Question 1

A payroll tax with a 4.5 percent tax rate and exemption for income above $42,000 is
A)a progressive tax.
B)an indirect tax.
C)a regressive tax.
D)a proportional tax.

Accepted Answer

A regressive tax is a tax where people with lower incomes pay a larger percentage of their income in taxes than people with higher incomes. In this case, the payroll tax has a flat rate of 4.5 percent, meaning that everyone pays the same percentage regardless of their income. However, there is an exemption for income above $42,000, meaning that people with higher incomes are being taxed at a lower effective rate. This makes the payroll tax regressive because people with lower incomes will pay a higher percentage of their income in taxes than people with higher incomes.

Question 2

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. This tax is specifically used to fund Social Security and Medicare programs.

Question 3

If a corporation earns $1 million in revenues on $750,000 in expenses, including $415,000 from payrolls, and the corporate tax rate is 10 percent with a $100,000 exemption, then the corporate taxes would be
A)$90,000.
B)$31,000.
C)$25,000.
D)$15,000.

Accepted Answer

The answer of If a corporation earns $1 million in...

Question 4

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 they take a higher percentage of income from lower-income earners than from higher-income earners. This is because the tax is based on a fixed percentage of income up to a certain limit, which means that those who earn less pay a larger percentage of their income in Social Security taxes compared to those who earn more.

Question 5

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 federal income tax began in the United States with the passage of the 16th Amendment to the Constitution in 1913, which gave Congress the power to levy and collect taxes on income. Prior to this, the federal government primarily relied on tariffs and excise taxes to generate revenue.

Question 6

Corporate income taxes account for about what percent of federal revenues?
A)6 percent.
B)9 percent.
C)18 percent.
D)24 percent.

Accepted Answer

Corporate income taxes typically account for around 9 percent of federal revenues, though this can vary from year to year based on economic conditions and changes in tax law.

Question 7

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 8

An excise tax is
A)levied on accounting profits not economic profits.
B)levied on salaries and wages but not investment income.
C)levied on the purchase of specific goods.
D)levied on purchases of goods in general excluding exempted goods that are considered necessities.

Accepted Answer

An excise tax is a tax levied on specific goods, such as tobacco, alcohol, and gasoline. It is not levied on accounting profits or salaries and wages. It also does not apply to purchases of goods in general, but only on specific goods.

Question 9

Harun earned $50,000 in salary and paid $10,000 in federal taxes. If he receives $2,000 in interest payments from municipal bonds,
A)his marginal tax rate will be about 19.2 percent.
B)his average tax rate will fall.
C)his marginal tax rate will remain constant.
D)his marginal tax rate will be 20 percent.

Accepted Answer

Harun's average tax rate can be calculated as (taxes paid)/(income before taxes) = 10,000/50,000 = 0.2 = 20%
If he receives $2,000 in interest payments from municipal bonds, his income before taxes will now be $52,000 ($50,000 salary + $2,000 interest). However, municipal bond interest is not taxed at the federal level, so his taxes paid will remain at $10,000. 
Harun's new average tax rate will be (taxes paid)/(income before taxes) = 10,000/52,000 = 0.1923 = 19.23% 
Therefore, choice B is correct as his average tax rate will fall.

Question 10

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

Corporate income taxes have accounted for a declining share of federal revenue since the end of World War II. In the 1950s, corporate income taxes made up about 30% of federal revenue, but that share has steadily decreased to around 10% in recent years.

Question 11

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 a regressive tax as it takes a larger percentage of income from low-income earners compared to high-income earners. This is because the tax is a flat rate applied to all earnings up to a certain limit, which means that low-income earners pay a greater percentage of their income towards the tax than high-income earners.

Question 12

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 on specific goods or services, such as liquor, tobacco, and tires, and are typically included in the price of those products. They are indirect taxes because they are not directly tied to an individual's income or property value.

Question 13

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 14

Which of the following is not true about the tax exemptions on interest from municipal bonds?
A)It is a tax loophole.
B)It reduces excess tax burden.
C)It helps the wealthy the most.
D)It makes the tax system less progressive.

Accepted Answer

The answer of Which of the following is not true...

Question 15

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 imposed on a specific good or service, such as gasoline, cigarettes, or alcohol. It is usually included in the price of the product, and the manufacturer or seller is responsible for paying the tax. This is different from a sales tax, which is a broad-based tax on most goods and services.

Question 16

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, which include Social Security and Medicare taxes, are the second largest source of income for the federal budget.

Question 17

Which of the following is not true of tax loopholes?
A)They reduce the progressivity of the federal income tax.
B)They encourage particular patterns of behavior.
C)They include exemption of interest earned on municipal bonds.
D)They reduce excess burdens.

Accepted Answer

Tax loopholes do not reduce excess burdens. Excess burden refers to the economic cost of taxation, which includes both the actual tax revenue collected and the additional costs incurred by taxpayers in order to comply with the tax code. Tax loopholes reduce the actual tax revenue collected, but they do not necessarily reduce the additional compliance costs that taxpayers face. Therefore, tax loopholes do not necessarily reduce excess burdens.

Question 18

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

Social Security payments to current retirees come from payroll taxes collected from the current working population. These taxes are used to fund both current retirees' benefits and also fund the Social Security trust fund that will be used to pay future benefits for younger workers when they retire. There is no direct link between benefits paid to current retirees and the payroll taxes they themselves paid while working.

Question 19

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 20

Which is not true of current U.S. payroll taxes?
A)They are used to fund Social Security.
B)They account for about 35 percent of federal revenues.
C)They are proportional taxes because there is only one listed tax rate.
D)They are levied on wages and salaries but not investment income.

Accepted Answer

Current U.S. payroll taxes are not proportional taxes because there are different rates for different income levels.

Quiz 17: Taxation and Resource Allocation

A payroll tax with a 4.5 percent tax rate and exemption for income above $42,000 is

The payroll tax represents

If a corporation earns $1 million in revenues on $750,000 in expenses, including $415,000 from payrolls, and the corporate tax rate is 10 percent with a $100,000 exemption, then the corporate taxes would be

Social Security payroll taxes are examples of

The federal income tax began in the United States with the

Corporate income taxes account for about what percent of federal revenues?

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

An excise tax is

Harun earned $50,000 in salary and paid $10,000 in federal taxes. If he receives $2,000 in interest payments from municipal bonds,

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

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

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

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

Which of the following is not true about the tax exemptions on interest from municipal bonds?

An excise tax

The second largest source of income for the federal budget is

Which of the following is not true of tax loopholes?

The money for Social Security payments to current retirees comes from

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

Which is not true of current U.S. payroll taxes?