b.
False
54.
The Laffer curve illustrates how taxes in markets with greater elasticities of demand compare to
taxes in markets
with smaller elasticities of supply.
a.
True
b.
False
55.
The more elastic are supply and demand in a market, the greater are the distortions caused by a
tax on that market,
and the more likely it is that a tax cut in that market will raise tax revenue.
a.
True
b.
False