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1. The concept that people should pay taxes based on the benefits they receive from government services is called
a.
the ability-to-pay principle.
b.
the benefits principle.
c.
horizontal equity.
d.
vertical equity.
2. The principle that people should pay taxes based on the benefits they receive from government services is called the
a.
pay principle.
b.
tax-benefit principle.
c.
government services principle.
d.
benefits principle.
3. The benefits principle is used to justify
a.
sales taxes.
b.
gasoline taxes.
c.
“sin” taxes on cigarettes and alcoholic beverages.
d.
personal income taxes.
4. If revenue from a gasoline tax is used to build and maintain public roads, the gasoline tax may be justified on the basis
of
a.
the benefits principle.
b.
the ability-to-pay principle.
c.
vertical equity.
d.
horizontal equity.
5. If revenue from a cigarette tax is used to pay for healthcare for people with lung cancer, the cigarette tax may be
justified on the basis of
a.
the benefits principle.
b.
the ability-to-pay principle.
c.
vertical equity.
d.
horizontal equity.
6. Suppose New York City passes a local “big gulp” tax that taxes carbonated beverages larger than 20 ounces if they
contain sugar or high fructose corn syrup. If the revenue from the “big gulp” tax is earmarked for diabetes research, the
“big gulp” tax may be justified
a.
on the basis of the ability-to-pay principle.
b.
because it is an example of a lump-sum tax and thus is the most efficient tax.
c.
on the basis of the benefits principle.
d.
because it is an example of a progressive tax and thus is the most equitable tax.
7. The theory that the wealthy should contribute more to police protection than the poor because they have more to protect
is based on
a.
the ability-to-pay principle.
b.
a consumption tax plan.
c.
the benefits principle.
d.
property tax assessments.
8. When a tax is justified on the basis that the taxpayers who pay the tax receive specific government services from
payment of the tax, the tax
a.
is considered horizontally equitable.
b.
burden is minimized.
c.
satisfies the benefits principle.
d.
is considered vertically equitable.
9. Suppose the government levies a “fat tax” on naturally-sweetened carbonated beverages to try to reduce the number of
overweight children. If the tax revenues pay for the health problems of overweight children, the tax would satisfy the
a.
ability-to-pay principle.
b.
benefits principle.
c.
vertical-equity principle.
d.
horizontal-equity principle.
10. The benefits principle of taxation can be used to argue that wealthy citizens should pay higher taxes than poorer ones
on the basis that
a.
police services are more frequently used in poor neighborhoods.
b.
the wealthy benefit more from services provided by government than the poor.
c.
the poor are more active in political processes.
d.
the poor receive welfare payments.
11. If a poor family has three children in public school and a rich family has two children in private school, the benefits
principle would suggest that
a.
the poor family should pay more in taxes to pay for public education than the rich family.
b.
the rich family should pay more in taxes to pay for public education than the poor family.
c.
the benefits of private school exceed those of public school.
d.
public schools should be financed by property taxes.
12. Some colleges charge all students the same “activity fee.” Suppose that students differ by how many campus activities
they engage in. This charge is most like
a.
an excise tax which conforms to the benefits principle.
b.
an excise tax which violates the benefits principle.
c.
a lump-sum tax which conforms to the benefits principle.
d.
a lump-sum tax which violates the benefits principle.
13. Some colleges charge all students the same fee for access to campus computing services. Suppose that students differ
by how many hours of campus computing services they use. For example, some students print all their papers and
assignment in the campus computer labs, while others use their own printers in their apartments. The computing services
fee is most like a(n)
a.
excise tax that conforms to the benefits principle.
b.
excise tax that violates the benefits principle.
c.
lump-sum tax that conforms to the benefits principle.
d.
lump-sum tax that violates the benefits principle.
14. Some colleges charge all students the same fee for a weekly dining services meal plan. Suppose that students differ by
how much food they consume each week. For example, members of the women’s swimming team consume, on average,
twice as much food as the average female college student, and the average male college student consumes 20 percent
more food than the average female college student. The dining services fee is most like a(n)
a.
excise tax that conforms to the benefits principle.
b.
excise tax that violates the benefits principle.
c.
lump-sum tax that conforms to the benefits principle.
d.
lump-sum tax that violates the benefits principle.
15. Suppose an excise tax is imposed on luxury boats and yachts. Economists argue that such a tax
a.
is sure to be vertically equitable, since buyers of luxury boats and yachts are wealthy.
b.
entails no deadweight loss as long as buyers of boats and yachts can easily substitute one luxury good for
another.
c.
violates the benefits principle of taxation.
d.
may burden workers in the luxury-boat-and-yacht industry more than it burdens the buyers of luxury boats and
yachts.
16. If a poor family has three children in public school and a rich family has two children in private school, the ability-to-
pay principle would suggest that
a.
the poor family should pay more in taxes to pay for public education than the rich family.
b.
the rich family should pay more in taxes to pay for public education than the poor family.
c.
the benefits of private school exceed those of public school.
d.
public schools should be financed by property taxes.
17. The argument that each person should pay taxes according to how well the individual can shoulder the burden is called
a.
the ability-to-pay principle.
b.
the equity principle.
c.
the benefits principle.
d.
regressive.
18. "A $1,000 tax paid by a poor person may be a larger sacrifice than a $10,000 tax paid by a wealthy person" is an
argument in favor of
a.
the horizontal equity principle.
b.
the benefits principle.
c.
a regressive tax argument.
d.
the ability-to-pay principle.
19. Vertical equity and horizontal equity are associated with
a.
the benefits principle of taxation.
b.
the ability-to-pay principle of taxation.
c.
taxes that have no deadweight losses.
d.
falling marginal tax rates.
20. The claim that all citizens should make an "equal sacrifice" to support government programs is usually associated with
a.
the ability-to-pay principle.
b.
the benefits principle.
c.
efficiency arguments.
d.
regressive tax arguments.
21. A tax system based on the ability-to-pay principle claims that all citizens should
a.
pay taxes based on the benefits they receive from government services.
b.
pay the same amount in taxes.
c.
pay taxes based on consumption rather than income.
d.
make an equal sacrifice.
22. The ability-to-pay principle claims that a person should pay taxes according to
a.
the level of public education that the person has received throughout his lifetime.
b.
how many government services that person will receive.
c.
how well that person can shoulder the tax burden.
d.
the level of debt that the person has.
23. Vertical equity in taxation refers to the idea that people
a.
in unequal conditions should be treated differently.
b.
in equal conditions should pay equal taxes.
c.
should pay taxes based on the benefits they receive from the government.
d.
should pay a proportional tax rather than a progressive tax.
24. Vertical equity states that taxpayers with a greater ability to pay taxes should
a.
contribute a decreasing proportion of each increment in income to taxes.
b.
contribute a larger amount than those with a lesser ability to pay.
c.
be less subject to administrative burdens of a tax.
d.
be less subject to tax distortions that lead to deadweight losses.
25. In the 1980s, President Ronald Reagan argued that high tax rates distorted economic incentives to work and save. In
the 1990s, President Bill Clinton argued that the rich were not paying their fair share of taxes. Which of the following
statements best summarizes the economic theories behind the differing philosophies?
a.
President Reagan was concerned about vertical equity, whereas President Clinton was concerned about
horizontal equity.
b.
President Reagan was concerned about average tax rates, whereas President Clinton was concerned about
horizontal equity.
c.
President Reagan was concerned about marginal tax rates, whereas President Clinton was concerned about
vertical equity.
d.
None of the above is correct.
26. Which of the following tax systems could not be structured to satisfy conditions of vertical equity?
a.
a proportional tax
b.
a regressive tax
c.
a progressive tax
d.
a lump-sum tax
27. The notion that similar taxpayers should pay similar amounts of taxes is known as
a.
vertical equity.
b.
the benefits principle.
c.
horizontal equity.
d.
taxpayer efficiency.
28. Horizontal equity in taxation refers to the idea that people
a.
in unequal conditions should be treated differently.
b.
in equal conditions should pay equal taxes.
c.
should be taxed according to their ability to pay.
d.
should receive government benefits according to how much they have been taxed.
29. In which of the following tax systems do taxes increase as income increases?
a.
both proportional and progressive
b.
proportional but not progressive
c.
progressive but not proportional
d.
neither proportional nor progressive
30. The idea that people in equal conditions should pay equal taxes is referred to as
a.
horizontal equity.
b.
vertical equity.
c.
the ability-to-pay principle.
d.
the marriage tax.
31. Two families who live in Plains, GA have identical incomes. The Smiths deduct $5,000 from their taxable income for
mortgage interest paid during the year. The Jones family lives in an apartment and is not eligible for a mortgage-interest
deduction. This situation exemplifies
a.
an application of the benefits principle of taxation.
b.
a violation of horizontal equity.
c.
a violation of vertical equity.
d.
an application of egalitarian tax rules.
32. A tax that is higher for men than for women violates the criterion of
a.
horizontal equity.
b.
vertical equity.
c.
the ability-to-pay principle.
d.
the marriage tax.
33. One of the most difficult issues associated with trying to structure a tax policy to satisfy horizontal equity is
determining
a.
whether or not a taxpayer falls within the highest income quintile.
b.
the level of transfer payments made to low-income groups.
c.
the source of income for taxpayers.
d.
what differences are relevant to a family's ability to pay.
34. Which of the following statements is not correct?
a.
A gasoline tax can be an example of a tax that uses the benefits principle.
b.
A progressive tax attempts to achieve vertical equity.
c.
A progressive tax can be an example of the ability-to-pay principle.
d.
A regressive tax attempts to achieve vertical equity.
Scenario 12-5
Senator Filch argues that a tax must be paid by people who benefit from government services. Senator Fudge argues that a
tax must be paid in accordance with a person’s ability to bear the tax burden. Senator Malfoy argues that people with a
greater ability to pay a tax should pay a larger amount. Senator Moody argues that taxpayers with similar abilities to pay
should contribute the same amount.
35. Refer to Scenario 12-5. Which Senator is advocating taxes based on the benefits principle?
a.
Senator Filch
b.
Senator Fudge
c.
Senator Malfoy
d.
Senator Moody
36. Refer to Scenario 12-5. Which Senator is advocating taxes based on a person’s ability to pay?
a.
Senator Filch only
b.
Senator Moody only
c.
Senators Fudge and Malfoy only
d.
Senators Malfoy and Moody only
37. Refer to Scenario 12-5. Which Senator is advocating for taxes based on horizontal equity?
a.
Senator Filch
b.
Senator Fudge
c.
Senator Malfoy
d.
Senator Moody
Table 12-13
The table below provides information on the 4 households that make up a small economy and how much they would pay
in taxes under 3 types of taxes.
Household
Ability to Pay
Tax A
Tax B
Tax C
A
low and same as B
100
30
40
B
low and same as A
100
30
50
C
high and same as D
100
40
60
D
high and same as C
100
40
70
38. Refer to Table 12-13. In this economy Tax A exhibits
a.
horizontal and vertical equity.
b.
horizontal equity but not vertical equity.
c.
vertical equity but not horizontal equity.
d.
neither horizontal nor vertical equity.
39. Refer to Table 12-13. In this economy Tax B exhibits
a.
horizontal and vertical equity.
b.
horizontal equity but not vertical equity.
c.
vertical equity but not horizontal equity.
d.
neither horizontal nor vertical equity.
40. Refer to Table 12-13. In this economy Tax C exhibits
a.
horizontal and vertical equity.
b.
horizontal equity but not vertical equity.
c.
vertical equity but not horizontal equity.
d.
neither horizontal nor vertical equity.
41. Tax incidence refers to
a.
what product or service the tax is levied on.
b.
who bears the tax burden.
c.
what sector of the economy is most affected by the tax.
d.
the dollar value of the tax revenues.
42. In order to determine tax incidence, one must
a.
consider issues of equity.
b.
also determine the legal liability of the tax.
c.
evaluate where the tax burden eventually falls.
d.
use the "flypaper theory" of taxation.
43. In order to construct a more complete picture of the economic burden of government across income classes,
economists usually
a.
include tax payments as well as transfer payments received.
b.
focus only on the tax payments of wealthy tax payers.
c.
limit their analysis to taxes based on the ability-to-pay principle.
d.
focus their analysis on issues of tax efficiency.
44. If transfer payments are included when evaluating tax burdens, then the average tax rate of the poorest quintile of
taxpayers would be approximately
a.
negative 30 percent.
b.
negative 10 percent.
c.
positive 1 percent.
d.
positive 8 percent.
45. Which tax system requires all taxpayers to pay the same percentage of their income in taxes?
a.
a regressive tax
b.
a proportional tax
c.
a progressive tax
d.
a horizontal equity tax
46. If a tax takes a constant fraction of income as income rises, it is
a.
regressive.
b.
proportional.
c.
progressive.
d.
based on the ability-to-pay principle.
47. An income tax in which the average tax rate is the same for all taxpayers would be considered a
a.
progressive tax.
b.
regressive tax.
c.
distortion-free tax.
d.
proportional tax.
48. Which of the following statements is correct?
a.
Vertical equity is the idea that taxpayers with similar abilities to pay taxes should pay the same amount.
b.
Horizontal equity is the idea that taxes should be levied on a person according to how well that person can
shoulder the burden.
c.
A regressive tax would mean that high-income tax payers pay a larger fraction of their income in taxes than
would low-income taxpayers.
d.
A proportional tax would mean that high-income and low-income taxpayers pay the same fraction of income
in taxes.
49. When the marginal tax rate equals the average tax rate, the tax is
a.
proportional.
b.
progressive.
c.
regressive.
d.
egalitarian.
50. A country is using a proportional tax when
a.
its marginal tax rate equals its average tax rate.
b.
its marginal tax rate is less than its average tax rate.
c.
its marginal tax rate is greater than its average tax rate.
d.
it uses a lump-sum tax.
51. Which tax system requires higher-income taxpayers to have lower tax rates, even though they pay a larger amount of
tax when compared to lower-income taxpayers?
a.
a proportional tax
b.
a progressive tax
c.
a regressive tax
d.
a lump-sum tax
52. If a tax takes a smaller fraction of income as income rises, it is
a.
proportional.
b.
regressive.
c.
progressive.
d.
based on the ability-to-pay principle.
53. Which of the following statements is correct?
a.
A general sales tax on food is regressive when low-income taxpayers spend a larger proportion of their income
on food than high-income taxpayers.
b.
A general sales tax on food is regressive when middle income taxpayers spend a smaller proportion of their
income on food than high-income taxpayers.
c.
A general sales tax on food is regressive when high-income taxpayers spend a larger proportion of their
income on food than middle income taxpayers.
d.
A general sales tax on food is regressive when high-income taxpayers spend a larger proportion of their
income on food than low-income taxpayers.
54. Which tax system requires higher-income taxpayers to pay a higher percentage of their income in taxes?
a.
a progressive tax
b.
a proportional tax
c.
a regressive tax
d.
a lump-sum tax
55. You are trying to design a tax system that will simultaneously achieve both of the following goals: 1) two people with
the same total income would pay taxes of the same amount, and 2) a high-income person would pay a higher fraction of
income in taxes than a low-income person. Which of the following tax systems could achieve both goals?
a.
a lump-sum tax
b.
a regressive tax
c.
a progressive tax
d.
a proportional tax
