Chapter 16 – Public Finance: Expenditures and Taxes
16-1
CHAPTER 16
Public Finance: Expenditures and Taxes
A. Short-Answer, Essays, and Problems
1. Briefly describe the role of government in the economy. How are these government activities financed?
2. The circular flow diagram below includes business, household, and government sectors. Also shown are
the product and resource markets. Supply a label or an explanation for each of the twelve flows in the
model.
(1) ________________________
(2) ________________________
(3) ________________________
(4) ________________________
(5) ________________________
(6) ________________________
(7) ________________________
(8) ________________________
(9) ________________________
(10) ________________________
(11) ________________________
(12) ________________________
3. Differentiate between government purchases of goods and services and government transfer payments.
4. How is total government spending defined? What is its size in the economy?
5. List the four main categories of Federal spending.
6. List the four major sources of Federal revenues.
7. Explain the difference between marginal and average tax rates.
8. Given the following information on the tax paid for different levels of taxable income, fill in the average
and the marginal tax rates for each income level. Also explain how to calculate the average tax rate and the
marginal tax rate. Is this tax progressive?
Taxable income
Tax Average tax rate, (in %) Marginal tax rate, (in %)
$10,000 $1000 _____ _____
15,000 1750 _____ _____
20,000 2750 _____ _____
25,000 5000 _____ _____
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9. Given the following information on the tax paid for different levels of taxable income, fill in the average
and the marginal tax rates for each income level. Also explain how to calculate the average tax rate and the
marginal tax rate. Is this tax progressive?
Taxable income
Tax Average tax rate, (in %) Marginal tax rate, (in %)
$10,000 $ 1,000 _____ _____
15,000 3,000 _____ _____
20,000 7,000 _____ _____
25,000 12,000 _____ _____
10. What are the major expenditures of state governments? What are the major sources of tax revenue?
11. (Consider This) Discuss the arguments for and against state lotteries.
12. Give the most important source of revenue for local governments and their most important expenditure.
13. Describe the major sources of revenue and major types of expenditures at each level of government.
14. Describe the size of government employment as a percentage of the labor force. What are three major
types of government employment at the state and local levels and at the Federal level?
15. What are the problems encountered in any strict application of benefits-received and ability-to-pay
principles of taxation?
16. Explain and evaluate this statement: “No tax on income can be a just tax unless it leaves individuals in the
same relative condition in which it found them.”
17. Explain and evaluate this statement: “Because there is no sure definition of the limits to progression, no
firm basis of its ‘reasonable’ use, and no protection against its unconscionable abuse, those who uphold the
system as a revenue device are playing into the hands of the group that would use progressive taxation as
the means of destroying private capitalism and ushering in the collectivist state.”
18. Why are payroll taxes regressive?
19. Answer the next three questions on the basis of the following data:
Taxable
income
Total tax
$10,000 $ 0
20,000 1,000
30,000 3,000
40,000 6,000
50,000 10,000
60,000 15,000
(a) What type of tax is represented by the tax schedule?
(b) What will your average tax rate be if your taxable income is $50,000?
(c) If your taxable income increases from $30,000 to $40,000, what will your marginal tax rate be?
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20. Answer the next three questions on the basis of the following data:
Taxable
income
Total tax
$ 5,000 $ 0
10,000 500
15,000 1000
20,000 2000
25,000 4000
30,000 8000
(a) What type of tax is represented by the tax schedule?
(b) What will your average tax rate be if your taxable income is $25,000?
(c) If your taxable income increases from $15,000 to $20,000, what will your marginal tax rate be?
21. In the following table are five levels of taxable income and the amount that would be paid at each of the
five levels under three tax laws: X, Y, and Z. Compute for each of the three tax laws the average rate of
taxation at each of the four remaining income levels and indicate whether the tax is regressive,
proportional, or progressive.
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Tax X Tax Y Tax Z
Chapter 16 – Public Finance: Expenditures and Taxes
339
Income
Tax paid Average tax rate %
Tax paid Average tax rate %
Tax paid Average tax rate %
$10,000 $ 400 4% $ 500 5% $ 300 3%
20,000 800 _____ 700 _____ 800 _____
30,000 1200 _____ 900 _____ 1500 _____
40,000 1600 _____ 1100 _____ 2400 _____
50,000 2000 _____ 1300 _____ 3500 _____
Type of tax: ____________________ ____________________ ____________________
22. Assume a state government levies a 5% sales tax on all consumption expenditures. Consumption
expenditures at six income levels are shown in the table below. Compute the sales tax paid and the average
tax rate at these incomes in the table.
Income Consumption expenditures Sales tax paid Average tax rate, %
$16,000 $15,000 $750 4.7
20,000 17,000 850 4.3
24,000 20,000 _____ _____
28,000 22,000 _____ _____
32,000 25,000 _____ _____
36,000 27,000 _____ _____
What type of tax is the sales tax in this case? Why?
23. (Consider This) What are the advantages and disadvantages to the value-added tax (VAT)?
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24. In the graph below, if the government imposes an excise tax as shown, what is the tax burden to the seller?
And to the buyer? Explain.
25. Answer the next two questions on the basis of the following demand and supply data for a competitive
market:
Quantity demanded
Price Quantity supplied
3000 $7 7000
4000 6 6000
5000 5 5000
6000 4 4000
7000 3 3000
(a) If government levies a per unit excise tax of $2 on suppliers of this product, what would the
equilibrium price and quantity be? How much tax will be paid?
(b) If government has instead provided a per unit subsidy of $2 to suppliers of this product, what would
the equilibrium price and quantity be?
26. In the table below are the demand and supply schedules for beer in thousands of cases in a state.
Quantity demanded (cases)
Price per case Before tax quantity supplied (cases) After tax quantity supplied
(cases)
250 $11.60 1000 _____
300 11.40 900 _____
350 11.20 800 _____
400 11.00 700 _____
450 10.80 600 _____
500 10.60 500 _____
550 10.40 400 0
600 10.20 300 0
650 10.00 200 0
(a) What is the equilibrium price and quantity before a tax is imposed?
(b) If state government now imposes an excise tax of $0.60 per case of beer, what is the after-tax supply
schedule?
(c) What is the equilibrium price of beer after the tax is imposed? How much of the $0.60 is borne by the
buyer and how much by the seller?
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27. In the table below are the demand and supply schedules for rum in thousands of liters in a state.
Quantity demanded (liters)
Price per liter Before tax quantity supplied (liters) After tax quantity supplied
(liters)
100 $7.00 1100 _____
200 6.75 1000 _____
300 6.50 900 _____
400 6.25 800 _____
500 6.00 700 _____
600 5.75 600 _____
700 5.50 500 0
800 5.25 400 0
900 5.00 300 0
(a) What is the equilibrium price and quantity before a tax is imposed?
(b) If state government now imposes an excise tax of $1.00 per liter of rum, what is the after–tax supply
schedule?
(c) What is the equilibrium price of rum after the tax is imposed? How much of the $1.00 is borne by the
buyer and how much by the seller?
28. The next four questions refer to the below supply and demand graph for a product on which the
government imposes an excise tax.
(a) What is the amount of the tax per unit?
(b) What is the total amount of the excise tax paid by the consumer? By the producer?
(c) What is the total tax revenue for government?
(d) What is the efficiency loss of the tax?
29. Can you imagine graphically a case where the efficiency loss from a tax would equal zero? Explain.
30. Assuming the basic purpose is to raise additional revenue, should government levy an excise tax on
cigarettes whose demand is highly inelastic or on a product whose demand is highly elastic? Are there any
other reasons to levy such a tax?
31. In many large cities auto commuters are given quantity discounts on tickets to use bridges, tunnels, and toll
roads. Some argue that these discounts are a subsidy to traffic congestion and air pollution. Do you agree?
Explain.
32. What is the meaning of the incidence of a tax? Give an example using a landlord and tenants.
33. What is the probable incidence of the personal income tax?
34. Explain the probable incidence of a general sales tax imposed by a state.
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35. A state decides to pass a new law raising the excise tax on cigarettes. What would be the probable
incidence of this new tax?
36. Discuss probable incidence of a local tax on business property.
37. Is the tax structure of the United States progressive at the Federal level, the state and local level, and
combined? How do transfer payments affect the distribution of income?
38. (Last Word) Who pays taxes and who receives government spending? Explain.
Chapter 16 – Public Finance: Expenditures and Taxes
B. Answers to Short-Answer, Essays, and Problems
1. Briefly describe the role of government in the economy. How are these government activities financed?
2. The circular flow diagram below includes business, household, and government sectors. Also shown are
the product and resource markets. Supply a label or an explanation for each of the twelve flows in the
model.
(1) ________________________
(2) ________________________
(3) ________________________
(4) ________________________
(5) ________________________
(6) ________________________
(7) ________________________
(8) ________________________
(9) ________________________
(10) ________________________
(11) ________________________
(12) ________________________
3. Differentiate between government purchases of goods and services and government transfer payments.
4. How is total government spending defined? What is its size in the economy?
Chapter 16 – Public Finance: Expenditures and Taxes
344
5. List the four main categories of Federal spending.
6. List the four major sources of Federal revenues.
7. Explain the difference between marginal and average tax rates.
8. Given the following information on the tax paid for different levels of taxable income, fill in the average
and the marginal tax rates for each income level. Also explain how to calculate the average tax rate and the
marginal tax rate. Is this tax progressive?
Taxable income
Tax Average tax rate, (in %) Marginal tax rate, (in %)
$10,000 $1000 _____ _____
15,000 1750 _____ _____
20,000 2750 _____ _____
25,000 5000 _____ _____
Chapter 16 – Public Finance: Expenditures and Taxes
345
9. Given the following information on the tax paid for different levels of taxable income, fill in the average
and the marginal tax rates for each income level. Also explain how to calculate the average tax rate and the
marginal tax rate. Is this tax progressive?
Taxable income
Tax Average tax rate, (in %) Marginal tax rate, (in %)
$10,000 $ 1,000 _____ _____
15,000 3,000 _____ _____
20,000 7,000 _____ _____
25,000 12,000 _____ _____
10. What are the major expenditures of state governments? What are the major sources of tax revenue?
11. (Consider This) Discuss the arguments for and against state lotteries.
State lotteries are popular with supporters because they provide a voluntary means for governments to
obtain revenue that is then used to support desired government goods and services. To the extent that
lotteries also compete with illegal gambling, they are thought to help curtail organized crime.
12. Give the most important source of revenue for local governments and their most important expenditure.
13. Describe the major sources of revenue and major types of expenditures at each level of government.
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14. Describe the size of government employment as a percentage of the labor force. What are three major
types of government employment at the state and local levels and at the Federal level?
15. What are the problems encountered in any strict application of benefits-received and ability-to-pay
principles of taxation?
16. Explain and evaluate this statement: “No tax on income can be a just tax unless it leaves individuals in the
same relative condition in which it found them.”
17. Explain and evaluate this statement: “Because there is no sure definition of the limits to progression, no
firm basis of its ‘reasonable’ use, and no protection against its unconscionable abuse, those who uphold the
system as a revenue device are playing into the hands of the group that would use progressive taxation as
the means of destroying private capitalism and ushering in the collectivist state.”