Question 1

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 2

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

Accepted Answer

Tax preferences are provisions in the tax law that provide incentives for certain economic behaviors, such as investing in certain industries or activities. These preferences can take the form of deductions, exemptions, or credits that reduce an individual or corporation's tax liability.

Question 3

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

Accepted Answer

Vertical equity refers to the idea that people who have more resources or ability to pay taxes should pay more. Horizontal equity, on the other hand, focuses on treating individuals with similar abilities to pay similarly. Therefore, vertical equity mostly focuses on the tax rate structure, while horizontal equity focuses on the measurement of the tax base.

Question 4

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 the same, meaning there is no change in taxpayer behavior in response to the tax rate change. This may not be the case in reality as taxpayers may alter their spending or investment decisions in response to changes in taxation, leading to a different revenue effect.

Question 5

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 not distort market outcomes or change the allocation of resources. It should be neutral in its effect on economic decision-making and not create disincentives for individuals or businesses to engage in productive activities.

Question 6

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

According to supply-side economic theory, reducing tax rates for high-income individuals incentivizes them to work more, earn more, and thus increase the overall amount of taxable income. This increase in taxable income could potentially generate enough revenue to offset the initial loss from the decrease in tax rates, resulting in a net increase in tax revenue. This concept is referred to as the Laffer curve, which suggests that there exists an optimal tax rate that maximizes government revenue.

Question 7

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

Accepted Answer

Changes in the tax law intended to make the measurement of taxable income more precise often involve adding new formulas, calculations, and definitions, which can make the tax law even more complex.

Question 8

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

Accepted Answer

A convenient tax is one that is easy for both taxpayers and the government to comply with and enforce, resulting in lower costs for both parties. This type of tax system is desirable as it allows for efficient collection of revenue while minimizing the burden on taxpayers.

Question 9

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

Accepted Answer

The answer of A good tax should result in either...

Question 10

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 the subway with walking due to the tax increase, which is an example of the substitution effect.

Question 11

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 the amount of a good or service that a consumer will demand based on a change in their income. In this case, the taxpayer is working harder to earn more income in response to the increased tax rate, which is an example of the income effect.

Question 12

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, as this is the cost of borrowing money. Interest payments are made to the holders of U.S. Treasury bonds, notes, and bills.

Question 13

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 14

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

The standard of efficiency for a tax is not solely based on generating enough revenue to pay for government goods and services, but also on minimizing the distortion of economic behavior caused by the tax. This can involve analyzing the impact of the tax on incentives, market efficiency, and equity.

Question 15

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 holds that people who benefit from a tax rate reduction will use their tax windfall to increase investment and production, leading to economic growth and job creation.

Question 16

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 behavior and economic activity in response to a tax rate change, so it assumes that the tax base may change.

Question 17

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

Accepted Answer

State use taxes are imposed on goods purchased out of state (via online or mail order) and brought into the state for use. Individual consumers have to self-report and remit use taxes to the state, which can be inconvenient and often overlooked. State sales taxes, on the other hand, are collected by businesses at the point of sale and remitted to the state, making it more convenient for individual consumers as they do not have to worry about self-reporting or remitting taxes.

Question 18

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 federal Social Security tax burden on employees has actually increased since 1990 because the wage base (the maximum amount of income subject to the tax) has increased and the tax rate for Medicare has increased. However, the tax rate for Social Security has remained the same since 1990.

Question 19

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

Accepted Answer

The cost of collecting $100 in tax revenue by the Internal Revenue Service (IRS) is significantly lower, approximately $0.35 as of the latest data, indicating a highly efficient collection process.

Question 20

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

Accepted Answer

This statement is false. The relationship between sales tax rate and sales tax revenue is not always direct. Other factors, such as changes in consumer behavior or economic conditions, can impact the amount of revenue generated. Additionally, the increase in tax rate may lead to decreased consumer spending, which could result in a lower overall revenue increase than expected.

Quiz 2: Policy Standards for a Good Tax