Chapter 12/The Design of the Tax System ❖ 21
107. Which of the following statements is not correct?
a.
All states have state income taxes, but the percentages vary widely.
b.
Sales taxes and property taxes are important revenue sources for state and local governments.
c.
Medicare spending has increased because the percentage of the population that is elderly and the
cost of health care have both increased.
d.
A budget deficit occurs when government spending exceeds government receipts.
108. Which of the following statements about state income taxes is correct?
a.
Some states do not tax income at all.
b.
If states tax income, they must follow federal guidelines for designing the tax structure.
c.
States are not allowed to have a higher marginal tax rate than the federal marginal tax rate.
d.
All of the above are correct.
109. The two types of taxes that are most important to state and local governments as sources of revenue are
a.
individual income taxes and corporate income taxes.
b.
sales taxes and individual income taxes.
c.
sales taxes and property taxes.
d.
social insurance taxes and property taxes.
110. The tax that generates the most revenue for state and local government is the
a.
corporate income tax.
b.
individual income tax.
c.
property tax.
d.
sales tax.
111. State and local governments receive the largest portion of their tax revenues from
a.
sales taxes and income taxes.
b.
income taxes and property taxes.
c.
payroll taxes and income taxes.
d.
property taxes and sales taxes.
112. When a state levies a sales tax, the tax
a.
is paid only by the state’s residents.
b.
occasionally excludes items that are deemed to be necessities.
c.
is commonly levied on labor services.
d.
applies to wholesale purchases but not retail purchases.
22 ❖ Chapter 12 /The Design of the Tax System
113. For state and local governments, sales taxes and property taxes make up approximately
a.
19 percent of all receipts.
b.
22 percent of all receipts.
c.
35 percent of all receipts.
d.
48 percent of all receipts.
114. State and local governments
a.
are funded entirely by their own tax base.
b.
receive the majority of their tax revenues from corporate income taxes.
c.
are generally not responsible for collecting sales taxes.
d.
receive some of their funds from the federal government.
115. State and local governments
a.
use a mix of taxes and fees to generate revenue.
b.
are required by federal mandate to levy income taxes.
c.
are required to tax property at a standard rate set by the federal government.
d.
cannot impose state excise taxes on products that are taxed by the federal government.
116. State and local governments generate revenue from all of the following sources except
a.
sales taxes.
b.
the federal government.
c.
corporate income taxes.
d.
customs duties.
117. A tax levied on the total amount spent in retail stores is called
a.
a sales tax.
b.
an excise tax.
c.
a retail tax.
d.
an income tax.
118. The single largest expenditure by state and local governments is on
a.
highways.
b.
police.
c.
public welfare.
d.
education.
Chapter 12/The Design of the Tax System ❖ 23
119. For state and local governments, education accounts for approximately what percentage of spending?
a.
25 percent
b.
34 percent
c.
50 percent
d.
75 percent
120. As a share of total spending, state and local government expenditure on education in 2007 was
a.
6 percent.
b.
18 percent.
c.
34 percent.
d.
42 percent.
121. The typical state spends the most on
a.
education.
b.
Medicare and Social Security.
c.
highways.
d.
defense.
122. State and local government spending on public welfare includes
a.
trash removal.
b.
transfer payments to the poor.
c.
libraries.
d.
road repairs.
123. Public schools, which educate most students through high school, are paid for primarily by
a.
state governments.
b.
local governments.
c.
the federal government.
d.
taxpayers directly.
124. Rank the following state and local government expenditure categories from largest to smallest.
a.
education, public welfare, highways
b.
education, highways, public welfare
c.
highways, education, public welfare
d.
public welfare, education, highways
24 ❖ Chapter 12 /The Design of the Tax System
125. The public welfare spending category for state and local governments includes
a.
many programs that are initiated by private foundations.
b.
contributions in support of public universities.
c.
some federal programs that are administered by state and local governments.
d.
All of the above are correct.
126. Among the major spending categories for state and local governments, which of the following statements is
correct?
a.
The biggest single expenditure is education.
b.
The public welfare category does not include the costs of administering some federal programs.
c.
As a general rule, spending on public schools and public universities exceeds that spent on all other
services combined.
d.
Local services such as libraries, police, trash removal, fire protection, and park maintenance, are a
very small share of expenditures overall.
127. Rank the following state and local government expenditure categories from smallest to largest.
a.
education, public welfare, highways
b.
education, highways, public welfare
c.
highways, public welfare, education
d.
public welfare, education, highways.
TAXES AND EFFICIENCY
1. In designing a tax system, policymakers have two objectives that are often conflicting. They are
a.
maximizing revenue and minimizing costs to taxpayers.
b.
efficiency and minimizing costs to taxpayers.
c.
efficiency and equity.
d.
maximizing revenue and reducing the national debt.
2. Most people agree that the tax system
a.
should be both efficient and equitable.
b.
cannot raise enough revenue to cover government expenditures.
c.
would raise more revenue if tax rates were lowered.
d.
should be rewritten to require everyone to pay the same percentage of income in taxes.
Chapter 12/The Design of the Tax System ❖ 25
3. One tax system is less efficient than another if it
a.
places a lower tax burden on lower-income families than on higher-income families.
b.
places a higher tax burden on lower-income families than on higher-income families.
c.
raises the same amount of revenue at a higher cost to taxpayers.
d.
raises less revenue at a lower cost to taxpayers.
4. Which of the following is not a cost of taxes to taxpayers?
a.
the tax payment itself
b.
deadweight losses
c.
administrative burdens
d.
goods and services provided by the government
5. In addition to tax payments, the two other primary costs that a tax system inevitably imposes on taxpayers are
a.
deadweight losses and administrative burdens.
b.
deadweight losses and frustration with the political system.
c.
administrative burdens and tax-preparation costs.
d.
administrative burdens and the risk of punishment for failure to comply with tax laws.
6. Country A’s tax system is more efficient than Country B’s tax system if
a.
Country A collects less tax revenue than Country B, and the cost to taxpayers is the same in both
countries.
b.
Country A collects more tax revenue than Country B, even though the cost to taxpayers is greater in
Country A than in Country B.
c.
the same amount of revenue is raised in both countries, but the cost to taxpayers is smaller in
Country A than in Country B.
d.
the same amount of revenue is raised in both countries, but the taxes are collected in a shorter
amount of time in Country A than in Country B.
7. Suppose the country of Mankiwland has a new king, King Gregory. For the purpose of efficiency King Greg-
ory’s chief economic advisor would encourage him to design his country’s tax system to minimize
(i)
deadweight losses from taxes.
(ii)
administrative burdens from taxes.
(iii)
the tax payments themselves.
(iv)
government expenditures to correct for market failures.
a.
(i) only
b.
(i) and (ii) only
c.
(iii) and (iv) only
d.
(i), (ii), (iii), and (iv)
26 ❖ Chapter 12 /The Design of the Tax System
8. A tax system with little deadweight loss and a small administrative burden would be described as
a.
equitable.
b.
communistic.
c.
capitalistic.
d.
efficient.
9. An efficient tax system is one that imposes small
a.
deadweight losses and administrative burdens.
b.
marginal rates and deadweight losses.
c.
administrative burdens and transfers of money.
d.
marginal rates and transfers of money.
10. An efficient tax system is one that
(i)
maximizes tax revenues.
(ii)
minimizes deadweight losses from taxes.
(iii)
minimizes administrative burdens from taxes.
(iv)
promotes equity across taxpayers.
a.
(i) only
b.
(ii) and (iii) only
c.
(i), (ii), and (iii) only
d.
(i), (ii), (iii), and (iv)
11. Which of the following is a characteristic of a more efficient tax system?
a.
The system minimizes deadweight loss.
b.
The system raises the same amount of revenue at a lower cost.
c.
The system minimizes administrative burdens.
d.
All of the above are correct.
12. The resources that a taxpayer devotes to complying with the tax laws are a type of
a.
consumption tax.
b.
value-added tax.
c.
deadweight loss.
d.
producer surplus.
Chapter 12/The Design of the Tax System ❖ 27
13. The deadweight loss of a tax is
a.
the reduction in economic welfare of taxpayers that exceeds the revenue raised by the government.
b.
the improved efficiency created as people reallocate resources according to the tax incentive rather
than the true costs and benefits.
c.
the loss in tax revenues.
d.
Both a and b are correct.
14. Because taxes distort incentives, they typically result in
a.
deadweight losses.
b.
reductions in consumer surplus.
c.
reductions in producer surplus.
d.
All of the above are correct.
15. Taxes can create deadweight losses because they
a.
allow the government to fund private goods.
b.
create administrative burdens as people comply with tax laws.
c.
allow the government to fund public goods.
d.
Both b and c are correct.
16. Taxes create deadweight losses because they
a.
reduce costs for firms.
b.
distort incentives.
c.
cause prices to decrease.
d.
create revenue for the government.
17. An optimal tax is one that minimizes the
a.
external benefit.
b.
total deadweight loss from the tax.
c.
income taxes.
d.
horizontal equity.
18. Deadweight losses occur in markets in which
a.
firms decide to downsize.
b.
the government imposes a tax.
c.
profits fall because of low consumer demand.
d.
equilibrium prices fall.
28 ❖ Chapter 12 /The Design of the Tax System
19. Deadweight losses represent the
a.
inefficiency that taxes create.
b.
shift in benefit from producers to consumers.
c.
part of consumer and producer surplus that is now revenue to the government.
d.
increase in revenue to the government.
20. One reason that deadweight losses are so difficult to avoid is that
a.
taxes affect the decisions that people make.
b.
income taxes are not paid by everyone.
c.
consumption taxes must be universally applied to all commodities.
d.
the administrative burden is hard to calculate.
21. Deadweight losses are associated with
a.
taxes that distort the incentives that people face.
b.
taxes that target expenditures on survivor’s benefits for Social Security.
c.
taxes that have no efficiency losses.
d.
lump-sum taxes.
22. When taxes are imposed on a commodity,
a.
there is never a deadweight loss.
b.
some consumers alter their consumption by not purchasing the taxed commodity.
c.
tax revenue will rise by the amount of the tax multiplied by the before-tax level of consumption.
d.
the taxes do not distort incentives.
23. In the absence of taxes, Ashley would prefer to purchase a large sport utility vehicle (SUV). The government
has recently decided to place a $10,000 nuisance tax on SUVs. If Ashley decides to purchase a small economy
car as a result of the tax, which of the following statements is correct?
a.
Other people who choose to purchase SUVs will incur the cost of the deadweight loss of the tax.
b.
There are no deadweight losses as long as some people still choose to purchase SUVs.
c.
In order to determine the magnitude of the deadweight loss, we must add the revenues from the tax
to the loss in Ashley’s consumer surplus.
d.
Ashley is worse off, and her loss of welfare is part of the deadweight loss of the tax.
24. Taxes create deadweight loss when they
a.
distort behavior.
b.
cause the price of the product to increase.
c.
don’t raise sufficient government revenue.
d.
cannot be computed easily.
Chapter 12/The Design of the Tax System ❖ 29
25. Zoe, Chloe, and Brody each like to read novels. The current bestseller costs $11. Zoe values it at $16, Chloe at
$14, and Brody at $12. Suppose that if the government taxes books at $2 each, the selling price will rise to
$13. A consequence of the tax is that
a.
consumer surplus shrinks by $4 and tax revenues increase by $6, so there is a deadweight loss of
$2.
b.
consumer surplus shrinks by $6 and tax revenues increase by $6, so there is no deadweight loss.
c.
consumer surplus shrinks by $5 and tax revenues increase by $6, so there is no deadweight loss.
d.
consumer surplus shrinks by $5 and tax revenues increase by $4, so there is a deadweight loss of
$1.
26. Zoe, Chloe, and Brody each like to read novels. The current mystery thriller costs $10. Zoe values it at $15,
Chloe at $13, and Brody at $11. Suppose that if the government taxes books at 50 cents each the selling price
rises to $10.50. A consequence of the tax is that
a.
consumer surplus shrinks by $1.50 and tax revenues increase by $1.50, so there is no deadweight
loss.
b.
consumer surplus shrinks by $9.00 and tax revenues increase by $1.50, so there is a deadweight
loss of $7.50.
c.
consumer surplus shrinks by $7.50 and tax revenues increase by $7.50, so there is no deadweight
loss.
d.
consumer surplus shrinks by $7.50 and tax revenues increase by $1.50, so there is a deadweight
loss of $6.
27. Mark, Kerry, Greg, and Carlos each like Chicago Cubs baseball games. The single-game ticket price for an
infield box seat is $50. Mark values a ticket at $70, Kerry at $65, Greg at $60, and Carlos at $55. Suppose that
if the government taxes tickets at $5 each, the selling price will rise to $55. A consequence of the tax is that
a.
consumer surplus shrinks by $50 and tax revenues increase by $20, so there is a deadweight loss of
$30.
b.
consumer surplus shrinks by $30 and tax revenues increase by $20, so there is a deadweight loss of
$10.
c.
consumer surplus shrinks by $20 and tax revenues increase by $20, so there is no deadweight loss.
d.
consumer surplus shrinks by $50 and tax revenues increase by $20, so there is no deadweight loss.
28. Mark, Kerry, Greg, and Carlos each like Boston Red Sox baseball games. The single-game ticket price for an
infield box seat is $50. Mark values a ticket at $70, Kerry at $65, Greg at $60, and Carlos at $55. Suppose that
if the government taxes tickets at $10 each the selling price rises to $60. A consequence of the tax is that
a.
consumer surplus shrinks by $50 and tax revenues increase by $30, so there is a deadweight loss of
$20.
b.
consumer surplus shrinks by $35 and tax revenues increase by $30, so there is a deadweight loss of
$5.
c.
consumer surplus shrinks by $20 and tax revenues increase by $20, so there is no deadweight loss.
d.
consumer surplus shrinks by $15 and tax revenues increase by $20, so there is no deadweight loss.
30 ❖ Chapter 12 /The Design of the Tax System
29. Suppose Jack values an ice cream sundae at $4. Dianne values an ice cream sundae at $6. The pre–tax price
of an ice cream sundae is $2. The government imposes a “fat tax” of $3 on each ice cream sundae, and the
price rises to $5. The deadweight loss from the tax is
a.
$1.
b.
$2.
c.
$3.
d.
$4.
30. Suppose Jack values an ice cream sundae at $4. Dianne values an ice cream sundae at $6. The pre–tax price
of an ice cream sundae is $2. The government imposes a “fat tax” of $3 on each ice cream sundae, and the
price rises to $5. The deadweight loss from the tax is
a.
$4, and the deadweight loss comes from both Jack and Dianne.
b.
$4, and the deadweight loss comes only from Jack because he does not buy a sundae after the tax.
c.
$2, and the deadweight loss comes from both Jack and Dianne.
d.
$2, and the deadweight loss comes only from Jack because he does not buy a sundae after the tax.
31. Mary values a movie at $15 while Tim values it at $10. The price of the movie is $9. If the government im-
poses a $2 tax per movie and the price of a movie rises to $11, what part of the deadweight loss comes from
Mary and what part comes from Tim?
a.
none comes from Mary, $1 comes from Tim
b.
none comes from Mary, $3 comes from Tim
c.
$2 comes from Mary, $1 comes from Tim
d.
$4 comes from Mary, $3 comes from Tim
32. Refer to Scenario 12-1. How much total consumer surplus do Skip and Walt get when each purchases one
bottle of wine?
a.
$1
b.
$2
c.
$5
d.
$7
33. Refer to Scenario 12-1. Suppose the government levies a tax of $3 on each bottle of wine, and the equilibri-
um price of a bottle of wine increases to $18. How much tax revenue is collected?
a.
$0
b.
$2
c.
$3
d.
$6
Chapter 12/The Design of the Tax System ❖ 31
34. Refer to Scenario 12-1. Suppose the government levies a tax of $3 on each bottle of wine, and the equilibri-
um price of a bottle of wine increases to $18. What is total consumer surplus after the tax is levied?
a.
$0
b.
$2
c.
$5
d.
$6
35. Refer to Scenario 12–1. Suppose the government levies a tax of $3 on each bottle of wine, and the equilibri-
um price of a bottle of wine increases to $18. Because total consumer surplus has
a.
fallen by more than the tax revenue, the tax has a deadweight loss
b.
fallen by less than the tax revenue, the tax has no dead weight loss.
c.
fallen by exactly the amount of the tax revenue, the tax has no deadweight loss.
d.
increased by less than the tax revenue, the tax has a deadweight loss.
36. Refer to Scenario 12-1. Suppose the government levies a tax of $1 on each bottle of wine, and the equilibri-
um price of a bottle of wine increases to $16. How much tax revenue is collected?
a.
$0
b.
$1
c.
$2
d.
$4
37. Refer to Scenario 12-1. Suppose the government levies a tax of $1 on each bottle of wine, and the equilibri-
um price of a bottle of wine increases to $16. What is total consumer surplus after the tax is levied?
a.
$2
b.
$3
c.
$4
d.
$5
38. Refer to Scenario 12–1. Suppose the government levies a tax of $1 on each bottle of wine, and the equilibri-
um price of a bottle of wine increases to $16. Because total consumer surplus has
a.
fallen by more than the tax revenue, the tax has a deadweight loss.
b.
fallen by less than the tax revenue, the tax has no deadweight loss.
c.
fallen by exactly the amount of the tax revenue, the tax has no deadweight loss.
d.
increased by less than the tax revenue, the tax has a deadweight loss.
39. Part of the deadweight loss from taxing labor earnings is that people
a.
will work more.
b.
will be reluctant to hire accountants to file their tax returns.
c.
with low tax liabilities will universally be worse off than under some other tax policy.
d.
will work less.
32 ❖ Chapter 12 /The Design of the Tax System
Table 12-3
Weekend Ski Trip
Value to Anna
$150
Value to Brian
$90
Value to Clem
$75
Value to Dave
$50
40. Refer to Table 12-3. Assume that the price of a weekend ski pass is $45 and that the price reflects the actual
unit cost of providing a weekend of skiing. What is the value of the surplus that accrues to all four skiers from
their weekend trip?
a.
$75
b.
$105
c.
$185
d.
$215
41. Refer to Table 12-3. Assume that the price of a weekend ski pass is $45 and that the price reflects the actual
unit cost of providing a weekend of skiing. How much consumer surplus accrues to Anna and Clem individu-
ally?
a.
$125 and $20 respectively
b.
$105 and $30 respectively
c.
$85 and $40 respectively
d.
$65 and $50 respectively
42. Refer to Table 12-3. Assume that the price of a weekend ski pass is $45 and that the price reflects the actual
unit cost of providing a weekend of skiing. Suppose the government imposes a tax of $12 on skiing, which
raises the price of a weekend ski pass to $57. What is the value of the surplus that accrues to all four skiers
from their weekend trip?
a.
$41.
b.
$95.
c.
$144.
d.
$185.
43. Refer to Table 12-3. Assume that the price of a weekend ski pass is $45 and that the price reflects the actual
unit cost of providing a weekend of skiing. Suppose the government imposes a tax of $12 on skiing, which
raises the price of a weekend ski pass to $57. How much tax revenue is collected from these four skiers?
a.
$0.
b.
$12.
c.
$36.
d.
$48.
Chapter 12/The Design of the Tax System ❖ 33
44. Refer to Table 12-3. Assume that the price of a weekend ski pass is $45 and that the price reflects the actual
unit cost of providing a weekend of skiing. Suppose the government imposes a tax of $12 on skiing, which
raises the price of a weekend ski pass to $57. The deadweight loss associated with the tax is
a.
$5.
b.
$12.
c.
$36.
d.
$41.
Table 12-4
Hot Fudge Brownie Delight
$9.00
$5.00
45. Refer to Table 12-4. Suppose that the government imposes a $2 tax on delights, causing the price to increase
from $4.00 to $6.00. Total consumer surplus
a.
falls by less than the tax revenue generated.
b.
falls by more than the tax revenue generated.
c.
falls by the same amount as the tax revenue generated.
d.
will not fall since Jennifer will no longer be in the market.
46. Refer to Table 12-4. Suppose that the government imposes a $2 tax on delights, causing the price to increase
from $4.00 to $6.00. Deadweight loss arises because
a.
Lucy will pay more tax as a percentage of her value of delights than Ricky.
b.
Ricky must pay the $2.00 tax from his consumer surplus.
c.
Ricky will have to pay a higher price for delights.
d.
Lucy will leave the market.
47. Refer to Table 12-4. Suppose that the government imposes a $2 tax on delights, causing the price to increase
from $4.00 to $6.00. Total consumer surplus will fall from
a.
$6 to $3.
b.
$7 to $4.
c.
$6 to $2.
d.
$5 to $3.
48. The deadweight loss associated with a tax on a commodity is generated by
a.
the consumers who still choose to consume the commodity but pay a higher price that reflects the
tax.
b.
the consumers who choose to not consume the commodity that is taxed.
c.
all citizens who are able to use services provided by government.
d.
the consumers who are unable to avoid paying the tax.
34 ❖ Chapter 12 /The Design of the Tax System
Scenario 12-2
Suppose Roger and Regina receive great satisfaction from their consumption of cheesecake. Regina would be
willing to purchase only one slice and would pay up to $8 for it. Roger would be willing to pay $11 for his
first slice, $9 for his second slice, and $5 for his third slice. The current market price is $5 per slice.
49. Refer to Scenario 12-2. How much consumer surplus does Regina receive from consuming her slice of
cheesecake?
a.
$3
b.
$5
c.
$9
d.
$12
50. Refer to Scenario 12-2. How much total consumer surplus do Regina and Roger collectively receive from
consuming cheesecake?
a.
$3
b.
$6
c.
$9
d.
$13
51. Refer to Scenario 12-2. Assume that the government places a $4 tax on each slice of cheesecake and that the
new equilibrium price is $9. What is Regina’s consumer surplus from cheesecake?
a.
zero
b.
$2
c.
$3
d.
$6
52. Refer to Scenario 12-2. Assume that the government places a $4 tax on each slice of cheesecake and that the
new equilibrium price is $9. What is the deadweight loss of the tax?
a.
$3
b.
$6
c.
$8
d.
$9
53. Refer to Scenario 12-2. Assume that the government places a $4 tax on each slice of cheesecake and that the
new equilibrium price is $9. How much tax revenue will be generated from sales to Regina and Roger?
a.
zero
b.
$4
c.
$8
d.
$12
Chapter 12/The Design of the Tax System ❖ 35
54. Refer to Scenario 12-2. Assume that the government places a $2 tax on each slice of cheesecake and that the
new equilibrium price is $7. What is the deadweight loss of the tax?
a.
zero
b.
$3
c.
$6
d.
$8
55. Refer to Scenario 12-2. Assume that the government places a $4 tax on each slice of cheesecake and that the
new equilibrium price is $9. Which of the following statements is correct?
a.
Roger will bear the full burden of the deadweight loss.
b.
Regina will bear the full burden of the deadweight loss.
c.
Both Regina and Roger will share the burden of the deadweight loss.
d.
There will be no deadweight loss.
Scenario 12-3
Suppose that Bob places a value of $10 on a movie ticket and that Lisa places a value of $7 on a movie ticket.
In addition, suppose the price of a movie ticket is $5.
56. Refer to Scenario 12–3. What is total consumer surplus for Bob and Lisa?
a.
$0
b.
$2
c.
$5
d.
$7
57. Refer to Scenario 12–3. Suppose the government levies a tax of $1 on each movie ticket and that, as a result,
the price of a movie ticket increases to $6.00. If Bob and Lisa both purchase a movie ticket, what is total con-
sumer surplus for Bob and Lisa?
a.
$0.00
b.
$0.50
c.
$5.00
d.
$6.00
58. Refer to Scenario 12–3. Suppose the government levies a tax of $1 on a movie ticket and that, as a result, the
price of a movie ticket increases to $6. If Bob and Lisa both purchase a movie ticket, what is the deadweight
loss from the tax?
a.
$0
b.
$1
c.
$2
d.
$3
36 ❖ Chapter 12 /The Design of the Tax System
59. Refer to Scenario 12–3. Suppose the government levies a tax of $3 on a movie ticket and that, as a result, the
price of a movie ticket increases to $8. What is total consumer surplus after the tax is imposed?
a.
$0
b.
$1
c.
$2
d.
$3
60. Refer to Scenario 12–3. Suppose the government levies a tax of $3 on a movie ticket and that, as a result, the
price of a movie ticket increases to $8. What is the deadweight loss from the tax?
a.
$0
b.
$1
c.
$2
d.
$3
61. Many economists believe that the U.S. tax system would be made more efficient if the basis of taxation were
changed so that people paid taxes, more so than they do now, based on
a.
their saving rather than their income.
b.
their spending rather than their income.
c.
their income rather than their wealth.
d.
their wealth rather than their spending.
62. European countries tend to rely on which type of tax more so than the United States does?
a.
an income tax
b.
a lump-sum tax
c.
a value-added tax
d.
a corrective tax
63. Why do some policymakers support a consumption tax rather than an earnings tax?
a.
The average tax rate would be lower under a consumption tax.
b.
A consumption tax would encourage people to save earned income.
c.
A consumption tax would raise more revenues than an income tax.
d.
The marginal tax rate would be higher under an earnings tax.
64. A value-added tax or VAT is a tax on
a.
retail purchases only.
b.
wholesale purchases only.
c.
pollution.
d.
all stages of production of a good.
Chapter 12/The Design of the Tax System ❖ 37
65. A tax imposed at every stage of production is a
a.
value-added tax.
b.
lump sum tax.
c.
corrective tax.
d.
regressive tax.
66. Economist Alan Greenspan discussed the advantages of which kind of tax system, “particularly if one were
designing a tax system from scratch”?
a.
a progressive tax system
b.
a regressive tax system
c.
a consumption tax
d.
a lump-sum tax
67. When the government taxes labor earnings we can expect people to
a.
work more so they can keep the same standard of living.
b.
work less and enjoy more leisure.
c.
quit their present job and find one that pays better.
d.
stop working altogether and go on welfare.
68. The U.S. income tax
a.
discourages saving.
b.
encourages saving.
c.
has no effect on saving.
d.
will reduce the administrative burden of taxation.
69. A tax on all forms of income will
a.
lower the effective rate of interest on savings.
b.
have no effect on savings.
c.
enhance social welfare because the benefits will outweigh the costs.
d.
enhance the incentives to save.
70. Changing the basis of taxation from income earned to amount spent will
a.
necessarily reduce tax revenues.
b.
lower effective interest rates on savings.
c.
distort incentives to earn income.
d.
eliminate disincentives to save.
38 ❖ Chapter 12 /The Design of the Tax System
71. When interest income from savings is taxed,
a.
people will save more to make up for what is lost in taxes.
b.
people will save the same amount as they would have without the tax.
c.
people will save less than they would without the tax.
d.
None of the above is correct since the government would not tax interest on savings.
72. A consumption tax is a tax on
a.
goods but not on services.
b.
the amount of income that people spend.
c.
the amount of income that people earn.
d.
the amount of income that people save.
73. An advantage of a consumption tax over the present tax system is that a consumption tax
a.
raises more revenues.
b.
would save the government millions in administrative costs.
c.
places more of the tax burden on the wealthy.
d.
does not discourage saving.
74. Incentives to work and save are reduced when
a.
income taxes are higher.
b.
consumption taxes replace income taxes.
c.
corrective taxes are implemented.
d.
All of the above are correct.
75. Individual Retirement Accounts and 401(k) plans make the current U.S. tax system
a.
less like European tax systems than it otherwise would be.
b.
more like a payroll tax than it otherwise would be.
c.
more like an income tax than it otherwise would be.
d.
more like a consumption tax than it otherwise would be.
76. Individual Retirement Accounts and 401(k) plans make the current U.S. tax system
a.
more like a consumption tax and so more like the tax system of many European countries.
b.
more like a consumption tax and so less like the tax system of many European countries.
c.
less like a consumption tax and so more like the tax system of many European countries.
d.
less like a consumption tax and so less like the tax system of many European countries.
Chapter 12/The Design of the Tax System ❖ 39
77. For the 2010 calendar year only, the federal estate tax does not exist. Which of the following is not correct?
a.
The one year absence of this tax creates peculiar incentives for people with large estates who are
nearing the end of their lives.
b.
Some people created provisions in their health-care proxies allowing for life support to continue
until 2010 so the estate beneficiaries would receive a larger bequest.
c.
The estate tax usually applies to about 5,500 taxpayers per year.
d.
Before 2010, the estate tax was approximately 20 percent of the total estate.
78. Part of the administrative burden of a tax is
a.
the money people pay to the government in taxes.
b.
reducing the size of the market because of the tax.
c.
the hassle of filling out tax forms that is imposed on taxpayers who comply with the tax.
d.
the cost of administering programs that use tax revenue.
79. Tax evasion is
a.
facilitated by legal deductions to taxable income.
b.
the same as tax avoidance.
c.
recommended by the American Accounting Association.
d.
illegal.
80. Which of the following statements is correct?
a.
Both tax avoidance and tax evasion are legal.
b.
Both tax avoidance and tax evasion are illegal.
c.
Tax avoidance is legal, whereas tax evasion is illegal.
d.
Tax avoidance is illegal, whereas tax evasion is legal.
81. A mortgage interest deduction would be considered
a.
tax evasion.
b.
a subsidy to the poor.
c.
a deduction that benefits all members of society equally.
d.
a tax loophole.
82. In many cases, tax loopholes are designed by Congress to
a.
give special treatment to specific types of behavior.
b.
reduce the overall administrative burden of the tax system.
c.
raise revenues for special projects.
d.
All of the above are correct.
40 ❖ Chapter 12 /The Design of the Tax System
83. Special tax treatment given to specific types of behavior are called
a.
tax avoidance.
b.
tax evasion.
c.
tax loopholes.
d.
tax burden.
84. Which of the following describes a situation where tax laws give preferential treatment to specific types of
behavior?
a.
tax evasion
b.
a political payoff
c.
a tax loophole
d.
compensation for the benefit of society
85. The U.S. tax code gives preferential treatment to investors in municipal bonds. This is an example of
a.
a tax loophole.
b.
tax evasion.
c.
an administrative burden.
d.
tax enforcement.
86. Tax systems that impose recordkeeping requirements on taxpayers are said to have
a.
an auditing burden.
b.
a lower incidence of compliance.
c.
an administrative burden.
d.
a certification requirement.
87. As tax laws become more complex,
a.
the administrative burden of taxes will increase.
b.
compliance costs are likely to decrease.
c.
the government will collect more in tax revenue.
d.
the amount of tax revenue lost to tax evasion will decrease.
88. Which of the following is not an administrative burden of our tax system?
a.
government resources used to enforce tax laws
b.
keeping tax records throughout the year
c.
paying the taxes owed
d.
time spent in April filling out forms