Deck 12: The Design of the Tax System

Question 1

Road construction funded by taxes on petrol is an example of the benefits principle applied to the equity of the tax burden.

Answer 1

True

Question 2

'Vertical equity' refers to the idea that taxpayers with similar abilities to pay taxes should pay the same amount.

Answer 2

False

Question 3

Resources devoted to complying with the tax laws constitute a type of deadweight loss.

Answer 3

True

Question 4

Complex tax laws result from political processes.

Question 5

Taxes create deadweight losses because they distort incentives.

Question 6

After a tax is imposed some people change their behaviour.These changes cause a deadweight loss to be generated.

Question 7

A progressive tax is a tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers.

Question 8

A budget deficit is when a government owes money to overseas investors.

Question 9

Tax schemes that satisfy the benefits principle are always considered to be the most equitable.

Question 10

Social security is an income support measure, designed primarily to maintain the living standards of the poor.

Question 11

When a tax does not have a deadweight loss, the reduction in surplus is exactly offset by tax revenue collected by the government.

Question 12

An efficient tax system is one that generates a lot of revenue even if the administrative burden is high.

Question 13

Lump-sum taxes are equitable but not efficient.

Question 14

Company income is taxed three times: first when the corporation earns profits; second when the bondholders pay tax on interest income; and third when individuals pay tax on company dividends.

Question 15

Ambiguities or omission in the tax laws generate tax loopholes.

Question 16

Income tax is a good example of a lump-sum tax.

Question 17

Some welfare groups argue that the GST places a disproportionate tax burden on lower income earners.

Question 18

It is rarely straightforward applying the concepts of vertical and horizontal equity to the tax system.

Question 19

Administrative burden and changes in behaviour are inefficiencies of any tax system.

Question 20

There is little disagreement about what constitutes tax equity.

Question 21

The GST is an example of a regressive tax.

Question 22

When the marginal tax rate exceeds the average tax rate, the tax is progressive.

Question 23

There is little disagreement among people about tax policy because most people attach the same weights to the goals of equity and efficiency.

Question 24

The most important taxes for state and local governments in Australia are individual and company income taxes.

Question 25

A lump-sum tax results in equality between average and marginal tax rates.

Question 26

The average tax rate is total taxes paid divided by total income.

Question 27

The average tax rate is used to calculate the marginal tax rate.

Question 28

The federal government collects all tax revenue in Australia and then passes a proportion of it onto the states.

Question 29

The ability-to-pay principle states that people should pay taxes based on the benefits they receive from government services.

Question 30

Vertical equity states that taxpayers with a greater ability to pay taxes should contribute a decreasing proportion of each increment in income to taxes.

Question 31

Tax evasion is another term for tax avoidance.

Question 32

'Loopholes' refer to the detailed provisions of the tax code that are abused by individuals and companies to avoid paying tax.

Question 33

To gauge the extent to which the tax system distorts incentives, the marginal tax rate is the appropriate tax rate to use.

Question 34

If the government imposes a tax of 20 per cent on the first $20 000 of income and 40 per cent on all incomes above $20 000, a person whose income is $30 000 would face a tax liability of $8000.

Question 35

An income tax in which the average tax rate is the same for all taxpayers would be considered a regressive tax.

Question 36

The 'poverty trap' refers to the problem where low income earners are effectively taxed at a high marginal tax rate when they begin to work more, and consequently lose some of their government benefits.

Question 37

It is only if a taxpayer has a very low income that his average tax rate will equal his marginal tax rate.

Question 38

An excise tax on alcohol and tobacco is viewed as an unfair tax on the poor by some critics.

Question 39

The marginal tax rate is the extra taxes paid on an additional dollar of income.

Question 40

If higher income taxpayers pay a higher percentage of their income in taxes, then the tax system is classed as progressive.

Question 41

According to the information provided, the amount of surplus value that accrues to Dean, Jess, Brent and Frida from their day surfing is:

A)$250
B)$126
C)$124
D)$146

Question 42

State and local governments:

A)are funded entirely by their own tax base
B)receive the majority of their tax revenues from company income tax
C)are generally not responsible for collecting sales tax
D)receive some of their funds from the federal government

Question 43

A poorly designed tax policy tends to be accompanied by which of the following costs?

A)the transfer of money from the government to the taxpayer
B)marginal rates
C)large administrative costs
D)equity penalties

Question 44

Tax evasion is when a person will try to minimise their marginal tax rate.

Question 45

If the government imposes a $2 tax on pizza and so the price of pizza rises from $7 to $9, the deadweight loss will arise from:

A)the pizza suppliers who lose $2 of revenue
B)the consumers who pay the tax
C)the government which pays $2 to the taxpayer
D)the consumers who change their behaviour and stop buying pizza as a result of the tax

Question 46

The marginal tax rate is:

A)how much every dollar earned is taxed
B)how much every dollar earned is taxed, on average
C)how much the first $18 200 earned is taxed
D)how much every extra dollar earned is taxed

Question 47

The average tax rate of a taxpayer is only likely to equal the marginal tax rate when the taxpayer:

A)collects a government salary
B)has a very high income
C)has a very low income
D)is a middle-income earner

Question 48

According to the information provided, if the government imposes a tax of $20 on every visit to the beach, the deadweight loss associated with the tax is:

A)$23
B)$26
C)$48
D)$15

Question 49

A 'tax liability' refers to:

A)the fine incurred when a taxpayer is caught evading tax
B)the amount of tax a taxpayer owes at the end of the financial year
C)the taxpayer who is liable to pay the tax
D)the fine incurred when a taxpayer is caught avoiding tax

Question 50

The GST can be described as a:

A)payroll tax
B)excise tax
C)consumption tax
D)income tax

Question 51

According to the information provided, how much consumer surplus accrues to Frida and Brent individually?

A)$64 and $93, respectively
B)$85 and $39, respectively
C)$46 and $35, respectively
D)$64 and $39, respectively

Question 52

Deadweight losses from taxation are equal to:

A)the reduction in revenue a supplier suffers from the imposition of the tax
B)taxes that target expenditures on social security
C)the reduction in consumer surplus resulting from the tax
D)the change in people's behaviour as a result of the tax

Question 53

Governments tax company income primarily on the basis of:

A)profit
B)its total revenue
C)pollution levels
D)all of the above

Question 54

The largest source of revenue for state governments is:

A)property tax
B)transfers from the federal government
C)individual income tax
D)tax on goods and services

Question 55

The administrative burden of a tax includes:

A)the amount of money people pay as income taxes
B)the reduction in the size of a market because of the tax
C)the time and effort of completing tax forms that is imposed on taxpayers who comply with the tax
D)the cost of administering programs that use tax revenue

Question 56

The amount of tax owed by a family is:

A)not simply proportional to its total income
B)largely unaffected by deductions
C)total income minus tax credits
D)some constant fraction of income

Question 57

When a tax is levied as a percentage of the total amount spent in retail stores, this tax is called a:

A)value-added tax
B)retail tax
C)commercial tax
D)sales tax

Question 58

One reason why deadweight losses are so difficult to avoid is that:

A)administrative burden and deadweight loss reflect a clear trade-off to policymakers
B)income taxes are not paid by everyone
C)consumption taxes must be universally applied to all commodities
D)taxes affect the decisions that people make

Question 59

Tax avoidance can occur unintentionally.

Question 60

Which of the following is NOT a tax levied in Australia?

A)goods and services tax
B)payroll tax
C)carbon tax
D)stamp duty

Question 61

According to the information provided, how much consumer surplus does Celia receive from consuming her 12-litre bottle of micro-brewed beer?

A)$13
B)$9
C)$6
D)$3

Question 62

High marginal tax rates:

A)are used to encourage saving behaviour
B)distort incentives to work
C)will invariably lead to lower average tax rates
D)are not associated with deadweight losses

Question 63

When taxes are imposed on a commodity:

A)there is never a deadweight loss
B)some consumers alter their consumption by not purchasing the taxed commodity
C)tax revenue will rise by the amount of the tax multiplied by the before-tax level of consumption
D)these taxes are considered non-distortionary

Question 64

If marginal tax rates decrease, the:

A)deadweight loss from taxes is unaffected
B)deadweight loss from taxes will be reduced
C)deadweight loss from taxes will rise
D)average tax rate will be falling

Question 65

A lump-sum tax has a marginal tax rate that is:

A)always positive
B)always negative
C)zero
D)greater than the prevailing average tax rate

Question 66

A tax on all forms of income will:

A)lower the effective rate of interest on savings
B)increase the potential income from saving
C)increase the amount of income received in the economy
D)enhance the incentives to save

Question 67

If tax laws become simplified then:

A)the administrative burden of taxes is decreased
B)compliance costs are most likely to increase
C)the government always collects less in tax revenue
D)the amount of tax revenue lost to tax evasion always increases

Question 68

With a lump-sum tax, the:

A)marginal tax rate is always less than the average tax rate
B)average tax rate is always less than the marginal tax rate
C)marginal tax rate falls as income rises
D)marginal tax rate rises as income rises

Question 69

Which of the following factors will influence the size of the deadweight loss from the individual income tax?
(i) on average, people will choose to not work as hard as they would if income was not taxed
(ii) on average, people will choose to save less and consume more
(iii) on average, people will choose to reduce their leisure time

A)(i), (ii) and (iii)
B)(i) and (ii) only
C)(i) and (iii) only
D)(ii) and (iii) only

Question 70

If your income is $80 000 and you paid $500 car registration, your:

A)lump-sum tax is $500
B)proportional tax $500
C)average tax rate is six per cent
D)marginal tax rate is six per cent

Question 71

The resource cost of tax compliance is:

A)not considered in calculations of tax burden
B)solely a product of company income taxes
C)solely a product of property taxes
D)included in the administrative burden of a tax

Question 72

When tax laws give preferential treatment to specific types of behaviour, it is called:

A)tax evasion
B)a political pay-off
C)a tax loophole
D)compensation for the benefit of society

Question 73

Attempts by taxpayers to illegally reduce their tax liability are termed:

A)tax avoidance
B)tax evasion
C)a tax-return compensation plan
D)activities outside the intent of tax law

Question 74

Amy's marginal tax rate was 18 per cent last year.This means the amount she paid on the last dollar she earned in that year was:

A)more than $0.18
B)exactly $0.18
C)more than 18 per cent
D)less than $0.18

Question 75

Tax evasion is:

A)facilitated by legal deductions to taxable income
B)the same as tax avoidance
C)recommended by the Australian Accounting Standards Board
D)illegal

Question 76

Suppose a tax is imposed on cameras.The administrative burden of the tax comes from:

A)those consumers who still choose to buy cameras, but pay a higher price that reflects the tax
B)those consumers who choose not to buy the camera after the tax raises the price
C)those citizens who must include the camera tax in their tax returns
D)those consumers who are unable to avoid paying the tax on cameras

Question 77

If everyone had to pay a tax of $100 to register their cars, this would be an example of a:

A)transport tax
B)consumption tax
C)lump-sum tax
D)marginal tax

Question 78

Lump-sum taxes:

A)are most frequently used to tax real property
B)do not distort incentives
C)are the most distortionary taxes
D)are used in taxing sales

Question 79

Harry's average tax rate on his November income is 15 per cent.The marginal tax rate on his December income of $10 000 exceeds his average tax rate.The tax liability on his December income:

A)will be less than $1500
B)will exactly equal $1500
C)will exceed $1500
D)from the information provided, any of the answers above could be correct

Question 80

In the absence of taxes, Jane would prefer to purchase a large four-wheel drive (4WD).However, the government has recently decided to place a $10 000 nuisance tax on 4WDs.Which of the following statements best reflects the effect of this tax if Jane decides to purchase a small economy car as a result of the tax?

A)other people who choose to purchase 4WDs will incur the cost of the deadweight loss of the tax
B)there are no deadweight losses as long as some people still choose to purchase 4WDs
C)all deadweight losses are mitigated if there is a net decrease in air pollution
D)Jane is worse off, and her loss of welfare is part of the deadweight loss of the tax