Deck 13: The Theory of Income Taxation 

Question 1

Because a tax on interest income results in income and substitution effects, it is not possible to pre?dict the effect it will have on saving.

Answer 1

True

Question 2

A tax on labor income:

A)results only in an income effect that always decreases hours worked per year.
B)results in a substitution effect that always decreases hours worked per year.
C)results in an income effect that increases hours worked per year if leisure is a normal good.
D)both (b) and (c) are correct.

Answer 2

both (b) and (c) are correct.

Question 3

If an individual is subject to a 30 percent income tax, then the net interest on a certificate of deposit yielding 5 percent would be 3.5 percent after taxes.

Answer 3

True

Question 4

The Haig-Simons definition of income is different from comprehensive income.

Question 5

Points on a compensated labor supply curve are always more elastic than points for corresponding wage levels on a regular labor supply curve.

Question 6

Comprehensive income is the sum of annual consumption and the change in net worth.

Question 7

Most empirical studies indicate that the interest elasticity of supply of savings is close to zero.

Question 8

Under a comprehensive income tax, transfer payments received by Social Security recipients would be fully taxable.

Question 9

Comprehensive income equals consumption plus the change in net worth.

Question 10

Comprehensive income:

A)is the sum of annual consumption and realized capital gains.
B)is the sum of annual consumption and changes in net worth.
C)excludes corporation income.
D)is the sum of annual consumption and net worth.

Question 11

The market wage elasticity of labor is zero.If this is the case, the excess burden of a tax on labor income will also be zero.

Question 12

Comprehensive income excludes unrealized capital gains.

Question 13

A comprehensive income tax will always reduce work effort by taxpayers.

Question 14

A comprehensive income tax will result in a divergence between gross wages paid by employers and net wages received by workers.

Question 15

Homeowners earn rental income-in-kind from their home that would be taxable under a compre?hensive income tax.

Question 16

A tax on interest income does not prevent the credit market from efficiently allocating resources.

Question 17

The substitution effect of a tax-induced decline in wages always leads workers to work less.

Question 18

A comprehensive income tax is a lump-sum tax.

Question 19

Income tax became a permanent fixture in the United States starting in the early nineteenth century.

Question 20

The actual federal income tax currently taxes all income irrespective of its source or use at the same tax rate.

Question 21

The higher the compensated elasticity of supply of savings,

A)the lower the excess burden of a tax on capital income.
B)the higher the excess burden of a tax on capital income.
C)the higher the excess burden of a tax on labor income.
D)both (b) and (c) are correct.

Question 22

The compensated labor supply curve:

A)will always be vertical.
B)will always be upward sloping.
C)will always be downward sloping.
D)reflects both the income and substitution effects of wage changes.

Question 23

Which of the following is true about comprehensive income?

A)Only labor income is included.
B)Only capital income is included.
C)Capital gains are not included.
D)Both realized and unrealized capital gains are included.

Question 24

A tax on labor income will:

A)increase the net wage received by workers.
B)decrease the net wage received by workers.
C)cause the net wage received by workers to decline below the gross wage paid by employers.
D)both (b) and (c) are correct.

Question 25

If the return to savings, r, is subject to taxation at rate t, then in equilibrium a saver's marginal rate of time preference will equal:

A)r
B)t
C)(1 + r)
D)[1 + r(1 - t)]

Question 26

Using a regular labor supply curve instead of a compensated supply curve to calculate the excess burden of a tax on labor income will:

A)result in an accurate estimate of the excess burden.
B)overestimate the excess burden.
C)underestimate the excess burden.
D)accurately estimate the excess burden only if the market supply of labor is perfectly inelastic.

Question 27

Income from labor services (wages) account for what percentage of gross income in the United States?

A)More than 90 percent
B)More than 75 percent
C)More than 60 percent
D)More than 80 percent

Question 28

Interest income tends to increase with the total income of persons.This means that upper-income groups are likely to receive higher amounts of interest income as a percent of their income than lower-income groups.This implies that a flat-rate tax on interest income will take more dollars per year from the rich than from the poor.Do you agree with this argument? Indicate the market condi?tions that would have to prevail to prevent the shifting of a tax on interest income to groups other than those who earn interest.What will be the incidence of the tax if those conditions do not prevail?

Question 29

Which of the following will increase a person's comprehensive income?

A)An increase in the market value of the person's home
B)A decrease in the value of the person's stock portfolio
C)A decrease in labor income
D)A decrease in consumption

Question 30

The market supply of labor is perfectly inelastic.It then follows that:

A)the substitution effect of wage changes is zero.
B)the income effect of wage changes is zero.
C)leisure is a normal good and the income effect of wage changes exactly offsets the substitution effect.
D)the excess burden of a tax on labor income will be zero.

Question 31

A tax on interest income:

A)causes the gross interest rate paid by investors to exceed the net interest rate received by savers.
B)will always reduce saving.
C)will always increase saving.
D)is equivalent to a lump-sum tax.

Question 32

A flat-rate tax on labor income will:

A)always reduce hours worked per year.
B)always increase hours worked per year.
C)either increase or decrease hours worked per year.
D)never have any effect on the amount of leisure hours per year.

Question 33

An example of a nonpecuniary return is:

A)job satisfaction.
B)unemployment benefits.
C)employer contributions to a retirement plan.
D)both (b) and (c) are correct.

Question 34

Most empirical research indicates that the market supply curve of labor hours by prime-age males is:

A)very elastic.
B)almost perfectly inelastic.
C)always upward sloping.
D)perfectly elastic.

Question 35

A 20 percent, flat-rate tax on labor income is imposed.Show how the excess burden of the tax could be estimated.In your answer list all the data you would require to make your estimate.Under what circumstance will workers not bear the full incidence of a tax on labor income? Under what circum?stances will an increase in the tax rate decrease tax revenue?

Question 36

If the market supply curve of savings is upward sloping, a tax on interest income will:

A)increase the amount of saving.
B)increase the market rate of interest.
C)decrease the market rate of interest.
D)have no effect on the market rate of interest.

Question 37

If the supply of labor is perfectly inelastic, then the incidence of a payroll tax levied entirely on employers will be:

A)borne by employers as a reduction in profits.
B)split between workers and employers.
C)paid entirely by workers.
D)shifted forward to consumers.

Question 38

Income-in-kind:

A)is exemplified by nonpecuniary returns.
B)is generally non-taxable because there is no monetary transaction.
C)is generally taxable.
D)both (a) and (b) are correct.