Deck 25: Fundamental Tax Reform and Consumption Tax

Question 1

Changes to the tax code made in 1993,1997,2001,2003,and 2012 have:

A) reduced the number of tax brackets.
B) greatly limited tax loopholes.
C) created more opportunities for tax evasion and avoidance.
D) changed the structure of tax rates to a flat tax.

Answer 1

created more opportunities for tax evasion and avoidance.

Question 2

Suppose that you respond to an income tax increase by claiming false deductions.This is an example of:

A) reporting effect.
B) income exclusion effect.
C) compliance effect.
D) direct effect.

Answer 2

compliance effect.

Question 3

Suppose that you respond to an income tax increase by contributing more money to your individual retirement account.This is an example of:

A) reporting effect.
B) income exclusion effect.
C) compliance effect.
D) direct effect.

Answer 3

income exclusion effect.

Question 4

Which definition best describes tax shelters?

A) homeless shelters paid for by voluntary donations on one's tax form
B) special sections of the tax code that favor special interests that wish to minimize their tax burden
C) tax-exempt regions of the country
D) activities whose sole reason for existence is to minimize one's tax burden

Question 5

Suppose that there is an income tax increase in the United States.Empirical evidence suggests that one channel through which tax rate changes can affect tax revenues will be LEAST responsible for eroding the tax base.What is it?

A) reporting effect
B) income exclusion effect
C) direct effect
D) gross income effect

Question 6

Suppose that you respond to an income tax increase by giving more money to charity (which is tax deductible).This is an example of:

A) reporting effect.
B) income exclusion effect.
C) compliance effect.
D) direct effect.

Question 7

Which statement is NOT true of tax evasion?

A) Tax evasion is inefficient.
B) Tax evasion violates vertical equity.
C) Tax evasion violates horizontal equity.
D) People never made a choice to engage in tax evasion.

Question 8

Suppose the personal income tax rate is reduced and the penalties associated with tax evasion are reduced.Holding all else constant,which of the following must be TRUE?

A) The marginal cost of tax evasion is increased for any given level of unreported income.
B) The marginal benefit of tax evasion is reduced for any given level of unreported income.
C) Less tax evasion occurs.
D) The two changes cancel each other out so there is no change in tax evasion.

Question 9

Under the current U.S.tax code,saving in the form of real estate is:

A) discouraged because of the high rate of taxation on capital gains in housing relative to the rate of taxation on other capital gains.
B) encouraged because of the low rate of taxation on capital gains in housing.
C) discouraged because of the high rate of taxation on all capital gains.
D) encouraged because of the high rate of taxation on capital gains in housing.

Question 10

Suppose that,as a result of a tax rate increase,you decide to work fewer hours.This is an example of which channel through which tax rate changes can change tax revenues?

A) reporting effect
B) compliance effect
C) direct effect
D) gross income effect

Question 11

Tax _______ is willingness to pay taxes; tax ________ is the result of efforts to reduce one's tax burden within the limits of the law.

A) compliance; avoidance
B) compliance; evasion
C) compliance; hedging
D) avoidance; evasion

Question 12

Which of the following is an advantage of a consumption tax relative to the current tax system?

A) A consumption tax is more complex.
B) A consumption tax would increase vertical equity.
C) A consumption tax would increase horizontal equity.
D) A consumption tax reduces savings incentives

Question 13

In the theory of tax evasion,increasing the risk of getting caught _____ the marginal cost of tax evasion; reducing the penalty associated with tax evasion _____ the marginal _____ of tax evasion.

A) increases; decreases; benefit
B) increases; decreases; cost
C) increases; increases; benefit
D) decreases; increases; cost

Question 14

Which of the following statements is NOT true regarding the empirical evidence on tax evasion?

A) In the United States,the tax gap (the difference between the tax owed and taxes paid)is fairly low,similar to other developed countries.
B) The tax evasion rate is generally positively correlated with the level of economic development.
C) The appeals to conscience had no effect on the compliance rate in the United States.
D) Audit threats increased reported income for lower- and middle-class families in the United States.

Question 15

In the theory of tax evasion,what is the marginal benefit of evading taxes?

A) the additional utility one gets from beating the system
B) the tax payment saved per dollar of evasion
C) the total tax payment saved by evasion
D) the additional utility one gets from beating the system plus the tax payment saved per dollar of evasion

Question 16

Tax capitalization is defined by which description?

A) emphasizing the importance of taxation over spending
B) the change in wages due to taxation
C) the change in asset prices due to a change in the tax levied on the returns from the asset
D) the movement away from the taxation of income and toward the taxation of consumption

Question 17

Suppose the personal income tax rate is increased and the risk of getting caught for evading taxes increases.As a result,the marginal benefit of tax evasion _____ for any given level of unreported income and the level of tax evasion _____.

A) increases; is ambiguous
B) increases; is positive
C) decrease; is negative
D) is unchanged; is ambiguous

Question 18

Suppose that,as a result of an income tax rate increase,you pay more tax on the same amount of income.This is an example of which channel through which tax rate changes can change tax revenues?

A) reporting effect
B) income exclusion effect
C) compliance effect
D) direct effect

Question 19

If the penalties associated with tax evasion are increased and the risk of being caught evading taxes increases,which of the following statements is TRUE,other things held constant?

A) The marginal cost of evading taxes is decreased for any given level of unreported income.
B) The marginal cost of evading taxes is increased for any given level of unreported income.
C) More tax evasion occurs.
D) The two changes cancel each other out so there is no change in tax evasion.

Question 20

Tax ______ is legal; tax _______ is illegal.

A) avoidance; compliance
B) compliance; avoidance
C) evasion; avoidance
D) avoidance; evasion

Question 21

Under the Hall-Rabushka flat tax proposal:

A) labor earnings are taxed at a flat rate with an exemption to make the tax more progressive.
B) a value-added tax is imposed on the difference between a firm's sales and its allowable deductions.
C) firms are allowed to deduct the value of purchased inputs and compensation to workers to arrive at the amount to be taxed under the value-added tax (VAT).
D) labor earnings are taxed at a flat rate,with no exemptions to make the tax proportional.

Question 22

Suppose the government is considering replacing the current income tax system with either a national sales tax or a value-added tax.Would one of these alternatives be more desirable than the other in terms of compliance? Explain.

Question 23

Which statement about a value-added tax is TRUE?

A) A value-added tax is a consumption tax.
B) A value-added tax taxes goods at each stage of production on the total value of the good at that stage in the production process.
C) Avoiding a value-added tax is a strong incentive for black market activity.
D) A value-added tax is an income tax.

Question 24

Which statement about changing the current tax system in the U.S.to a cash-flow tax system is TRUE?

A) A cash-flow tax system would encourage black market activities to avoid the sales tax.
B) A cash-flow tax system would require giving large deductions to the richest people for saving.
C) A cash-flow tax system would require verification of how much money people spend every year.
D) A cash-flow tax system would require giving large deductions to the poorest people for spending.

Question 25

Making the transition from the current income tax system to a flat tax system would be likely to cause:

A) vertical inequities during the transition as high-income individuals lose access to tax loopholes.
B) horizontal inequities during the transition as tax preferences for homeownership and employer-provided health insurance are eliminated.
C) reduced compliance because the current system is less complex.
D) improvements in both horizontal and vertical equity.

Question 26

A consumption tax levied on the increase in the value of a good at each stage of production is called a(n):

A) expenditure tax.
B) cash-flow tax.
C) flat tax.
D) value-added tax.

Question 27

Identify and describe two political reasons the tax code is so complicated.

Question 28

The flat tax was popularized by:

A) Hall and Rabushka in 1981.
B) Haig and Simons in 1986.
C) Domar and Musgrave in 1944.
D) Roth and Rossotti in 1997.

Question 29

Assume that two people have the same income.Under the U.S.tax code,someone who chooses to save some income to consume more later is taxed _________ than someone who chooses to spend all of the income now,which is ________.

A) more; efficient
B) more; inefficient
C) more; vertically inequitable
D) less; inefficient

Question 30

The share of total national revenue from consumption taxation is approximately ________ in the United States.

A) 14%
B) 26%
C) 36%
D) 46%

Question 31

The share of total national tax revenue from consumption taxation averages approximately ________ in OECD (Organisation for Economic Co-operation and Development)nations.

A) 2%
B) 15%
C) 30%
D) 52%

Question 32

Compared to the current system,a consumption tax is expected to improve:

A) efficiency and horizontal equity.
B) horizontal and vertical equity.
C) efficiency and vertical equity.
D) efficiency,horizontal equity,and vertical equity.

Question 33

Suppose the government of Mascolia is considering replacing its income tax system with a consumption tax.Assume that the government's revenue requirement would be the same under either system.
(a)How would the base of a consumption tax compare with the base of an income tax? Does this have implications for the magnitude of the tax rate on consumption versus the magnitude of the tax rate on income? Explain.
(b)Compare the income tax and consumption tax in terms of vertical equity,assuming that both tax all people at the same rate (for example,a 20% tax on income and a 20% sales tax).

Question 34

A sales tax is a tax on ________; a payroll tax is a tax on __________.

A) capital gains; income
B) consumption; consumption
C) consumption; income
D) income; income

Question 35

Explain why a simpler tax system,such as Herman Cain's 9-9-9 Plan,has not received support from Democrats or Republicans.

Question 36

An excise tax is a tax on ________; a value-added tax is a tax on __________.

A) capital gains; income
B) consumption; consumption
C) consumption; income
D) income; income

Question 37

Suppose that,in place of the progressive income tax,a nation is considering adopting a national sales tax of 25% on all goods.
(a)If the politicians want to use a sales tax but also want the tax to be progressive,what could they do? Evaluate this option in terms of what you know about optimal commodity taxation.
(b)Would all groups be affected by the transition to a consumption tax in the same way? Explain.