518 Miller Economics Today, 16th Edition
19) Eight years ago you purchased an asset for $100,000 that has yielded a nominal capital gain of
$30,000. If you sold the asset today, your inflation adjusted capital gains would be zero due to
inflation over the last eight years. The capital gains tax is 28 percent. If you sold the asset today
your tax liability would be
A) zero.
B) $28,000.
C) $8,400.
D) cannot be determined without more information.
20) Suppose the capital gains tax is 28 percent and you purchased a house ten years ago for $80,000.
If you sold the house today you would get $140,000. Your tax liability would be
A) $39,200.
B) $16,800.
C) indeterminate without knowing the inflation rate.
D) indeterminate without knowing the personal income tax rate.
21) The reason a corporation has retained earnings is to
A) pay unemployment taxes.
B) make investments that will increase the value of the stock.
C) avoid the double taxation of corporate profits.
D)
b
e able to make unemployment payments.
22) Corporate profits are taxed twice because
A) taxes are collected on profits before profits are distributed to shareholders.
B) the government wants to minimize the amount of tax paid on capital gains.
C) it is economically efficient to reduce the amount of retained earnings.
D) capital gains are not indexed to the rate of inflation.
23) The earnings that a corporation saves for investment in other productive activities are
A) capital gains. B) tax incidence.
C) transfers in kind. D) retained earnings.
24) Retained earnings are
A) the funds held back to pay out dividends.
B) the funds used to pay corporate taxes.
C) profits not given out to stockholders.
D) the reason there is double taxation.
25) Tax incidence refers to
A) determining who sends the taxes into the government.
B) the tendency of some people to avoid paying taxes at all.
C) the distribution of tax burdens among groups, or who really pays a tax.
D) determining the marginal tax rate applied to any increase in income.
26) The distributions of tax burdens among various groups in society is known as
A) a proportional tax. B) a progressive tax.
C) a regressive tax. D) tax incidence.
27) The largest source of receipts for the federal government is
A) corporate income taxes. B) personal income taxes.
C) capital gains taxes. D) Social Security taxes.
28) Social Security taxes are paid by
A) employers only. B) employees only.
C)
b
oth employers and employees. D) neither employers nor employees.
29) When the profits of a corporation are taxed and the dividends paid to stockholders are also
taxed,
A) the government is engaging in double taxation.
B) the government is engaging in capital gains taxation.
C) the government is engaging in regressive taxation.
D) the government is engaging in progressive taxation.
30) One criticism of the corporate income tax is that
A) it is too regressive.
B) it is too flat.
C) it is so complex to administer that corporate income taxes are rarely collected by the
Internal Revenue Service.
D) a portion of the corporations tax burden is passed on to consumers via higher prices for
goods and services and to workers via lower wages.
31) The tax that brings in the most revenue in the United States is the
A) capital gains tax. B) corporate income tax.
C) Social Security tax. D) personal income tax.
32) State and local governments receive most of their revenue from
A) sales and excise taxes, revenue from the federal government, and property taxes.
B) individual income taxes, social insurance contributions, and property taxes.
C) corporate income taxes, property taxes, and personal income taxes.
D) property taxes, sales and excise taxes, and Social Security contribution.
33) Which one of the following statements is true?
A) In a proportional tax system, the marginal tax rate always exceeds the average tax rate.
B) In a proportional tax system, the average tax rate always exceeds the marginal tax rate.
C) The U.S. Social Security tax is proportional.
D) The U.S. Social Security tax is regressive.
34) Which of the following is subject to double taxation?
A) income earned by people in the lowest tax bracket
B) Social Security income
C) dividends and retained earnings
D) income earned by government employees
35) A friend tells you he is studying the incidence of the corporate income tax. What is the subject of
his study?
A) how frequently corporations should be taxed
B) how inflation affects the amount of tax revenue collected from firms
C) how corporations can aid the government in collecting delinquent taxes
D) how the burden of corporate taxation is distributed among stockholders, employees, and
consumers
36) The three possible sources of government funding include
A) explicit fees, taxes, and borrowing.
B) international income, personal income taxes, and export taxes.
C) foreign aid, revenues, and implicit fees.
D) None of the above are correct.
37) Which of the following is NOT an important source of revenue for the federal government?
A) individual income taxes B) property taxes
C) social insurance taxes and contributions D) corporate income taxes
38) Using the fiscal year 2009 estimates, the largest component of federal revenue is the
A) individual income tax. B) corporate income tax.
C) excise tax. D) social insurance and contributions.
39) Using the fiscal year 2009 estimates, the largest component of state and local revenue is the
A) individual income tax. B) corporate income tax.
C) revenue from the federal government. D) sales, excise, and gross receipts taxes.
40) For all earnings subject to Social Security taxes, what is the current Social Security tax rate?
A) 0.8% B) 2.9% C) 6.2% D) 9.1%
41) The Social Security program is financed directly from
A) voluntary contributions by the elderly.
B) sales taxes on goods with inelastic demand.
C) payroll taxes.
D) poll taxes.
42) Social Security contributions are
A) a voluntary dollar amount that people contribute towards Social Security.
B) entirely paid by your employer.
C) mandatory taxes partially paid out of workers wages and salaries.
D) collected only from people earning more than $80,000 a year.
43) A current concern about Social Security is that
A) funds set aside by past generations to pay benefits for future generations are growing too
rapidly and may trigger inflation.
B) promised benefit payouts are growing more rapidly than likely sources of revenues,
indicating a future inability to keep the system operating.
C) continued political bickering between the president and Congress could lead to an end to
any funding of the program.
D) the payroll taxes used to fund the program are being eliminated as part of an effort to
generate employment increases, thus leaving the program bankrupt.
44) Current concern about Social Security is that
A) the fund is growing too rapidly and would trigger inflation.
B) the fund might be depleted before long and might not be there for workers who retire
later.
C) the government is planning to phase out the program.
D) none of the above
45) Ultimately, the real burden of paying for Social Security benefits will be paid for by
A) taxes levied on workers. B) Social Security trust fund bonds.
C) new federally issued Treasury bills. D) a new tax levied on businesses.
46) The Social Security system was founded
A) during the Civil War, to pay pensions for veterans.
B) during the last years of the nineteenth century, as people who had once depended on
having a family farm found themselves without a means of support.
C) as the United States began to recover from the Great Depression.
D) in response to concerns that arose during the high inflation of the 1970s.
47) What is meant by the term tax incidence ? What is the tax incidence of the personal income tax?
What is the tax incidence of the corporate income tax?
48) In what way is corporate income subject to double taxation?
49) Explain how corporate profits are taxed twice.
Chapter 6 Funding the Public Sector 525
6.4 Tax Rates and Tax Revenues
1) Sales taxes are
A) assessed on the prices paid on a large set of goods and services.
B) levied on purchases of a particular good or service.
C)
b
ased on each individual taxpayer s income level.
D) collected only by the U.S. government.
2)
A
d valorem taxes
A) are not used in the United States.
B) are assessed as a percentage of a good s price.
C) are based on income levels.
D) are applied only to imports.
3) A ad valorem sales tax can be thought of as
A) a proportional tax.
B) not part of the tax base.
C) a revenue source for county governments only.
D) none of the above.
4) Governments have to rely on taxes for financing because
A) they cannot borrow unlimited amounts.
B) they usually spend all of the gold reserves.
C) gold prices have fallen steadily over the years.
D) they are not allowed to sell bonds.
5) Which of the following statements is TRUE of static tax analysis?
A) A government receives lower tax revenues by raising the tax rate.
B) A government receives higher tax revenues by raising the tax rate.
C) A government cannot change it tax revenues by changing the tax rate.
D) A change in the tax rate can raise or lower tax revenues, depending on other factors.
6) Dynamic tax analysis is based on the recognition that as tax rates are increased,
A) tax revenue collections will eventually decline.
B) tax revenue collections will continually increase.
C) tax revenue collections will change at the same rate as the tax rates.
D) tax revenue collections will increase at a faster rate than the tax rate change.
7) A government wishing to maximize its tax revenues should
A) always assess the highest possible tax rate.
B) always assess the lowest possible tax rate.
C) determine the highest possible tax rate and then back it down by exactly 4 percentage
points.
D) push tax rates up to the point where revenues peak, but raise the tax rate no farther.
8) Which of the following statements is FALSE about the issues faced by the government when
contemplating a tax?
A) Consideration must be given to how tax rates relate to the amount actually received.
B) Consideration must be given to how taxes influence market prices.
C) Consideration must be given to how taxes influence equilibrium quantity.
D) Consideration must be given to the amount of funds the government will be receiving
from the transfer payments paid by the public to the government.
9) The value of goods, services, incomes or wealth subject to taxation is
A) the tax base. B) a sales tax.
C) the collected tax revenue. D) a unit tax.
10) A sales tax is
A) a tax assessed on personal income.
B) a tax assessed on the prices paid for numerous goods and services.
C) a tax assessed on a public good.
D) the total tax base.
11) Ad valorem taxation
A) refers to the personal income tax.
B) is used to tax goods but not services.
C) is assessed by charging a tax rate as a fraction of the market price of a good.
D) is a tax that is applied only to cigarettes and alcohol.
12) An example of ad valorem taxation is
A) a luxury tax. B) the corporate profit tax.
C) the personal income tax. D) the Social Security tax.
13) Static tax analysis assumes that
A) an increase in a tax rate may lead to a decrease in the tax base.
B) an increase in a tax rate will lead to an increase in the tax base.
C) an increase in a tax rate will leave the tax base unchanged.
D) the tax base will always remain unchanged.
14) Dynamic tax analysis assumes that
A) an increase in a tax rate may lead to a decrease in the tax base.
B) an increase in a tax rate will lead to an increase in the tax base.
C) an increase in a tax rate will leave the tax base unchanged.
D) the tax base will always remain unchanged.
15) A 2 percent tax is going to be applied to a $100,000 tax base. What can be said about the revenue
collected assuming static tax analysis?
A) The total revenue will be zero.
B) The total revenue will be between $0 and $2,000.
C) The total revenue will be $2,000.
D) There is not enough information to determine what revenues will equal.
16) A 2 percent tax is going to be applied to a $100,000 tax base. What can be said about the revenue
collected assuming dynamic tax analysis?
A) The total revenue will be zero.
B) The total revenue will be between $0 and $2,000.
C) The total revenue will be $2,000.
D) There is not enough information to determine what revenues will equal.
17) In what type of analysis will an increase in the tax rate always lead to an increase in tax
revenues?
A) Ad valorem taxation B) Excise taxation
C) Dynamic tax analysis D) Static tax analysis
18) In what type of analysis could an increase in the tax rate lead to a decrease in tax revenues?
A) Ad valorem taxation B) Excise taxation
C) Dynamic tax analysis D) Static tax analysis
19) The Mayor of Stuckeyville is considering increasing the tax on bowling. He is confident that tax
revenues will increase but recognizes the possibility that they may decrease. The mayor is
engaging in
A) dynamic tax analysis.
B) static tax analysis.
C) a policy that will cause the tax base to increase.
D) a policy that will cause the tax base to remain unchanged.
20) A major criticism of static tax analysis is that it
A) uses only ad valorem taxes.
B) does not use ad valorem taxes.
C) ignores the incentive effects created by higher tax rates.
D) assumes that the tax base will not increase.
21) Which of the following statements about taxation is TRUE?
A) Increasing taxes will always increase tax revenues.
B) Static tax analysis recognizes that an increase in taxation could lead to a decrease in tax
revenues.
C) Dynamic tax analysis assumes that an increase in taxation will leave the tax base
unchanged.
D) There is a tax rate at which tax revenues are maximized.
22) If the government wishes to maximize its tax revenue, it should
A) recognize that too high of a tax rate can decrease the tax base.
B) engage in static tax analysis.
C) recognize that an increase in the tax rate will lead to an increase in tax revenues.
D) use only flat taxes.
23) A local government currently has a tax base of $4 billion and a tax rate of 5 percent. If the tax
rate is increased to 6 percent, the tax base will decrease to $3.5 billion. If the goal is to maximize
tax revenues the tax rate should be
A) lowered below 5 percent. B) kept at 5 percent.
C) raised to 6 percent. D) abolished.
24) A local government currently has a tax base of $4 billion and a tax rate of 5 percent. If the tax
rate is increased to 6 percent, the tax base will decrease to $3.2 billion. If the goal is to maximize
tax revenues the tax rate should be
A) raised above 6 percent. B) kept at 5 percent.
C) raised to 6 percent. D) abolished.
25) Refer to the above figures. Which panel represents the expected relationship between tax
revenue and the sales tax rate if static tax analysis is used?
A) Panel 1 B) Panel 2 C) Panel 3 D) Panel 4
26) Refer to the above figures. Which panel represents the expected relationship between tax
revenue and the sales tax rate if dynamic tax analysis is used?
A) Panel 1 B) Panel 2 C) Panel 3 D) Panel 4
27) Which of the following are considered ad valorem taxes?
A) taxes assessed by charging a rate equal to a percentage of an item s price
B) taxes assessed by charging a flat amount per unit purchased
C) taxes based on the amount of debt that the government must repay
D) taxes based on the amount of spending the government will undertake
28) Assume that the government one day decides to tax greens fees at all state golf courses. To the
government s dismay, not only was the amount of tax collected small, but there was a 90 percent
decline in golfing. What type of tax analysis did the government apparently rely upon when it
imposed this tax?
A) static tax analysis B) dynamic tax analysis
C) transaction cost analysis D) ad hoc tax analysis
29)
A
d valorem taxation means
A) that only the value added by a service provider is taxed.
B) that the tax rate is a percentage of the price paid for a product.
C) a negative income tax.
D) a progressive property tax imposed in some states.
30) According to dynamic tax analysis, continually increasing the tax rate will eventually
A) cause an increase in the tax base.
B) have no impact on the tax base.
C) cause a decrease in the tax base.
D) result in an initial decrease in the tax base followed ultimately by a rise in the tax base.
31) Dynamic tax analysis is an economic evaluation of tax rate changes
A)
b
y the National Tax Institute in Burlington, Massachusetts.
B)
b
y various state governments.
C)
b
y the tax institutes established by a consortium of business schools.
D)
b
ased on the assumption that tax base declines if tax rates continuously increase.
32) Dynamic tax analysis generally predicts
A) that the higher the tax rate is, the higher the tax revenue will continue to be into the future.
B) that the higher tax rates lead to higher revenues only to a point at which revenues will
begin to decrease due to a diminishing tax base.
C) that lower tax rates will always and continuously lead to increased tax revenues.
D) that lower tax rates are always going to lead to decreased tax revenues.
33) In order for the government to collect taxes, the government must first establish a(n)
A) ad valorem taxation. B) tax base.
C) philosophy of taxation. D)
j
ustice system.
34) State sales taxes are operated as a system of
A) ad valorem taxation. B) unit taxation.
C) income taxation. D) revenue minimizing taxation.
35) To set a tax rate at the appropriate level to maximize its tax revenues, a government must
engage in
A) static tax analysis. B) dynamic tax analysis.
C) debt free tax analysis. D) ad valorem tax analysis.
36) Static tax analysis assumes
A) all of the present tax rates will be in place for a minimum of twenty years.
B) changes in the tax rates have no effect on the tax base.
C) changes in the tax rates have no effect on tax revenue.
D) changes in the tax rates will change the tax base.