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This class currently uses the 16th edition of Economics Today by Roger LeRoy Miller. Questions are based on this text and companion Study Guide by Roger LeRoy Miller and David VanHoose, as well as a companion website for the 15th edition. Even if you are using a newer edition, I would expect most of the material to be the same, at least for a few years.

Ultimately, all government spending, transfers, and borrowing are primarily financed by ______.

taxes

The ______ is the limitation that taxes and user charges place on the total amount of government expenditures and transfer payments.

Government budget constraint

If the price of an asset rises after its purchase, the owner receives a(n) ______ gain. If the price falls, the owner suffers an(n) ______ loss.

capital

capital

The marginal tax rate applies only to the ______ tax bracket

last

The corporate income tax is paid by one or more of the following groups:

1. stockholders
2. consumers
3. employees

Under an ad valorem sales tax system, the government applies a ______ to the price of an item to determine the tax owed on the purchase of the item.

tax rate

______ tax analysis emphasizes the potential for ever-higher tax rates to induce a reduction in the tax base.

Dynamic

A(n) ______ tax is levied on purchases of a particular good or service.

excise

If the demand and supply curves for an item have their typical shapes, then imposing a unit excise tax on the item results in a(n) ______ in the market price of the item and a(n) ______ the equilibrium quantity purchased and sold.

increase

decrease

The maximum wage earnings subject to the Social Security payroll tax ______ assessed against the earnings is called the wage ___________ of the payroll tax system.

rate

base

The federal individual income tax is regressive.

F

It is progressive

The largest source of receipts for the federal government is the individual income tax.

T

In a progressive tax structure, the average tax rate is greater than the marginal tax rate.

F

For average taxes to rise with income (a progressive tax), the marginal tax rate must exceed the average tax rate

Positive economics confirms that a progressive taxation system is more equitable than a regressive taxation system.

F

"Equitable" requires normative (value judgment) statements.

In the United States, the tax system that yields the most revenue to all governments combined is the corporate income tax.

F

The personal income tax yields the most revenue.

When corporations are taxed, consumers and corporate employees are also affected.

T

A sales tax is typically a constant amount charged on the sale of a particular item.

F

A sales tax covers a large set of items and typically is levied as a fraction of the price.

Static tax analysis indicates that raising the tax rate by 1 percentage point will always increase tax revenues by an amount equal to 1 percent of the tax base.

T

Every U.S. state government relies on sales taxes to fund at least a portion of its spending and transfer programs.

F

There are no sales taxes in Delaware, Montana, New Hampshire and Oregon

According to dynamic tax analysis, there is likely to be a single tax rate that maximizes government tax collections.

T

Consumers always pay the full amount of a unit excise tax.

F

Consumers pay the full tax only if demand is completely unresponsive to price.

A switch from the current progressive income tax to a national sales tax
a. would not change our tax system very much.
b. would lead to more taxes on savings.
c. would cause the current structure of the Internal Revenue Service (IRS) to be greatly reduced.
d. would cause more IRS agents to be hired.

c. would cause the current structure of the Internal Revenue Service (IRS) to be greatly reduced.

If the government taxes group A and gives to group B, then economic incentives for
a. group A may be reduced.
b. group B may be reduced.
c. both may change so as to reduce output.
d. All of the above.

d. All of the above.

In a progressive tax structure,
a. the marginal tax rate exceeds the average tax rate.
b. equity exists.
c. the average tax rate rises as income falls.
d. All of the above.

a. the marginal tax rate exceeds the average tax rate.

Which one of the following statements is true?
a. Under a regressive tax structure, the average tax rate remains constant as income rises.
b. If upper-income people pay more taxes than lower-income people, equity must exist.
c. The U.S. federal personal income tax system is progressive.
d. At very high income levels, the Social Security tax and employee contribution become progressive.

c. The U.S. federal personal income tax system is progressive.

The tax incidence of the corporate income tax falls on
a. corporate stockholders.
b. corporate employees.
c. consumers of goods and services produced by corporations.
d. All of the above.

d. All of the above.

Which one of the following statements about the Social Security tax is not true?
a. It is a progressive tax.
b. It came into existence in 1935.
c. It is imposed on employers and employees.
d. It is a payroll tax.

a. It is a progressive tax.

If Mr. Romano faces a 90 percent marginal tax rate,
a. the next dollar he earns nets him 90 cents.
b. his total tax payments equal 90 percent of his total income.
c. he has a strong incentive not to earn extra income.
d. his average tax rate must be falling.

c. he has a strong incentive not to earn extra income.

A proportional tax system
a. is unfair.
b. cannot be consistent with people's ability to pay such taxes.
c. means that upper-income people pay smaller percentages of their income in taxes than do lower- income people.
d. requires upper-income people to pay more tax dollars than lower-income people pay.

d. requires upper-income people to pay more tax dollars than lower-income people pay.

If the government establishes a sales tax on a broad set of goods and services by levying a tax rate equal to a fraction of the market price of each unit purchased, then it uses a system of
a. unit taxes.
b. excise taxes.
c. ad valorem taxes.
d. constant per-unit taxes.

c. ad valorem taxes.

The value of goods, services, or incomes subject to taxation is known as the
a. tax base.
b. unit base.
c. ad valorem constraint.
d. government budget constraint.

a. tax base.

A key assumption of static tax analysis is that
a. the tax base declines as the government raises the tax rate.
b. there is a single tax rate that maximizes government tax revenues.
c. the government's tax revenues always rise with increases in the tax rate.
d. the government's tax revenues eventually decline when it levies ever-higher tax rates.

c. the government's tax revenues always rise with increases in the tax rate.

Imposing a unit excise tax results in
a. an upward shift in the market supply curve equal to the amount of the tax.
b. a downward shift in the market supply curve equal to the amount of the tax.
c. an upward shift in the market demand curve equal to the resulting price increase.
d. a downward shift in the market demand curve equal to the resulting price decline.

a. an upward shift in the market supply curve equal to the amount of the tax.

If market demand and supply curves have their normal shapes, then when a government levies a unit excise tax on an item equal to $5 per unit, the market price of the item will
a. decline by an amount less than $5 per unit.
b. increase by an amount less than $5 per unit.
c. decline by an amount more than $5 per unit.
d. increase by an amount more than $5 per unit.

b. increase by an amount less than $5 per unit.

If market demand and supply curves have their normal shapes, then a $1 increase in a unit excise tax on a good causes
a. the price consumers pay for each unit to rise by $1.
b. the costs suppliers incur to supply each unit to rise by $1.
c. the price consumers pay for each unit to rise by more than $1.
d. the costs suppliers incur to supply each unit to rise by less than $1.

d. the costs suppliers incur to supply each unit to rise by less than $1.

Today, the Social Security payroll tax rate is closest to
a. 2 percent.
b. 4 percent.
c. 10 percent.
d. 14 percent.

d. 14 percent.

The government budget constraint implies that the sum of government spending and transfers equals

government borrowings + taxes and user charges.

What is the major concern about Social Security?

The number of elderly requiring health care will create a large financial burden on younger citizens.

The type of tax analysis that assumes that the tax base is the same regardless of the tax rate is known as

static tax analysis.

The type of tax analysis that assumes that the tax base changes depending on the tax rate is known as

dynamic tax analysis.

An excise tax of 40 cents is levied on a product. As a result of the tax, the market price of the product goes from $2 to $2.30. How much of the tax does the consumer pay and how much does the producer pay?

The consumer pays 30 cents and the producer pays 10 cents.

The largest source of U.S. tax receipts is

individual income taxes.

Suppose you are a single person, and you earn $74,200 per year and are in the 25% tax bracket. If you get a raise to $100,000 per year and are now in the 28% tax bracket, you pay 28% on

your income between $74,201 and $100,000.

Suppose you earn $40,000 per year and pay $4,000 in income taxes, while your friend earns $30,000 and pays $2,500 per year in income taxes. The income tax system is

progressive taxation.

If the marginal tax rate and the average tax rate are the same, then the tax system in use is

proportional taxation.

Suppose the tax rate is 0 percent on the first $20,000 income, 20 percent on the next $20,000, and 25 percent on the next $20,000. For a family earning $30,000, the marginal tax rate is

20 percent.

The change in taxes due divided by the change in taxable income is the

marginal tax rate.

U.S. Social security taxes are a

regressive tax system.

Over the long run, a government's fundamental source of revenues is

taxes and user fees.

Proposals for reforming the current Social Security system include

reforming immigration policies.

In the regressive tax system, the higher is the level of taxable income,

the lower is the marginal tax rate.

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