66. 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.
67. 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 their
a.
b.
c.
d.
68. 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
69. 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.
70. 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.
71. A tax imposed at every stage of production is a
a.
value-added tax.
b.
lump sum tax.
c.
corrective tax.
d.
regressive tax.
72. 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.
73. 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.
74. 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.
75. When interest income from savings is taxed, people will save
a.
more to make up for what is lost in taxes.
b.
the same amount as they would have without the tax.
c.
less than they would without the tax.
d.
None of the above is correct since the government would not tax interest on savings.
76. 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.
77. 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.
78. 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.
79. 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.
80. 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.
81. Alan Greenspan, former Chairman of the Federal Reserve, 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
82. 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.
83. 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.
84. 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.
85. 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.
86. 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.
87. Special tax treatment given to specific types of behavior are called
a.
tax avoidance.
b.
tax evasion.
c.
tax loopholes.
d.
tax burden.
88. 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
89. ‘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.
90. Tax systems that impose recordkeeping requirements on taxpayers are said to have a(n)
a.
auditing burden.
b.
lower incidence of compliance.
c.
administrative burden.
d.
certification requirement.
91. 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.
92. 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
93. A person’s marginal tax rate equals
a.
her tax obligation divided by her average tax rate.
b.
the increase in taxes she would pay as a percentage of the rise in her income.
c.
her tax obligation divided by her income.
d.
the increase in taxes if her average tax rate were to rise by 1percent.
94. In the United States, the marginal tax rate on individual federal income tax
a.
decreases as income increases.
b.
increases as income increases.
c.
is constant at all income levels.
d.
applies only to payroll taxes.
95. Because the marginal tax rate rises as income rises,
a.
higher income families, in general, pay a larger percentage of their income in taxes.
b.
lower income families, in general, pay a larger percentage of their income in taxes.
c.
a disproportionately large share of the tax burden falls upon the poor.
d.
higher income families pay the same percentage of their income in taxes as lower-income families.
20 percent of the first $40,000 of her income;
30 percent of all her income above $40,000.
96. Refer to Scenario 12–4. The taxpayer faces a marginal tax rate of
a.
20 percent when her income rises from $40,000 to $40,001.
b.
20 percent when her income rises from $30,000 to $30,001.
c.
0 percent when her income rises from $30,000 to $30,001.
d.
10 percent when her income rises from $40,000 to $40,001.
97. Refer to Scenario 12–4. The taxpayer faces
a.
an average tax rate of 22.5 percent when her income is $30,000.
b.
an average tax rate of 22.0 percent when her income is $50,000.
c.
a marginal tax rate of 10 percent when her income rises from $40,000 to $40,001.
d.
a marginal tax rate of 50 percent when her income rises from $60,000 to $60,001.
98. Refer to Scenario 12–4. At what level of income would the taxpayer’s marginal tax rate be 30 percent and her average
tax rate be 25 percent?
a.
$42,000
b.
$57,000
c.
$60,000
d.
$80,000
99. If your income is $40,000 and your income tax liability is $5,000, your marginal tax rate is
a.
8 percent.
b.
12.5 percent.
c.
20 percent.
d.
unknown. We do not have enough information to answer this question.
100. The deadweight loss of an income tax is determined by the
a.
amount of total tax revenue to the government.
b.
marginal tax rate.
c.
average tax rate.
d.
ability-to-pay principle.
101. Nancy paid a tax of $0.50 on the last dollar she earned in 1999. Nancy’s marginal tax rate in 1999 was
a.
more than 50 percent.
b.
exactly 50 percent.
c.
higher than her average tax rate.
d.
lower than her average tax rate.
102. If we want to gauge how much the income tax system distorts incentives, we should use the
a.
average tax rate.
b.
ability-to-pay principle.
c.
total tax revenue collected.
d.
marginal tax rate.
103. Suppose the government imposes a tax of 10 percent on the first $40,000 of income and 20 percent on all income
above $40,000. What are the tax liability and the marginal tax rate for a person whose income is $50,000?
a.
12 percent and 20 percent, respectively
b.
12 percent and $50,000, respectively
c.
$6,000 and 12 percent, respectively
d.
$6,000 and 20 percent, respectively
104. Suppose the government imposes a tax of 10 percent on the first $40,000 of income and 20 percent on all income
above $40,000. What are the tax liability and the marginal tax rate for a person whose income is $30,000?
a.
both are 10 percent
b.
10 percent and $2,000, respectively
c.
$3,000 and 10 percent, respectively
d.
$3,000 and 20 percent, respectively
105. Tim earns income of $60,000 per year and pays $21,000 per year in taxes. Tim paid 20 percent in taxes on the first
$30,000 he earned. What was the marginal tax rate on the second $30,000 he earned?
a.
20 percent
b.
30 percent
c.
50 percent
d.
70 percent
106. James earns income of $90,000 per year. His average tax rate is 40percent. James paid $5,500 in taxes on the first
$40,000 he earned. What was the marginal tax rate on the rest of his income?
a.
6.1 percent
b.
44 percent
c.
55 percent
d.
61 percent
107. Sue earns income of $80,000 per year. Her average tax rate is 30 percent. Sue paid 20 percent in taxes on the first
$30,000 she earned. What was the marginal tax rate on the rest of her income?
a.
20 percent
b.
24 percent
c.
30 percent
d.
36 percent
108. Sue earns income of $80,000 per year. Her average tax rate is 40 percent. Sue paid $4,500 in taxes on the first
$30,000 she earned. What was the marginal tax rate on the rest of her income?
a.
15 percent
b.
32 percent
c.
40 percent
d.
55 percent
109. Sue earns income of $80,000 per year. Her average tax rate is 50 percent. Sue paid $5,000 in taxes on the first
$30,000 she earned. What was the marginal tax rate on the first $30,000 she earned, and what was the marginal tax rate on
the remaining $50,000?
a.
6.25 percent and 50.00 percent, respectively
b.
10.00 percent and 70.00 percent, respectively
c.
16.67 percent and 60.00 percent, respectively
d.
16.67 percent and 70.00 percent, respectively
110. Suppose the government imposes a tax of 20 percent on the first $50,000 of income and 30 percent on all income
above $50,000. What is the marginal tax rate when income is $60,000?
a.
10 percent
b.
20 percent
c.
30 percent
d.
50 percent
111. If your income is $50,000, your income tax liability is $10,000, and you paid $0.25 in taxes on the last dollar you
earned, your
a.
marginal tax rate is 20 percent.
b.
average tax rate is 5 percent.
c.
marginal tax rate is 25 percent.
d.
average tax rate is 25 percent.
112. High marginal income tax rates
a.
distort incentives to work.
b.
are used to encourage saving behavior.
c.
will invariably lead to lower average tax rates.
d.
are not associated with deadweight losses.
113. If we want to gauge the sacrifice made by a taxpayer, we should use the
a.
average tax rate.
b.
marginal tax rate.
c.
lump-sum tax rate.
d.
sales tax rate.
114. Total taxes paid divided by total income is called the
a.
lump-sum tax liability.
b.
marginal tax rate.
c.
average tax rate.
d.
average consumption tax liability.
115. A person’s tax obligation divided by her income is called her
a.
marginal social tax rate.
b.
marginal private tax rate.
c.
marginal tax rate.
d.
average tax rate.
116. A person’s average tax rate equals her
a.
tax obligation divided by her marginal tax rate.
b.
increase in taxes if her income were to rise by $1.
c.
tax obligation divided by her income.
d.
increase in taxes if her marginal tax rate were to rise 1percent.
117. If your income is $40,000 and your income tax liability is $5,000, your
a.
marginal tax rate is 8 percent.
b.
average tax rate is 8 percent.
c.
marginal tax rate is 12.5 percent.
d.
average tax rate is 12.5 percent.
118. The average tax rate measures the
a.
fraction of spending paid in taxes.
b.
fraction of income paid in taxes.
c.
incremental rate of tax on income.
d.
average deadweight loss from all taxes.
119. Suppose the government imposes a tax of 10 percent on the first $40,000 of income and 20 percent on all income
above $40,000. What is the average tax rate when income is $50,000?
a.
20 percent
b.
15 percent
c.
12 percent
d.
10 percent
120. Suppose the government imposes a tax of 20 percent on the first $50,000 of income and 30 percent on all income
above $50,000. What is the average tax rate when income is $60,000?
a.
21.7 percent
b.
25.0 percent
c.
46.7 percent
d.
50.0 percent
121. Bert faces a progressive tax structure that has the following marginal tax rates: 0 percent on the first $10,000, 10
percent on the next $10,000, 15 percent on the next $10,000, 25 percent on the next $10,000, and 50 percent on all
additional income. If Bert earns $75,000, what is his average tax rate?
a.
20 percent
b.
25 percent
c.
30 percent
d.
36.67 percent
122. Maurice faces a progressive federal income tax structure that has the following marginal tax rates: 0 percent on the
first $10,000, 10 percent on the next $10,000, 15 percent on the next $10,000, 25 percent on the next $10,000, and 50
percent on all additional income. In addition, he must pay 5 percent of his income in state income tax and 15.3 percent of
his labor income in federal payroll taxes. Maurice earns $60,000 per year in salary and another $10,000 per year in non–
labor income. What is his average tax rate?
a.
17.19 percent
b.
46.69 percent
c.
48.87 percent
d.
56.01 percent
123. Which of the following statements is correct?
a.
The average tax rate gauges the sacrifice made by a taxpayer, whereas the marginal tax rate gauges the
distortion of taxes on consumer decisions.
b.
The marginal tax rate gauges the sacrifice made by a taxpayer, whereas the average tax rate gauges the
distortion of taxes on consumer decisions.
c.
The average tax rate measures how much the tax system discourages people from working.
d.
The marginal tax rate measures total taxes paid divided by total income.
124. Suppose that the government taxes income in the following fashion: 30 percent of the first $20,000, 50 percent of the
next $30,000, and 60 percent of all income over $50,000. Ted earns $40,000, and Robin earns $60,000. Which of the
following statements is correct?
a.
Ted’s marginal tax rate is 60 percent, and his average tax rate is 50 percent.
b.
Ted’s marginal tax rate is 50 percent, and his average tax rate is 40 percent.
c.
Robin’s marginal tax rate is 50 percent, and her average tax rate is 45 percent.
d.
Robin’s marginal tax rate is 60 percent, and her average tax rate is 40 percent.
125. Suppose that the government taxes income in the following fashion: 20 percent of the first $50,000, 40 percent of the
next $50,000, and 60 percent of all income over $100,000. Marshall earns $200,000, and Lily earns $600,000. Which of
the following statements is correct?
a.
Marshall’s marginal tax rate is higher than Lily’s marginal tax rate.
b.
Marshall’s average tax rate is higher than his marginal tax rate.
c.
Lily’s average tax rate is higher than her marginal tax rate.
d.
Lily’s average tax rate is higher than Marshall’s average tax rate.
126. Pat calculates that for every extra dollar she earns, she owes the government 33 cents. Her total income now is
$35,000, on which she pays taxes of $7,000. Determine her average tax rate and her marginal tax rate.
a.
Her average tax rate is 33 percent and her marginal tax rate is 20 percent.
b.
Her average tax rate is 20 percent and her marginal tax rate is 33 percent.
c.
Her average tax rate is 20 percent and her marginal tax rate is 20 percent.
d.
Her average tax rate is 33 percent and her marginal tax rate is 33 percent.
127. Pat calculates that for every extra dollar she earns, she owes the government 40 cents. Her total income now is
$44,000, on which she pays taxes of $11,000. Determine her average tax rate and her marginal tax rate.
a.
Her average tax rate is 40 percent and her marginal tax rate is 25 percent.
b.
Her average tax rate is 40 percent and her marginal tax rate is 40 percent.
c.
Her average tax rate is 25 percent and her marginal tax rate is 25 percent.
d.
Her average tax rate is 25 percent and her marginal tax rate is 40 percent.
128. Suppose the government taxes 30 percent of the first $70,000 and 50 percent of all income above $70,000. For a
person earning $100,000, the marginal tax rate is
a.
30 percent, and the average tax rate is 50 percent.
b.
30 percent, and the average tax rate is 36 percent.
c.
50 percent, and the average tax rate is 40 percent.
d.
50 percent, and the average tax rate is 36 percent.
129. The income tax requires that taxpayers pay 10percent on the first $40,000 of income and 20 percent on all income
over $40,000. Karen paid $6,000 in taxes. What were her marginal and average tax rates?
a.
20 percent and 12 percent, respectively
b.
20 percent and 15 percent, respectively
c.
10 percent and 12 percent respectively
d.
10 percent and 15 percent respectively
130. The income tax requires that taxpayers pay 10 percent on the first $50,000 of income and 20 percent on all income
over $50,000. Andy paid $9,000 in taxes. What were his marginal and average tax rates?
a.
20 percent and 13 percent, respectively
b.
20 percent and 15 percent, respectively
c.
10 percent and 13 percent respectively
d.
10 percent and 15 percent respectively
131. The income tax requires that taxpayers pay 10percent on the first $40,000 of income and 20 percent on all income
over $40,000. Karen paid $6,000 in taxes. What were her marginal and average tax rates?
a.
20 percent and 12 percent, respectively
b.
20 percent and 15 percent, respectively
c.
10 percent and 12 percent respectively
d.
10 percent and 15 percent respectively
132. The income tax requires that taxpayers pay 10percent on the first $40,000 of income and 20 percent on all income
over $40,000. Emily paid $9,000 in taxes. What were her marginal and average tax rates?
a.
20 percent and 13.8 percent, respectively
b.
20 percent and 15 percent, respectively
c.
10 percent and 13.8 percent respectively
d.
10 percent and 15 percent respectively
133. Suppose the government taxes 30 percent of the first $70,000 and 50 percent of all income above $70,000. For a
person earning $200,000, the marginal tax rate is
a.
30 percent, and the average tax rate is 50 percent.
b.
30 percent, and the average tax rate is 43 percent.
c.
50 percent, and the average tax rate is 40 percent.
d.
50 percent, and the average tax rate is 43 percent.
134. Suppose the government taxes 25 percent of the first $60,000 of income and 40 percent of all income above $60,000.
For a person earning $200,000, the marginal tax rate is
a.
25 percent, and the average tax rate is 32.5 percent.
b.
25 percent, and the average tax rate is 36 percent.
c.
40 percent, and the average tax rate is 32.5 percent.
d.
40 percent, and the average tax rate is 36 percent.
135. Suppose the government taxes 10 percent of the first $40,000 of income and 20 percent of all income over $40,000.
Shahina paid $10,000 in taxes. What were her marginal and average tax rates?
a.
20 percent and 15 percent, respectively
b.
20 percent and 14 percent, respectively
c.
10 percent and 15 percent respectively
d.
10 percent and 14 percent respectively
136. Costas faces a progressive federal income tax structure that has the following marginal tax rates: 0 percent on the
first $10,000, 10 percent on the next $10,000, 15 percent on the next $10,000, 25 percent on the next $10,000, and 50
percent on all additional income. In addition, he must pay 5 percent of his income in state income tax and 15.3 percent of
his labor income in federal payroll taxes. Costas earns $70,000 per year in salary and another $20,000 per year in non-
labor income. What is his average tax rate, and what is his marginal tax rate on his salary?
a.
His average tax rate is 17.19 percent, and the marginal tax rate on his salary is 55 percent.