Question 1

Which of the following is exempt from taxation (a tax exemption)?
A)interest on a home mortgage
B)interest from municipal bonds
C)rent
D)property taxes

Accepted Answer

Interest from municipal bonds is generally exempt from federal income tax and may also be exempt from state and local taxes, making it a tax-exempt investment. The other options listed are taxable in various ways. Interest on a home mortgage may be deductible from taxable income but is not exempt from taxation. Rent and property taxes are also taxable, although property taxes may be deductible from taxable income in certain circumstances.

Question 2

The payroll tax appears to be a proportional tax.In reality it is
A)highly progressive.
B)actually proportional.
C)highly regressive.
D)regressive on low-income persons and progressive on high-income persons.

Accepted Answer

The payroll tax is regressive because it is a flat tax rate applied to all workers, regardless of their income level. This means that low-income earners will pay a higher percentage of their income towards this tax than high-income earners. Therefore, the payroll tax is regressive on low-income persons and relatively less burdensome for high-income individuals.

Question 3

The corporate income tax is
A)an indirect tax.
B)a regressive tax.
C)the second largest source of revenue for the federal government.
D)a direct tax.

Accepted Answer

The corporate income tax is a direct tax because it is imposed on the income or capital of corporations.

Question 4

The federal income tax began in the United States with the
A)Morrill Act of 1862.
B)addition of the Bill of Rights to the Constitution in 1791.
C)passage of the 16th Amendment to the Constitution in 1913.
D)New Deal legislation of the 1930s.

Accepted Answer

The passage of the 16th Amendment to the Constitution in 1913 gave Congress the power to levy a federal income tax. The Morrill Act of 1862 established land-grant colleges, the Bill of Rights was a document of individual rights and liberties added to the Constitution in 1791, and the New Deal legislation of the 1930s implemented various economic programs but did not introduce the federal income tax.

Question 5

Mrs.Dodge has $8 million in income and pays no income taxes.Her income is most likely
A)capital gains.
B)interest on corporate bonds.
C)interest on municipal bonds.
D)offset by mortgage interest.

Accepted Answer

Interest on municipal bonds is often exempt from federal income taxes, which would explain why Mrs. Dodge pays no income taxes on her $8 million income.

Question 6

Since the end of World War II, corporate income taxes have accounted for
A)an increasing share of federal revenue.
B)a steady share of federal revenue.
C)a declining share of federal revenue.
D)a rising share of revenue until 1980, and then a falling share.

Accepted Answer

Since the end of World War II, corporate income taxes have accounted for a declining share of federal revenue, according to data from the Congressional Budget Office. In 1952, corporate income taxes made up 32% of federal revenue, but by 2021, they are projected to make up only 7%.

Question 7

An excise tax
A)is a sales tax on the purchase of a particular good or service.
B)is a tax on the profits earned from the sale of an asset.
C)represents a surcharge on corporate profits beyond the normal corporate tax rate.
D)is a tax on income-earning rental property.

Accepted Answer

An excise tax is a tax on a specific good or service, usually levied by the government. It is often referred to as a "sin tax" because it is used to discourage certain behaviors, such as smoking or drinking. Unlike a sales tax, which is a percentage of the price of a good or service, an excise tax is a fixed amount per unit.

Question 8

The second largest source of income for the federal budget is:
A)personal income taxes.
B)corporate income taxes.
C)payroll taxes.
D)inheritance taxes.

Accepted Answer

Payroll taxes are the second largest source of income for the federal budget. These taxes are taken out of workers' paychecks and go towards funding Social Security and Medicare.

Question 9

The payroll tax receipts
A)are used to reduce the national debt.
B)are invested in private business for future payments.
C)pay off current recipients of Social Security payments.
D)go directly into a trust fund for investment in private businesses.

Accepted Answer

The payroll tax receipts are collected from current workers and used to pay current recipients of Social Security payments. The money is not invested in private businesses or used to reduce the national debt. It goes directly into the Social Security trust fund to pay for benefits for current retirees, survivors, and disabled workers.

Question 10

The payroll tax is a
A)progressive tax.
B)neutral tax.
C)regressive tax.
D)proportional tax.

Accepted Answer

The payroll tax is a regressive tax because it is not based on the ability to pay. It is a flat rate tax that is applied to all employees regardless of their income level. This means that low-income earners pay a higher percentage of their income towards payroll taxes compared to high-income earners.

Question 11

In 2005, the median income of renters was $26,317 and the median income of homeowners was $50,505.If imputed rent were added to household income or rent became deductible, the personal income tax would become
A)more progressive.
B)more regressive.
C)about proportional.
D)less progressive.

Accepted Answer

The answer of In 2005, the median income of renters...

Question 12

An excise tax on gasoline is regressive if
A)rich people buy more gasoline than poor people.
B)the demand for gasoline is elastic.
C)the tax causes people to buy less gasoline.
D)poor people spend a larger portion of their incomes on gasoline than rich people.

Accepted Answer

A regressive tax means that the burden falls more heavily on lower-income individuals. In this case, poor people spend a larger portion of their incomes on gasoline than rich people, meaning that the tax will have a larger impact on their budgets. The other options are not relevant to the regressive nature of the tax.

Question 13

Taxes on sales of liquor, tobacco, and tires are examples of
A)direct taxes.
B)excise taxes.
C)progressive taxation.
D)loopholes.

Accepted Answer

Excise taxes are taxes placed on specific goods, such as liquor, tobacco, and tires, rather than being based on income or property. They are often used to discourage consumption of these goods or to raise revenue for specific purposes.

Question 14

The corporate income tax is
A)a tax on corporate profit, not revenue.
B)the single largest source of federal revenue.
C)a payroll tax paid partially by employees and partially by employers.
D)has increased as a proportion of federal tax revenue since 1950.

Accepted Answer

The corporate income tax is a tax on corporate profit, not revenue.

Answer: B 
 The corporate income tax is not the single largest source of federal revenue. This title goes to individual income taxes.

Answer: C 
 The payroll tax is paid partially by employees and partially by employers, but it is separate from the corporate income tax.

Answer: D 
 The corporate income tax has actually decreased as a proportion of federal tax revenue since 1950.

Question 15

The money for Social Security payments to current retirees comes from
A)payroll taxes collected from those retirees when they were working.
B)income taxes collected from the current working population.
C)payroll taxes collected from the current working population.
D)only the interest earned now by the government on the invested Social Security trust fund.

Accepted Answer

The money for Social Security payments to current retirees comes from payroll taxes collected from the current working population. These taxes are collected from workers' paychecks and are used to pay current beneficiaries. The money is not taken from income taxes or the interest earned on the Social Security trust fund (which is invested in government bonds).

Question 16

Social Security payroll taxes are examples of
A)progressive taxation.
B)regressive taxation.
C)proportional taxation.
D)marginal taxes.

Accepted Answer

Social Security payroll taxes are regressive taxes because the tax rate decreases as income increases. This means that low-income earners pay a higher percentage of their income towards Social Security taxes than high-income earners.

Question 17

The payroll tax represents
A)the largest source of revenue in the federal budget.
B)the second largest source of revenue in the federal budget.
C)the third largest source of revenue in the federal budget.
D)the largest source of revenue in state government budgets.

Accepted Answer

The payroll tax is the second largest source of revenue in the federal budget, after income taxes. According to the Congressional Budget Office, in fiscal year 2019, the payroll tax accounted for approximately 36% of all federal revenues. It is not the largest source of revenue in state government budgets, as states primarily rely on sales taxes and income taxes.

Question 18

If Linda' annual income is $160,000 and she pays $35,000 in taxes and Paul's annual income is $100,000 and he pays $25,000 in taxes, the tax system is
A)regressive.
B)progressive.
C)proportional.
D)degressive.

Accepted Answer

The answer of If Linda' annual income is $160,000 and...

Question 19

Tax loopholes
A)reduce the progressivity of the federal income tax.
B)encourage particular patterns of behavior.
C)include exemption of interest earned on municipal bonds.
D)All of the above are correct.

Accepted Answer

Tax loopholes have multiple effects, including reducing the progressivity of the federal income tax (A), encouraging particular patterns of behavior (B), and including exemptions for certain types of income, such as interest earned on municipal bonds (C). Therefore, all of the above options are correct (D).

Question 20

Philip purchased one million dollars' worth of New York City bonds.His interest earnings were $100,000.His total federal tax on this income will be
A)$40,000, since his marginal tax rate was 40 percent.
B)$40,000, since only 40 percent of capital gains is taxed.
C)zero.
D)very small, since he had a clever accountant who knew how to use loopholes.

Accepted Answer

The answer of Philip purchased one million dollars' worth of...

Quiz 17: Taxation and Resource Allocation

Which of the following is exempt from taxation (a tax exemption) ?

The payroll tax appears to be a proportional tax.In reality it is

The corporate income tax is

The federal income tax began in the United States with the

Mrs.Dodge has $8 million in income and pays no income taxes.Her income is most likely

Since the end of World War II, corporate income taxes have accounted for

An excise tax

The second largest source of income for the federal budget is:

The payroll tax receipts

The payroll tax is a

In 2005, the median income of renters was $26,317 and the median income of homeowners was $50,505.If imputed rent were added to household income or rent became deductible, the personal income tax would become

An excise tax on gasoline is regressive if

Taxes on sales of liquor, tobacco, and tires are examples of

The corporate income tax is

The money for Social Security payments to current retirees comes from

Social Security payroll taxes are examples of

The payroll tax represents

If Linda' annual income is $160,000 and she pays $35,000 in taxes and Paul's annual income is $100,000 and he pays $25,000 in taxes, the tax system is

Tax loopholes

Philip purchased one million dollars' worth of New York City bonds.His interest earnings were $100,000.His total federal tax on this income will be