Chapter 12/The Design of the Tax System ❖ 61
10. 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.
11. 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.
12. “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.
13. 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.
14. The claim that all citizens should make an “equal sacrifice” to support government programs is usually associ-
ated with
a.
the ability-to-pay principle.
b.
the benefits principle.
c.
efficiency arguments.
d.
regressive tax arguments.
15. 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.
62 ❖ Chapter 12 /The Design of the Tax System
16. 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.
17. 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.
Table 12–10
The following table shows the marginal tax rates for unmarried individuals for two years.
2009
2010
On Taxable Income…
The Tax Rate is…
On Taxable Income…
The Tax Rate is…
$0 to $15,000
10%
Over $0
20%
$15,000 to $40,000
15%
$40,000 to $75,000
20%
$75,000 to $120,000
25%
Over $120,000
30%
18. Refer to Table 12–10. Suppose one goal of the tax system was to achieve vertical equity. While people may
disagree about what is “equitable,” based on the marginal tax rates given for the two years, which of the fol-
lowing statements is true?
a.
Vertical equity is possible in both years.
b.
Vertical equity is possible in 2009 but not in 2010.
c.
Vertical equity is not possible in 2009 but is possible in 2010.
d.
Vertical equity is not possible in either year.
19. Refer to Table 12–10. Which of the following best describes the tax schedule in 2009?
a.
proportional tax
b.
progressive tax
c.
regressive tax
d.
vertical tax
Chapter 12/The Design of the Tax System ❖ 63
Table 12–11
The following table presents the total tax liability for an unmarried taxpayer under four different tax schedules
for the income levels shown.
Amount of Tax Due
Tax Schedule A
Tax Schedule B
Tax Schedule D
$10,000
$20,000
$15,000
$30,000
$30,000
$30,000
$80,000
$40,000
$60,000
20. Refer to Table 12–11. Which tax schedules are progressive?
a.
Tax Schedule A only
b.
Tax Schedule A and Tax Schedule B
c.
Tax Schedule A, Tax Schedule B, and Tax Schedule C
d.
All four Tax Schedules are progressive.
21. Refer to Table 12–11. Which tax schedules are regressive?
a.
Tax Schedule A and Tax Schedule B
b.
Tax Schedule B and Tax Schedule C
c.
Tax Schedule C and Tax Schedule D
d.
None of the Tax Schedules are regressive.
22. Refer to Table 12–11. Which tax schedules are proportional?
a.
Tax Schedule B only
b.
Tax Schedule B and Tax Schedule C
c.
Tax Schedule D only
d.
Tax Schedule A and Tax Schedule B
23. Refer to Table 12–11. Which tax schedule could be considered a lump-sum tax?
a.
Tax Schedule B only
b.
Tax Schedule B and Tax Schedule C
c.
Tax Schedule D only
d.
None of the tax schedules could be considered a lump-sum tax.
64 ❖ Chapter 12 /The Design of the Tax System
Table 12–12
United States Income Tax Rates for a Single Individual, 2009 and 2010.
2009 Tax Rates
Income Ranges
2010 Tax Rates
Income Ranges
15%
$0 – $28,000
10%
$0 – $10,000
28%
$28,000 – $70,000
15%
$10,000 – $30,000
31%
$70,000 – $140,000
27%
$30,000 – $60,000
36%
$140,000 – $300,000
30%
$60,000 – $150,000
40%
over $300,000
35%
$150,000 – $320,000
38%
over $320,000
24. Refer to Table 12–12. What type of tax structure did the United States have in 2009 for single individuals?
a.
A proportional tax structure
b.
A regressive tax structure
c.
A progressive tax structure
d.
A lump-sum tax structure
25. Refer to Table 12–12. What type of tax structure does the United States have in 2010 for single individuals?
a.
A proportional tax structure
b.
A regressive tax structure
c.
A progressive tax structure
d.
A lump-sum tax structure
Table 12–13
The dollar amounts in the last three columns are the taxes owed under the three different tax systems.
Income
Tax System A
Tax System B
Tax System C
$ 50,000
$10,000
$25,000
$10,000
100,000
25,000
30,000
20,000
200,000
80,000
40,000
40,000
26. Refer to Table 12–13. Which of the three tax systems is proportional?
a.
Tax System A
b.
Tax System B
c.
Tax System C
d.
None of the systems are proportional.
27. Refer to Table 12-13 Which of the three tax systems is regressive?
a.
Tax System A
b.
Tax System B
c.
Tax System C
d.
None of the systems are regressive.
Chapter 12/The Design of the Tax System ❖ 65
28. Refer to Table 12-13. Which of the three tax systems is progressive?
a.
Tax System A
b.
Tax System B
c.
Tax System C
d.
All of the tax systems are progressive.
29. 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.
30. 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.
31. 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
32. 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.
66 ❖ Chapter 12 /The Design of the Tax System
33. 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.
34. 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.
35. 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.
36. 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.
37. 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.
38. 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.
Chapter 12/The Design of the Tax System ❖ 67
39. 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.
40. 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.
41. 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.
42. 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
43. 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.
44. 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.
68 ❖ Chapter 12 /The Design of the Tax System
45. 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.
46. When the marginal tax rate equals the average tax rate, the tax is
a.
proportional.
b.
progressive.
c.
regressive.
d.
egalitarian.
47. 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
48. 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.
49. 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.
Chapter 12/The Design of the Tax System ❖ 69
50. 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
51. 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
52. You are trying to design a tax system that will simultaneously achieve both of the following goals: 1) a person
with no income would pay no taxes, and 2) a high-income person would pay a higher fraction of income in
taxes than a low-income person. Which of the following statements is correct?
a.
A lump-sum tax would achieve the second goal but not the first.
b.
A regressive tax would achieve the second goal but not the first.
c.
A progressive tax could achieve both goals.
d.
A proportional tax could achieve the second goal but not the first.
53. When the marginal tax rate exceeds the average tax rate, the tax is
a.
proportional.
b.
regressive.
c.
non-egalitarian.
d.
progressive.
54. Suppose that the government collected taxes in the following fashion: people who earn less than $50,000 pay
25 percent in taxes, people who earn between $50,000 and $100,000 pay 35 percent in taxes, people who earn
between $100,000 and $200,000 pay 30 percent in taxes, and people who earn more than $200,000 pay 28
percent in taxes. Which of the following statements is correct?
a.
The tax system is proportional for income levels less than $50,000 and regressive for income levels
above $50,000.
b.
The tax system is regressive for income levels less than $100,000 and progressive for income levels
above $100,000.
c.
The tax system is progressive for income levels less than $100,000 and regressive for income levels
above $100,000.
d.
The tax system is progressive for income levels less than $50,000 and proportional for income
levels above $100,000.
70 ❖ Chapter 12 /The Design of the Tax System
Table 12–14
TAX A
TAX B
TAX C
TAX D
INCOME
AMOUNT OF TAX
AMOUNT OF TAX
AMOUNT OF TAX
AMOUNT OF TAX
$50,000
$12,500 (25%)
$15,000 (30%)
$10,000 (20%)
$15,000 (30%)
100,000
$25,000 (25%)
$25,000 (25%)
$25,000 (25%)
$15,000 (15%)
200,000
$50,000 (25%)
$40,000 (20%)
$60,000 (30%)
$15,000 (7.5%)
55. Refer to Table 12–14. A regressive tax is illustrated by tax
a.
A only.
b.
B or D.
c.
C only.
d.
A or D.
56. Refer to Table 12–14. A proportional tax is illustrated by tax
a.
A.
b.
B.
c.
C.
d.
D.
57. Refer to Table 12–14. A lump-sum tax is illustrated by tax
a.
A.
b.
B.
c.
C.
d.
D.
58. Refer to Table 12–14. A progressive tax is illustrated by tax
a.
A.
b.
B.
c.
C.
d.
D.
59. The flypaper theory of tax incidence
a.
ignores the indirect effects of taxes.
b.
assumes that most taxes should be “stuck on ” the rich.
c.
says that once a tax has been imposed, there is little chance of it changing, so in essence people are
stuck with it.
d.
suggests that taxes are like flies because they are everywhere and will never go away.
Chapter 12/The Design of the Tax System ❖ 71
60. Who pays a corporate income tax?
a.
owners of the corporation
b.
customers of the corporation
c.
workers of the corporation
d.
All of the above are correct.
61. When the government levies a tax on a corporation,
a.
all the burden of the tax ultimately falls on the corporation’s owners.
b.
the corporation is more like a tax collector than a taxpayer.
c.
output must increase to compensate for reduced profits.
d.
less deadweight loss will occur since corporations are entities and not people who respond to
incentives.
62. Many economists believe that
a.
the corporate income tax satisfies the goal of horizontal equity.
b.
the corporate income tax does not distort the incentives of customers.
c.
the corporate income tax is more efficient than the personal income tax.
d.
workers and customers bear much of the burden of the corporate income tax.
63. Which of the following is not a way that a corporate tax on the income of U.S. car companies will affect mar-
kets?
a.
The price of cars will rise.
b.
The wages of auto workers will fall.
c.
Owners of car companies (stockholders) will receive less profit.
d.
Less deadweight loss will occur since corporations are entities and not people who respond to
incentives.
64. 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.
72 ❖ Chapter 12 /The Design of the Tax System
Table 12–15
Percent of Income
Paid as Tax
10%
20%
30%
40%
65. Refer to Table 12-15. The tax system is
a.
proportional.
b.
regressive.
c.
progressive.
d.
lump sum.
66. Refer to Table 12-15. In this tax system which of the following is possible?
a.
vertical and horizontal equity
b.
vertical but not horizontal equity
c.
horizontal but not vertical equity
d.
neither horizontal nor vertical equity
67. 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
68. 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.