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Subjective Short Answer
1. What has been the relationship over the past century between the U.S. economy’s income and the percentage of that
income that the government collects in revenues?
2. Of all the taxes collected in the U.S. economy, what percentage is collected by the federal government?
3. What are the two largest categories of federal tax receipts?
4. What is the current, annual, approximate amount per person paid to the federal government in individual income taxes,
social insurance taxes, corporate income taxes, and other taxes?
5. As a person’s or family’s income rises, the marginal federal income tax rate __________.
6. The United States federal government has a large budget deficit. Long-term projections suggest that under current law,
taxes, as a percentage of GDP, will __________ and government spending, as a percentage of GDP, will __________.
7. Briefly describe some of the demographic trends that are predicted to increase the government’s budget deficit.
8. The largest category of expenditures for state and local governments is __________.
9. Over the past century in the U.S., what has been federal government revenue as a percentage of GDP? What has been
state and local government revenue as a percentage of GDP?
10. In 2014, what were the two largest sources of federal tax revenues, and what were the two largest expenses of the
federal government?
11. “Income security” programs comprised 33 percent of the federal government’s spending in 2011. Give a few examples
of the programs included in this category.
12. What are the two main sources of tax revenues for state and local governments?
13. What are the characteristic(s) of an efficient tax system?
14. What are the three categories of the costs of taxes to taxpayers?
15. Define the deadweight loss of a tax.
16. Briefly describe why taxes create deadweight loss.
17. Suppose that Deon places a $150 value on a new MP-3 player, and Juanita places a $140 value on it. The cost of the
MP-3 player is $130. Suppose the government levies a $15 tax on MP-3 players, which raises the price to $145. What is
the deadweight loss created by the tax?
18. List several examples of the administrative burden of the U.S. income tax system.
19. Define the marginal tax rate.
20. Define the average tax rate.
21. What is the most efficient tax and why?
22. Briefly evaluate the advantages and disadvantages of a lump-sum tax.
23. What are the two types of costs that a well-designed tax policy tries to avoid or minimize?
24. Suppose that Kara values a hot fudge sundae at $6 and Stacia values one at $5. The pretax price of a hot fudge sundae
is $3. The government imposes a $1 tax on hot fudge sundaes, which raises the price to $4. What is the deadweight loss
from the tax?
25. Suppose that Christine values a baseball hat at $20, and Mark values one at $18. The pretax price of a baseball hat is
$14. The government imposes a $5 tax on baseball hats, which raises the price to $19. What is the deadweight loss from
the tax?
26. Briefly describe why some economists prefer a value-added tax (VAT) to an income tax.
27. Time spent filling out tax forms, time spent keeping tax records, and government resources spent to enforce tax laws
are examples of the __________ of the U.S. income tax system.
28. Give an example of a tax system where the marginal tax rate would equal the average tax rate.
29. Suppose the government taxes 10 percent of the first $30,000 in income and 20 percent of all income over $30,000.
Calculate the marginal tax rate and the average tax rate for a person who earns $70,000.
30. Suppose the government taxes 10 percent of the first $30,000 in income, 20 percent of the next $20,000 in income,
and 30 percent of all income over $50,000. Calculate the marginal tax rate and the average tax rate for a person who earns
$70,000.
31. Suppose the government taxes 10 percent of the first $20,000 in income, 20 percent of the next $20,000 in income,
and 30 percent of all income over $40,000. Calculate the marginal tax rate and the average tax rate for a person who earns
$100,000.
32. What is the marginal tax rate of a lump-sum tax of $5,000?
33. Briefly describe the tradeoff between equity and efficiency of tax systems using a few examples.
34. If tax revenues from a tax on wine, beer, and hard liquor are used to pay for healthcare expenses related to liver
damage, the alcohol tax could be justified using the __________.
35. If tax revenues from a tax on fried foods are used to pay for healthcare expenses related to cardio-vascular diseases,
the fried foods tax could be justified using the __________.
36. How can a proportional tax achieve vertical equity?
37. If tax revenues from a cigarette tax are used to pay for healthcare expenses related to lung cancer, the cigarette tax
could be justified using the __________.
38. Which of the following types of taxes achieves vertical equity: a proportional tax, regressive tax, and/or progressive
tax?
39. Define horizontal equity and briefly describe some features of the U.S. federal income tax system that may interfere
with achieving it.
Table 12-24
Income
Amount of Tax
$50,000
$5,000
$60,000
$5,500
$70,000
$6,000
40. Refer to Table 12-24. The tax system is an example of a __________ tax.
41. Refer to Table 12-24. Does the tax system achieve vertical equity?
42. Refer to Table 12-24. Would the tax system be justified due to the benefits principle?
Table 12-25
Plan A
Plan B
Plan C
Income
Amount of Tax
Income
Amount of Tax
Income
Amount of Tax
$40,000
$6,000
$40,000
$6,000
$40,000
$6,000
$60,000
$6,000
$60,000
$9,000
$60,000
$12,000
$80,000
$6,000
$80,000
$12,000
$80,000
$18,000
43. Refer to Table 12-25. Which plan illustrates a regressive tax?
44. Refer to Table 12-25. Which plan illustrates a proportional tax?
45. Refer to Table 12-25. Which plan illustrates a progressive tax?
46. Refer to Table 12-25. Do any of the plans achieve vertical equity?
47. Refer to Table 12-25. Which plan represents the best tax?
48. List the three most important expenditure programs of the federal government. How do they differ from the three most
important expenditure programs of state and local governments? Explain why it makes more sense for the federal
government to purchase "national defense" rather than state governments.
49. Suppose a recent increase in federal gasoline taxes is estimated to cause a $150 million reduction in the total surplus
(consumer plus producer surplus) in the gasoline market. If tax revenues increased by $100 million, what is the
deadweight loss associated with the tax? As a result of the tax, 10,000 people sold their cars and started riding their
bicycles to work. How much of the burden of the deadweight loss is incurred by the bicycle riders?
50. Use Table A to complete Table B.
TABLE A
On Taxable Income
The Tax Rate Is
Up to $27,050
15.0%
From $27,051 to $65,550
27.5%
From $65,551 to $136,750
30.5%
From $136,751 to $297,350
35.5%
Over $297,350
39.1%
TABLE B
Taxpayer
Income
Tax Amount
Average Tax Rate
John
$52,700
Todd
$132,500
Glen
$237,000
Jake
$315,250
True / False
51. Rob’s income rises from $50,000 to $60,000 and his income tax increases from $6,000 to $7,500.His marginal tax rate
is 12.5%.
a.
True
b.
False
