Deck 15: Taxes on Business Income and Wealth

Question 1

In the short run,a constant (as a percentage of profits)corporate income tax imposed on a monopolist will _____.

A)cause capital to flee the industry
B)cause output to fall
C)leave output unchanged
D)cause output to rise

Answer 1

C

Question 2

Historically,the high level of taxation on dividends relative to capital gains or interest led to _____.

A)lower levels of corporate dividends
B)higher levels of corporate dividends
C)no changes in corporation behavior
D)fewer incorporations

Answer 2

A

Question 3

The federal corporate income tax rate in 2003 was about _____ for most corporations.

A)28 percent
B)35 percent
C)42 percent
D)47 percent

Answer 3

B

Question 4

_____ is the decline in value over time of capital equipment.

A)Bracket creep
B)Inflation
C)Depreciation
D)Diminishing productivity

Question 5

Which of the following is taxed under the current corporate income tax structure?

A)dividends
B)interest payments
C)fringe benefits
D)worker salaries

Question 6

Which of the following is not a nontaxable fringe benefit?

A)business travel to far away conferences
B)insurance plans
C)stock options
D)company automobiles

Question 7

Which of the following are arguments against taxing unrealized capital gains?

A)A person might have to sell an asset in order to pay the tax on it.
B)It might be difficult to determine the increase in valuation.
C)It increases the incentive to hold onto appreciated assets.
D)a and b
D)b and c

Question 8

The relationship between personal and corporate income taxes rates is significant because _____.

A)high-income taxpayers can choose between realizing income as personal or corporate
B)low-income taxpayers purchase the majority of goods produced by corporations
C)middle-income taxpayers equalize their income between corporate and personal income taxes
D)there is no relationship

Question 9

Government shares in the gains to risk-bearing activities but does not _____.

A)share in the losses when depreciation is straight-line
B)share in the losses when the investor has no other income
C)share in the losses when depreciation is accelerated
D)share in the losses when capital losses are allowed

Question 10

Dividends are paid by corporations out of _____ leading to _____.

A)pre-tax income;dividends escaping taxation
B)pre-tax income;the double taxation of saving
C)after-tax income;dividends escaping taxation
D)after-tax income;the double taxation of saving

Question 11

A(n)_____ is an increase in wealth caused by an appreciation of the value of an asset that an individual or corporation owns.

A)inflationary gain
B)profit
C)capital gain
D)accelerated appreciation

Question 12

An income tax _____.

A)increases the return to bearing risk,if the company is a monopolist
B)has no impact on the return to bearing risk
C)increases the return to bearing risk
D)reduces the return to bearing risk

Question 13

If the top personal tax rate is higher than the top corporate rate,high income taxpayers have an incentive to _____.

A)incorporate
B)save
C)engage in tax evasion
D)purchase stock

Question 14

Generally speaking,firms _____ of their capital assets.

A)prefer straight-line depreciation
B)prefer accelerated depreciation
C)are indifferent between straight-line and accelerated depreciation
D)prefer not to depreciate

Question 15

When corporate income taxes are increased on competitive industries,the increase _____.

A)will have the largest effect on firms with elastic demands
B)will have the largest effect on firms with inelastic demands
C)will be evenly distributed between stockholders and customers
D)will have zero effect

Question 16

Business-related expenses of employees are higher than they otherwise would be due to most business-related expenses being _____.

A)frivolous
B)accounted for at personal tax rates,not corporate tax rates
C)a tax credit for the individual
D)nontaxable fringe benefits

Question 17

The mobility of _____ means that in the _____ it can be used for consumption,thus the burden of most corporate income taxes will be borne by the customers of a firm.

A)labor;long run
B)labor;short run
C)capital;long run
D)capital;short run

Question 18

If unrealized capital gains are not taxed,then individuals _____.

A)have no incentive to own assets that are going to appreciate in value
B)have little incentive to own assets that are going to appreciate in value
C)have strong incentive to own assets that are going to appreciate in value
D)have incentives to not sell assets that have appreciated in value

Question 19

Increased inflation _____ the value of depreciating capital assets.

A)raises
B)erodes
C)does not affect
D)creates uncertainty regarding

Question 20

The significance of the corporate income tax as a percentage of federal revenues has _____.

A)declined since 1960
B)declined since 1983
C)remained constant since 1960
D)increased until 1960 and fallen since then

Question 21

Phantom capital gains occur when _____.

A)an asset increases in real terms,but not in nominal terms
B)an asset is constant in real terms,but increases in nominal terms
C)an asset decreases in real terms and decreases in nominal terms
D)an asset is purchased to be used upon an individual's death

Question 22

Site value taxation _____.

A)taxes improvements to land
B)taxes the assessed value of land
C)taxes the locational value of land
D)a and c

Question 23

Capital gains taxation can be justified on equity grounds,but not efficiency grounds.

Question 24

When deciding where to locate,businesses _____.

A)will always locate in the lowest tax area
B)pay no attention to property taxes
C)might move to a high property tax area if local amenities are good
D)will always locate closest to their customer base

Question 25

The double taxation of capital gains can be justified _____.

A)on the ability-to-pay principle
B)on efficiency grounds
C)on the grounds that government needs more revenue
D)on the benefit principle

Question 26

The burden of a site value tax will be borne entirely by the site owner _____.

A)because the demand for land is elastic
B)when the site owner is forced to remit the tax
C)because the supply of land is completely inelastic
D)when the supply of land is unitary elastic

Question 27

Severance taxes are collected on _____.

A)estates
B)unemployment insurance
C)the extraction of natural resources
D)large employee bonuses

Question 28

The value of tax land increases as a result of site value taxation only when _____.

A)all governments employ it
B)surrounding governments do not employ it
C)the supply of land is inelastic
D)the demand for housing is strong

Question 29

Which of the following is not true about wealth taxation?

A)Wealth taxation can be achieved through sales taxation.
B)Wealth taxation may be a way of taxing a stock that generates a difficult to measure flow of services.
C)Wealth taxation can be a method of taxing unrealized capital gains.
D)Wealth taxation may be a method to discourage the accumulation of wealth.

Question 30

The primary effect of an inheritance tax is _____.

A)to encourage the liquidation of assets
B)provide significant government revenue
C)encourage capital formation
D)the encouragement of pre-death asset transfers

Question 31

The U.S.tax system currently levies taxes on unrealized capital gains.

Question 32

Lower marginal tax rates facilitate a higher return to innovative and risk-taking behavior.

Question 33

Inflation reduces the return to capital gains _____.

A)only on large assets such as houses
B)because people have to pay taxes on nominal capital gains
C)when tax rates on capital gains are high
D)only under hyperinflation

Question 34

The concept of depreciation while widely employed,has little economic basis.

Question 35

The primary source of revenue for local governments is _____.

A)income taxation
B)sales taxation
C)estate taxation
D)property taxation

Question 36

Dividends are taxed three times.

Question 37

Strictly speaking,corporations do not pay taxes.

Question 38

Taxation of agricultural land at a lower rate than commercial property might be justified _____.

A)on utilitarian grounds
B)on the benefit principle
C)on the ability-to-pay principle
D)on efficiency grounds

Question 39

The corporate income tax can be understood fully without reference to other elements of the federal tax code.

Question 40

Some property tax limitations,such as California's Proposition 13,only do significant reassessment of property taxes when houses are sold.This creates _____

A)an incentive to rent
B)inequity between homeowners of comparable houses
C)a disincentive to move
D)b and c
E)all of the above

Question 41

Provide two justifications for not taxing unrealized capital gains.

Question 42

Severance taxes do not allow companies to shift any the tax burden to demanders because the supply of natural resources is completely inelastic.

Question 43

Why is it important to consider the personal income tax when evaluating the corporate income tax? Give an example of how differential rates between the corporate and personal income tax rates can change taxpayer behavior.

Question 44

Discuss why saving and investing entails risk.What is the reward for bearing risk? Explain how income taxes affect the returns to risk bearing and its impact on overall risk taking and innovation.

Question 45

There are no arguments in favor of inheritance taxation on efficiency grounds,only on equity grounds.

Question 46

A property tax discourages improvements that would increase the value of the property.

Question 47

A property tax is equivalent to a tax on income.

Question 48

Discuss the thought process of the owners of a new business with regard to property taxes when deciding where to locate.Will they always locate where property taxes are lowest? Why or why not?

Question 49

Is it proper to say corporations pay taxes? Why or why not? How does the allocation of the corporate income tax burden change from the short to the long run?