Question 1

Under a progressive income tax system, the marginal income tax rate paid by taxpayers

Accepted Answer

Under a progressive income tax system, the marginal income tax rate paid by taxpayers rises as their incomes increase. This means that taxpayers with higher incomes will pay a higher percentage of their income in taxes than those with lower incomes. This is based on the principle of ability-to-pay, which suggests that those with higher incomes are able to contribute more to society through taxes.

Question 2

A "flat tax" on personal income, in which the same tax rate is applied to every dollar of income earned by each taxpayer, is an example of

Accepted Answer

A flat tax is an example of a proportional tax because everyone pays the same percentage of their income, regardless of their income level.

Question 3

A tax system in which the average and marginal tax rates are the same for every level of taxable income and every change in income is an example of

Accepted Answer

A tax system in which the average and marginal tax rates are the same for every level of taxable income and every change in income is known as proportional taxation. In this system, every taxpayer pays the same percentage of tax on their income regardless of their income level.

Question 4

The tax base is

Accepted Answer

The tax base refers to the total value of all goods, services, incomes, or wealth that is subject to taxation. This is the amount on which the tax rate is applied in order to determine the total tax revenue. Option A and B are incorrect because the tax revenue collected is based on the tax base and is not predetermined. Option C is also incorrect as the tax base is not limited to only incomes earned in the United States.

Question 5

The average tax rate can be calculated by which of the following formulas?

Accepted Answer

The average tax rate is calculated by dividing the total taxes due by the total taxable income. This provides the overall percentage of income that is paid in taxes. Option A calculates the marginal tax rate, which is the tax rate on the last dollar earned. Option B is the inverse of option A and does not provide the average tax rate. Option D is also the inverse of option C and does not provide the average tax rate.

Question 6

In a progressive tax system

Accepted Answer

In a progressive tax system, both the marginal tax rate and average tax rate increase as income levels increase. However, the marginal tax rate increase is steeper than the average tax rate, resulting in the marginal tax rate exceeding the average tax rate at higher income levels. This is a deliberately designed system to ensure that those with higher incomes pay a higher proportion of their income in taxes.

Question 7

The federal income tax code of the United States is

Accepted Answer

The federal income tax code of the United States is progressive, meaning that the tax rate increases as a person's income increases. This is achieved through the use of tax brackets, where people with higher incomes are taxed a higher percentage of their income. While there are some deductions and credits that can reduce a person's tax liability, the overall nature of the tax code is progressive.

Question 8

The average tax rate is defined as

Accepted Answer

The average tax rate is calculated by dividing the total tax due by the total taxable income. This gives the percentage of the taxpayer's income that is paid to taxes.

Question 9

Suppose that in the economy of Springfield, USA, Homer, who has an income of $50,000, pays $10,000 in taxes. Edna, who has an income of $35,000, pays $9,000 in taxes. Based on this information, we could say that Springfield's tax system is

Accepted Answer

A regressive tax system is one where the tax rate decreases as the income level increases. In this case, Homer, with a higher income, pays a lower percentage of his income in taxes (20%) compared to Edna, who pays a higher percentage (approximately 25.7%).

Question 10

A tax system that applies a lower marginal tax rate at higher levels of income is

Accepted Answer

A regressive tax system imposes a lower marginal tax rate as income increases, meaning higher-income earners pay a smaller percentage of their income compared to lower-income earners.

Question 11

The U.S. Social Security tax is an example of a

Accepted Answer

The U.S. Social Security tax is a regressive tax because it is levied at a flat rate regardless of income level, which means that low-income earners pay a higher proportion of their income in Social Security taxes compared to high-income earners.

Question 12

If the marginal tax rate is less than the average tax rate, the tax system is

Accepted Answer

If the marginal tax rate is less than the average tax rate, it means that higher-income individuals will pay a lower percentage of their income in taxes compared to lower-income individuals. This is characteristic of a regressive tax system, where the tax burden falls disproportionately on those with lower incomes.

Question 13

Advocates of a progressive income tax use arguments EXCEPT for which of the following?

Accepted Answer

A progressive tax system is primarily justified by the ability to pay and the goal of redistributing income, not by the benefits received principle. The benefits received principle suggests that people should pay taxes in proportion to the benefits they receive from government services, which is a different concept.

Question 14

In a proportional income tax system

Accepted Answer

In a proportional income tax system, everyone pays the same proportion or percentage of their taxable income in taxes, regardless of their level of income. Therefore, the marginal tax rates remain the same for all taxpayers.

Question 15

The marginal tax rate is

Accepted Answer

The marginal tax rate is the amount of tax paid on an additional dollar of income. It is calculated by dividing the change in taxes due by the change in taxable income. Therefore, the correct answer is C - change in taxes due/change in taxable income.

Question 16

Assume a family that earns $20,000 pays $1,500 in income taxes, while a family that earns $40,000 pays $3,500 in income taxes. In this situation, the income tax system is

Accepted Answer

The tax system in this scenario is considered progressive because the percentage of income paid in taxes increases as the income of the family increases. The family earning $20,000 pays 7.5% of their income in taxes, while the family earning $40,000 pays 8.75% of their income in taxes. This means that the tax burden falls more heavily on those who earn more, which is a characteristic of a progressive tax system.

Question 17

Assume a family that earns $20,000 pays $2,000 in income taxes, while a family that earns $40,000 pays $3,500 in income taxes. In this situation, the income tax system is

Accepted Answer

A regressive tax system is one where the tax rate decreases as the income increases. In this case, the lower-income family pays 10% of their income in taxes, while the higher-income family pays 8.75%, indicating a regressive system.

Question 18

An example of a regressive tax is the

Accepted Answer

A regressive tax is one that takes a larger percentage of income from low-income earners than from high-income earners. The Social Security tax is an example of a regressive tax because it takes a fixed percentage of income up to a certain limit, which means lower-income earners may be paying a higher percentage of their income towards the tax than higher-income earners. The other options listed (A, B, and D) are examples of progressive taxes because they are based on income and generally take a higher percentage of income from higher earners.

Question 19

Mr. Smith earns $100,000 per year. Each year he spends $50,000 and saves $50,000. He pays a 5 percent sales tax on all of his spending. Assuming the sales tax is the only tax he pays, his average tax rate out of his income is

Accepted Answer

Mr. Smith spends $50,000 and pays a 5% sales tax on it, which is $2,500. His average tax rate is $2,500 divided by his total income of $100,000, which is 2.5%.

Question 20

The marginal tax rate can be calculated by which of the following formulas?

Accepted Answer

Marginal tax rate is the tax rate applicable to the last dollar earned. It can be calculated by dividing the change in taxes due by the change in taxable income. This formula gives the marginal tax rate for the incremental increase in taxable income.

Quiz 6: Funding the Public Sector