Chapter 12/The Design of the Tax System ✦ 69 Chapter 12 The Design of the Tax System During what war did government spending rise dramatically in the United States, and then never again fall to its peacetime levels? a Civil War b World War I c World War II d Vietnam War ANSWER: c World War II SECTION: 1 OBJECTIVE: 1 Which type of tax is used to finance the Social Security program in the United States? a consumption tax b income tax c payroll tax d property tax ANSWER: c payroll tax SECTION: 1 OBJECTIVE: 1 All of the following are transfer payments except a Medicaid b unemployment compensation c personal income taxes d food stamps ANSWER: c personal income taxes SECTION: 1 OBJECTIVE: 1 If Nebraska imposed a tax on milk of 10 cents per gallon, a this is an excise tax b this is an income tax c tax revenue will fall d the supply of milk will rise ANSWER: a this is an excise tax SECTION: 1 OBJECTIVE: 1 If either supply or demand is perfectly inelastic, then the deadweight social loss from a tax is a infinite b large c small d zero ANSWER: d zero SECTION: 2 OBJECTIVE: 2 70 ✦ Chapter 12/The Design of the Tax System The deadweight loss from a tax increases as supply becomes more or as demand becomes more a inelastic; inelastic b inelastic; elastic c elastic; elastic d elastic; inelastic ANSWER: c elastic; elastic SECTION: 2 OBJECTIVE: 2 Minimizing the total deadweight loss from taxes that raise a certain amount of revenue for the government is known as a an external benefit b optimal taxation c a lumpsum tax scheme d horizontal equity ANSWER: b optimal taxation SECTION: 2 OBJECTIVE: 2 In the short run, the imposition of a payroll tax of $1 per labor hour will have which of the following effects? a The quantity of labor exchanged will fall b The aftertax wage received by workers will fall c The quantity of labor traded will become inefficient d All of the above are correct ANSWER: d All of the above correct SECTION: 2 OBJECTIVE: 2 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 ANSWER: d average tax rate SECTION: 2 OBJECTIVE: 3 10 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 1% ANSWER: c tax obligation divided by her income SECTION: 2 OBJECTIVE: 3 11 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 1% ANSWER: b the increase in taxes she would pay as a percentage of the rise in her income SECTION: 2 OBJECTIVE: 3 Chapter 12/The Design of the Tax System ✦ 71 12 Pat figures 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. Her average tax rate is and her marginal tax rate is a 33%; 20% b 20%; 33% c 20%; 20% d 33%; 33% ANSWER: b 20%; 33% SECTION: 2 OBJECTIVE: 3 13 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 ANSWER: b in equal conditions should pay equal taxes SECTION: 3 OBJECTIVE: 3 14 The idea that people in equal conditions should pay equal taxes is referred to as a horizontal equity b vertical equity c diagonal equity d linear equity ANSWER: a horizontal equity SECTION: 3 OBJECTIVE: 3 15 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 be taxed according to their age and experience d should receive government benefits according to how much they have been taxed ANSWER: a in unequal conditions should be treated differently SECTION: 3 OBJECTIVE: 3 16 A tax that is higher for men than for women violates the criterion of a diagonal equity b linear equity c vertical equity d horizontal equity ANSWER: d horizontal equity SECTION: 3 OBJECTIVE: 3 17 The benefits principle of taxation is LEAST characteristic in a Social Security taxes b gasoline taxes c taxes on airline tickets d tolls used to finance the construction of a bridge ANSWER: Social Security taxes SECTION: 3 OBJECTIVE: 3 72 ✦ Chapter 12/The Design of the Tax System 18 A tax is if it takes a constant fraction of income as income rises a regressive b proportional c progressive d aggressive ANSWER: b proportional SECTION: 3 OBJECTIVE: 3 19 A tax is if it takes a smaller fraction of income as income rises a regressive b proportional c progressive d aggressive ANSWER: a regressive SECTION: 3 OBJECTIVE: 3 20 Most economists argue that when federal, state, and local taxes are combined, the overall effect is a proportional b progressive c regressive d unfair ANSWER: a proportional SECTION: 3 OBJECTIVE: 3 21 In its purest form, a system would eliminate the existing array of different tax rates on personal income and replace them with a single tax a valueadded tax b consumption tax c sales tax d flatrate income tax ANSWER: d flatrate income tax SECTION: 3 OBJECTIVE: 3 22 The main arguments in favor of a modified flatrate tax system (such as a proposal to place a 19% tax on all income over $20,000 with no deductions) are it would a raise more revenue than the current tax system, and it would be simpler b raise more revenue than the current tax system, and it would lower marginal tax rates c be simpler and it would lower average tax rates d be simpler and it would lower marginal tax rates ANSWER: d be simpler and it would lower marginal tax rates SECTION: 3 OBJECTIVE: 4 23 If the government imposed a $1,000 tax on every individual, a this would be an equitable tax b allocative efficiency would have to be sacrificed c this would be an efficient tax d this would be an income tax ANSWER: c this would be an efficient tax SECTION: 3 OBJECTIVE: 4 Chapter 12/The Design of the Tax System ✦ 73 24 In choosing the form of a tax, there is a tradeoff between a allocative and productive efficiency b profits and revenues c efficiency and fairness d fairness and profits ANSWER: c efficiency and fairness SECTION: 3 OBJECTIVE: 5 25 If society is interested in devising a tax that is fair to its citizens, a the tax will raise efficiency b none can be devised c the tax will create inefficiencies d it should choose a lumpsum tax ANSWER: c the tax will create inefficiencies SECTION: 3 OBJECTIVE: 5 ... the increase in taxes she would pay as a percentage of the rise in her income SECTION: 2 OBJECTIVE: 3 Chapter 12/ The Design of the Tax System ✦ 71 12 Pat figures that for every extra dollar she earns, she owes the government 33 cents. Her total ...70 ✦ Chapter 12/ The Design of the Tax System The deadweight loss from a tax increases as supply becomes more ... tolls used to finance the construction of a bridge ANSWER: Social Security taxes SECTION: 3 OBJECTIVE: 3 72 ✦ Chapter 12/ The Design of the Tax System 18 A tax is if it takes a constant fraction of income as income rises