Question 1

A static forecast of the revenue effect of a tax rate change assumes that the tax base does not change.

Accepted Answer

A static forecast assumes that the tax base remains constant and does not take into account any potential changes in taxpayer behavior or economic conditions that could affect the tax base.

Question 2

The federal Social Security tax burden on employees has not increased since 1990 because the tax rate has not increased since that year.

Accepted Answer

The Social Security tax burden increases annually because the tax base increases annually.

Question 3

State use taxes are more convenient for individual consumers than state sales taxes.

Accepted Answer

State sales taxes are more convenient because they are collected by the seller. Consumers must pay use taxes directly.

Question 4

If State H increases its sales tax rate by 1%, its sales tax revenue must also increase by 1%.

Accepted Answer

The relationship between sales tax rate and sales tax revenue is not always linear. Increase in sales tax rate may lead to decrease in sales and hence decrease in sales tax revenue. Factors such as elasticity of demand, substitutes, and competition can affect the relationship between sales tax rate and sales tax revenue.

Question 5

Vertical equity focuses on measurement of the tax base, and horizontal equity focuses on the tax rate structure.

Accepted Answer

Just the opposite!

Question 6

According to the Keynesian concept of efficiency, an efficient tax should be neutral in its effect on free market allocations of economic resources.

Accepted Answer

The Keynesian concept of efficiency does not necessarily prioritize neutrality in tax effects on market allocations; instead, it often supports using fiscal policy, including taxation, to manage economic cycles and address market failures, which can involve altering free market allocations.

Question 7

Supply-side economic theory holds that people who benefit from a tax rate reduction will spend their tax windfall on consumption goods.

Accepted Answer

Supply-side economic theory predicts that people who benefit from a tax rate reduction will invest their tax windfall in new economic ventures.

Question 8

A tax should result in either horizontal or vertical equity across taxpayers.

Accepted Answer

A good tax should result in both horizontal and vertical equity.

Question 9

The Internal Revenue Service's cost of collecting $100 of tax revenue is about $3.

Accepted Answer

The IRS's cost of collecting $100 of tax revenue averages less than 50 cents.

Question 10

According to supply-side economic theory, a decrease in tax rates for high-income individuals could actually cause an increase in tax revenue.

Accepted Answer

Supply-side economists argue that lower tax rates incentivize individuals to work harder, invest more, and engage in more economic activity, which ultimately leads to increased economic growth and higher tax revenue. However, this theory is not universally accepted by economists and has been subject to criticism and debate.

Question 11

A dynamic forecast of the revenue effect of a tax rate change assumes that the tax base does not change.

Accepted Answer

A dynamic forecast takes into account the potential change in the tax base resulting from a tax rate change, therefore assuming that the tax base does not change would not be accurate in a dynamic forecast.

Question 12

A tax meets the standard of efficiency if it generates enough revenue to pay for the public goods and services provided by the government.

Accepted Answer

Efficiency in taxation is not just about generating revenue, but also about doing so in a way that minimizes economic distortions and maximizes welfare.

Question 13

Jurisdiction P recently increased its income tax rate. A taxpayer who reacts to the increase by working harder to earn more income is demonstrating the income effect of the rate increase.

Accepted Answer

The income effect refers to the change in quantity demanded of a good or service resulting from a change in real income, which can occur when there is a change in income tax rates. If income tax rates increase, a taxpayer may be motivated to work harder to earn more income in order to maintain the same level of real income (after-tax income), which is an example of the income effect.

Question 14

A tax meets the standard of sufficiency if it is easy for people to pay the tax:

Accepted Answer

The answer of A tax meets the standard of sufficiency...

Question 15

The city of Berne recently enacted a 10% tax on the price of a subway ticket. Consequently, Mrs Lane now walks to work instead of taking the subway. Her behavior illustrates the substitution effect of a tax increase.

Accepted Answer

Mrs Lane substituted a nontaxable activity for a taxable activity.

Question 16

A convenient tax has low compliance costs for taxpayers and low collection and enforcement costs for the government.

Accepted Answer

A convenient tax is designed to be easy for taxpayers to comply with and for the government to collect and enforce, therefore having low costs for both parties.

Question 17

The federal government is not required to pay interest on the national debt.

Accepted Answer

The federal government is required to pay interest on the national debt. Failure to do so could result in default and significant economic consequences.

Question 18

Changes in the tax law intended to make the measurement of taxable income more precise usually make the tax law less complex.

Accepted Answer

Increased precision in the measurement of taxable income usually increases tax law complexity.

Question 19

According to the classical concept of efficiency, an efficient tax should be neutral in its effect on free market allocations of economic resources.

Accepted Answer

According to the classical concept of efficiency, an efficient tax should be neutral in its effect on free market allocations of economic resources, meaning that it does not distort the behavior of individuals or businesses in the market.

Question 20

A provision in the tax law designed to encourage a specific economic behavior is a tax preference.

Accepted Answer

A tax preference is a provision in the tax law created to encourage a specific economic behavior, such as investing in renewable energy or donating to charity. It is meant to incentivize individuals and businesses to engage in activities that will benefit the economy or society as a whole. These tax preferences can take the form of tax deductions, credits, or exemptions.

Quiz 2: Policy Standards for a Good Tax