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Chapter 6
Funding the Public Sector
6.1 Paying for the Public Sector
1) The fact that every dollar that the government spends or transfers must ultimately be provided
by the taxes and user charges it collects plus government borrowing is known as the
A) government balance sheet constraint. B) government budget constraint.
C) tax collection constraint D) user charge constraint.
2) The government budget constraint implies that
A) government borrowings government spending transfers taxes and user charges.
B) government borrowings taxes and user charges government spending transfers
C) government spending transfers taxes and user charges government borrowing.
D) government spending government borrowing transfers taxes and user charges
3) How do taxation and user charges compare as government revenue sources?
A) Each generates about the same amount of government revenue.
B) Revenues from taxation are much greater than revenues from user charges.
C) User charges generate much more revenue than do taxes.
D) We don t know because the government does not publish revenue figures broken down.
4) Over the long run, a government s fundamental source of revenues is
A) printing money. B) user fees and taxes.
C) exports. D) gold sales.
5) The main source of government funding is
A) user fees. B) taxes.
C)
b
orrowing. D) transfer payments.
6) The sum of public spending on goods and services and transfer payments during a given period
cannot exceed tax revenues plus borrowed funds. This is the statement for
A) ad valorem taxation. B) an excise tax.
C) a sales tax. D) the government budget constraint.
7) All of the following are possible funding sources for the government EXCEPT
A) user charges.
B) taxes.
C) interest income collected from government bonds.
D)
b
orrowing.
8) Over the long run, the fundamental funding sources for the government are
A) user charges, taxes, and borrowing.
B) taxes, transfer payments, and borrowing.
C) user charges and taxes.
D) taxes and borrowing.
9) According to the government budget constraint, any excess of public expenditures and transfers
over taxes and user fees must be funded by
A) private borrowing. B) government borrowing.
C) U.S. Treasury money creation. D) Federal Reserve money creation.
10) Of the following, which is the largest source of government funds?
A) government borrowing B) government transfers
C) user fees D) taxation
11) What are the three sources of funding for the public sector? Can the government rely on all of
these sources in the long run? Explain.
12) What is a government s budget constraint in the long run as opposed to a given time period?
13) Why is the government budget constraint different between the short run and the long run?
6.2 Systems of Taxation
1) The marginal tax rate shows
A) the percentage of income which a typical family pays in tax.
B) the average rate of taxation in the economy.
C) the deductions which are permitted for child care and medical expenses.
D) the extra tax due on an extra dollar of income.
2) The marginal income tax rate is equal to
A) the total tax payment divided by total income.
B) the change in the tax payment divided by the change in income.
C) the average tax payment divided by the total tax payment.
D) the percent of total income that goes to taxes.
3) The marginal income tax rate applies to
A) all income earned by a family.
B) the income in the highest tax bracket reached.
C) the income of the highest income U.S. taxpayers.
D) the income received by people above the national average.
4) Suppose the income tax rate is 0 percent on the first $10,000; 10 percent on the next $20,000; 20
percent on the next $20,000; 30 percent on the next $20,000; and 40 percent on all income above
$70,000. Family A has income of $100,000 while Family B has income of $40,000. The marginal
tax rates faced by the two families are
A) 40 percent on A and 10 percent on B. B) 40 percent on A and 20 percent on B.
C) 30 percent on A and 20 percent on B. D) 30 percent on A and 30 percent on B.
5) Suppose the tax rate on the first $10,000 of income is 0 percent; 10 percent on the next $20,000; 20
percent on the next $20,000; 30 percent on the next $20,000; and 40 percent on income over
$70,000. Family A has an income of $120,000 and Family B an income of $55,000. What is the tax
bill of each?
A) $48,000 for A and $16,500 for B B) $32,000 for A and $6600 for B
C) $32,000 for A and $7500 for B D) $34,000 for A and $7500 for B
6) Suppose the income tax rate schedule is 0 percent on the first $10,000; 10 percent on the next
$20,000; 20 percent on the next $20,000; 30 percent on the next $20,000; and 40 percent on any
income over $70,000. Family A earns $28,000 a year and Family B earns $65,000 a year. Both
receive a ten percent raise. What is the marginal tax rate of each and what is the extra tax paid
by each after the raise?
A) Family A: 10 percent marginal tax rate and $280 in extra taxes; Family B 30 percent
marginal tax rate and $1950 in extra taxes.
B) Family A: 10 percent marginal tax rate and $420 in extra taxes; Family B 30 percent
marginal tax rate and $2275 in extra taxes.
C) Family A: 20 percent marginal tax rate and $360 in extra taxes; Family B 40 percent
marginal tax rate and $2100 in extra taxes.
D) Family A: 20 percent marginal tax rate and $560 in extra taxes. Family B 40 percent
marginal tax rate and $2600 in extra taxes.
7) Suppose the tax rate on the first $10,000 income is 0 percent; 10 percent on the next $20,000; 20
percent on the next $20,000; 30 percent on the next $30,000; and 40 percent on any income over
$80,000. Family A has income of $40,000 and Family B has income of $100,000. What is the
marginal and average tax rate for each family?
A) Family A: marginal 10 percent; average 10 percent; Family B: marginal 30 percent;
average 30 percent.
B) Family A: marginal 20 percent; average 10 percent; Family B: marginal 40 percent;
average 23 percent.
C) Family A: marginal 20 percent; average 20 percent; Family B: marginal 40 percent;
average 40 percent.
D) Family A: marginal 20 percent; average 15 percent; Family B: marginal 40 percent;
average 20 percent.
8) Suppose the tax amount on the first $10,000 income is $0; $2000 on the next $20,000; $4000 on
the next $20,000; $6000 on the next $30,000; and 40 percent on any income over $80,000. Family
A has income of $30,000 and Family B has income of $80,000. What is the marginal and average
tax rate for each family?
A) Family A: marginal 10 percent; average 6.7 percent; Family B: marginal 30 percent;
average 15 percent.
B) Family A: marginal 10 percent; average 20 percent; Family B: marginal 30 percent;
average 23 percent.
C) Family A: marginal 10 percent; average 10 percent; Family B: marginal 40 percent;
average 40 percent.
D) Family A: marginal 10 percent; average 15 percent; Family B: marginal 40 percent;
average 20 percent.
9) The marginal tax rate and the average tax rate are the same under a
A) progressive income tax system. B) regressive income tax system.
C) proportional income tax system. D) none of the above.
10) A tax rate system characterized by higher marginal tax rates as income increases is known as
A) a progressive tax system. B) a regressive tax system.
C) a proportional tax system. D) a flat rate tax system.
11) Assume a family that earns $20,000 pays $1500 in income taxes, while a family that earns
$40,000 pays $3500 in income taxes. In this situation, the income tax system is
A) progressive.
B) regressive.
C) proportional.
D) one of the above but we cannot tell which one without more information.
12) Assume a family that earns $30,000 pays $3500 in income taxes, while a family that earns
$40,000 pays $3200 in income taxes. In this situation, the income tax system is
A) progressive.
B) regressive.
C) proportional.
D) one of the above but we cannot tell which one without more information.
13) An example of a regressive tax is the
A) corporate income tax. B) personal income tax.
C) Social Security tax. D) state inheritance tax.
14) If the marginal tax rate is less than the average tax rate, the tax system is
A) progressive. B) proportional. C) regressive. D) liberal.
15) In a proportional income tax system,
A) marginal tax rates are the same regardless of the level of taxable income.
B) marginal tax rates increase as the level of taxable income increases.
C) marginal tax rates decline as the level of taxable income declines.
D) everyone pays the same dollar amount in taxes.
16) A tax system that applies a lower marginal tax rate at higher levels of income is
A) progressive. B) regressive. C) proportional. D)
b
ackward.
17) A flat tax on personal income, in which the same tax rate is applied to every dollar of income
earned by each taxpayer, is an example of
A) a regressive tax. B) a proportional tax.
C) a progressive tax. D) a value added tax.
18) The average tax rate can be calculated by which of the following formulas?
A) The change in taxes due divided by the change in taxable income
B) The change in taxable income divided by the change in taxes due
C) Total taxes due divided by total taxable income
D) Total taxable income divided by total taxes due
19) The marginal tax rate can be calculated by which of the following formulas?
A) the change in taxes due divided by the change in taxable income
B) the change in taxable income divided by the change in taxes due
C) total taxes due divided by total taxable income
D) total taxable income divided by total taxes due
20) Suppose that in the economy of Springfield, USA, Homer, who has an income of $50,000, pays
$10,000 in taxes. Edna, who has an income of $35,000, pays $9,000 in taxes. Based on this
information, we could say that Springfield s tax system is
A) proportional. B) progressive. C) regressive. D) flat.
21) The federal income tax code of the United States is
A) progressive.
B) proportional.
C) regressive.
D) progressive for individuals but proportional for married couples.
22) Advocates of a progressive income tax use arguments EXCEPT for which of the following?
A) A progressive tax system taxes according to ability to pay.
B) A progressive tax system taxes according to benefits received.
C) A progressive tax system helps redistribute income away from the rich and towards the
poor.
D) A progressive tax system maximizes government revenues.
23) Under a progressive income tax system, the marginal income tax rate paid by taxpayers
A) declines as their incomes increase. B) rises as their incomes increase.
C) is unchanged as their incomes increase. D) is unrelated to their incomes.
24) The average tax rate is defined as
A) total tax due/change in taxable income.
B) total tax due/total taxable income.
C) change in taxes due/change in taxable income.
D) change in taxes due/total taxable income.
25) The marginal tax rate is
A) total tax due/change in taxable income.
B) total tax due/total taxable income.
C) change in taxes due/change in taxable income.
D) change in taxes due/total taxable income.
26) A tax system in which the average and marginal tax rates are the same for every level of taxable
income and every change in income is an example of
A) regressive taxation. B) proportional taxation.
C) progressive taxation. D) premium taxation.
27) In a progressive tax system,
A) the marginal tax rate and the average tax rate are the same for every income level and the
same as income increases.
B) the marginal tax rate increase as income increases but the average tax rate does not change
as income increases.
C) the marginal tax rate and the average tax rate increase as income levels increase and the
marginal tax rate exceeds the average tax rate.
D) the marginal tax rate and the average tax rate decrease as income levels increase and the
marginal tax rate is less than the average tax rate.
28) The tax base is
A) the minimum amount of tax revenue that government must collect each year.
B) the maximum amount of tax revenue that government must collect each year.
C) the sum of all incomes earned in the United States.
D) the value of all goods, services, incomes, or wealth subject to taxation.
29) The U.S. Social Security tax is an example of a
A) progressive tax. B) proportional tax.
C) premium tax. D) regressive tax.
30) Mr. Johnson earns $100,000 per year. Each year he spends $70,000 and saves $30,000. He pays a
5 percent sales tax on all of his spending. Assuming this is the only tax he pays, his average tax
rate out of his income is
A) 1.5 percent. B) 2.5 percent. C) 3.5 percent. D) 5.0 percent.
31) In a progressive income tax system,
A) the marginal tax rate exceeds the average tax rate.
B) the average tax rate exceeds the marginal tax rate.
C) high income earners pay a lower percentage of their income in taxes than do low income
earners.
D) the tax rate depends solely on how long an individual has been in the labor force.
32)
J
amal earns $160,000 per year and Josephina earns $80,000 per year. They both pay the same
price to buy the identical automobile and each pays $1,600 in sales tax. In relation to their
relative incomes, this is an example of a
A) regressive tax. B) progressive tax.
C) proportional tax. D) marginal tax.
33)
J
amal earns $160,000 per year and Josephina earns $80,000 per year. If Jamal pays $16,000 in
income taxes and Josephina pays $8,000 in income taxes, the income tax system would be
A) regressive. B) progressive. C) proportional. D) marginal.
34) Using the above figure, which of the lines in the above diagram represents a proportional tax?
A) A B) B C) C D) none of them
35) Using the above figure, which of the lines in the above diagram represents a progressive tax?
A) A B) B C) C D) none of them
36) Using the above figure, which of the lines in the above diagram represents a regressive tax?
A) A B) B C) C D) none of them
37)
J
amal earns $160,000 per year and Josephina earns $80,000 per year. If Jamal pays $16,000 in
income taxes and Josephina pays $5,000 in income taxes, the income tax system would be
A) regressive. B) progressive. C) proportional. D) marginal.
38) The Social Security tax is considered to be a
A) regressive tax. B) progressive tax.
C) proportional tax. D) marginal tax.
39) Another name for a flat rate tax in which the same tax rate applies to all income earners is a
A) proportional tax. B) progressive tax.
C) regressive tax. D) passive tax.
40) Assume that Mr. Smith s income increased from $40,000 last year to $45,000 this year and that
he paid an additional $2,000 in taxes. This would indicate that his marginal tax rate is
A) 10 percent. B) 25 percent. C) 30 percent. D) 40 percent.
41) If a tax system is progressive, then
A) the average and the marginal tax rates are equal.
B) the marginal tax rate is greater than the average tax rate as income rises.
C) the marginal tax rate is lower than the average tax rate as income rises.
D) the average tax rate is constant, but the dollar amount paid in taxes increases as income
increases.
42) The marginal tax rate is
A) the sum of all individual tax rates.
B) the total taxes paid as a percentage of total income.
C) the average tax rate paid by both individuals and corporations.
D) the increase in taxes as a percentage of the increase in income.
43) When income is $15,000, the amount of income taxes owed is $2,000; when income increases to
$20,000, the amount owed increases to $3,000. The average income tax rate when a person earns
$15,000 is
A) 75 percent. B) 15 percent. C) 13.3 percent. D) 20 percent.
44) When income is $15,000, the amount of income income taxes owed is $2,000; when income
increases to $20,000, the amount owed increases to $3,000. The marginal tax rate in this case is
A) 20 percent. B) 13.3 percent. C) 15 percent. D) 25 percent.
45) If you were to face a marginal tax rate of 15 percent, how much would your income have
increased if your tax bill increased by $300?
A) $300 B) $4,500 C) $45 D) $2,000
46) Suppose you are making $50,000 per year and paying $5,000 per year in income taxes. You get a
$10,000 per year raise and your income taxes are now $6,500 per year. Based on this
information, the income tax system is
A) proportional. B) progressive. C) regressive. D)
b
racketed.
47) Suppose you are making $50,000 per year and paying $5,000 per year in income taxes. You get a
$10,000 per year raise and your income taxes are now $6,000 per year. Based on this
information, the income tax system is
A) proportional. B) progressive. C) regressive. D)
b
racketed.
48) Suppose the income tax rate is 0 percent on the first $10,000; 10 percent on the next $20,000; 20
percent on the next $20,000; 30 percent on the next $20,000; and 40 percent on all income above
$70,000. Family A has income of $82,000 while Family B has income of $37,000. What are the
marginal tax rates faced by the two families?
49) Suppose the income tax rate schedule is 0 percent on the first $10,000; 10 percent on the next
$20,000; 20 percent on the next $20,000; 30 percent on the next $20,000; and 40 percent on any
income over $70,000. Family A earns $32,000 a year and Family B earns $70,000 a year. Both
families each receive a ten percent raise. What is the marginal tax rate of each and what is the
extra tax paid by each after the raise?
50) Briefly compare the three tax systems based on the relationship between the marginal tax rate
and the average tax rate as income rises.
51) Only in a progressive tax system does the amount of taxes increase as income increases. Do
you agree or disagree? Explain.
52) Suppose Jill has earned more income this year as compared to what she did last year. Her
income tax has also increased. Does it necessarily mean that the income tax system is
progressive? Explain.
6.3 The Most Important Federal Taxes
1) A typical capital gain is experienced by
A) selling stock or a mutual fund. B) only rich people.
C) only investment bankers. D) all shareholders in the United States.
2) A capital gain results when
A) an asset is sold for more than it was purchased.
B) a debt is settled.
C) a person purchases a bond.
D) a person buys gold.
3) Reduction or elimination of dividend taxes is designed, in part, to
A) reduce the double taxation burden on individuals.
B) make rich people richer.
C) reduce inefficiencies in the production process.
D) increase corporate tax levels.
4) A capital gain is defined as
A) the tax paid when one sells an asset.
B) the positive difference between the sale price and the purchase price of an asset.
C) the tax rate one pays when one moves into a higher tax bracket.
D) an unanticipated increase in income.
5) Suppose you purchased 100 shares of stock in 2000 for $25 a share and you sell them today for
$50 a share. If the capital gains tax is 28 percent, your tax liability is
A) $70.
B) $700.
C) $2500.
D) indeterminate without knowing the inflation rate.
6) Corporate profits are
A) taxed at too low a rate.
B) taxed only when a stockholder sells his or her shares of stock.
C) taxed twice once by the corporate tax system, and again by personal tax system when
they are paid to stockholders as dividends.
D) taxed three times once by the corporate tax system, again by the personal tax system, and
again as capital gains.
7) Some economists argue that corporate income taxes are typically not paid by firms, but by
A) stockholders, employees, and consumers.
B) the government.
C)
b
ond holders.
D) the board of directors of the firm.
8) The corporate income tax in the United States
A) excludes dividends paid out.
B) only taxes retained earnings.
C) results in individuals being doubly taxed on corporate earnings.
D) does not apply to profits earned on exports.
9) Social Security taxes are
A) progressive because all workers pay the tax.
B) regressive because higher income workers pay taxes on a smaller percentage of their
income.
C) proportional because everyone is charged the same percentage tax rate.
D) regressive because higher income workers don t pay the tax.
10) Social Security taxes are regressive because
A) they apply only to rich people.
B) they are not applied to income beyond a certain amount.
C) they are applied to welfare recipients.
D) they are applied to retired people only.
11) The responsibility of paying for the Social Security benefits for currently retired individuals falls
on
A) current and future workers.
B) the retired people themselves.
C) no one, since the government prints the money.
D) only working people over 50 years of age.
12) The distribution of tax burdens among various groups in society is referred to as
A) sectioning. B) regressive placement.
C) zero
b
ase budgeting. D) tax incidence.
13) Which of the following is an argument that the incidence of corporate taxation falls entirely on
consumers?
A) Corporations pass their tax burdens on to consumers by charging higher prices equal to
the amount of the tax.
B) Corporations pass their tax burdens on to consumers because consumers ultimately work
for the corporations.
C) Corporations always evade taxes so that consumers ultimately bear the tax burdens as
taxpayers.
D) Most taxes on consumers are collected by corporations through sales taxes.
14) The largest share of federal government tax receipts is derived from
A) corporate income taxes. B) excise taxes.
C) social insurance contributions. D) individual income taxes.
15) Which of the following forms of taxation accounts for the largest share of taxes received by state
and local governments?
A) sales, excise, and gross receipts taxes B) personal and corporate income taxes
C) license and permit fees D) property taxes
16) Local government expenditures depend on which taxes?
A) Revenues from licenses and permits B) Local property, sales, and excise taxes
C) Capital gains taxes D) Social Security taxes
17) When the purchase price of an asset is less than its sale price, then there is a
A)
b
udget deficit. B) corporate income tax.
C) capital gain. D) capital loss.
18) Suppose you purchased 100 shares of stock in 2009 for $20 a share, and the price now is $30 a
share. If you sell the stock, then your capital gain is
A) $1000.
B) $3000.
C) $1500.
D) indeterminate without knowing the inflation rate.
