Question 1

What does the Congressional Budget Office assume with respect to the tax incidence of excise taxes?

Accepted Answer

The answer of What does the Congressional Budget Office assume...

Question 2

Suppose the government levies a tax on all computers sold in the United States.Assume that all goods are normal goods.Which of the following results is a spillover complementary effect of the tax?

Accepted Answer

The spillover complementary effect refers to the impact of a change in the demand or supply of one good on a related good. In this case, if people buy fewer computers due to the tax, demand for computer printers, which are complementary goods to computers, would also decrease.

Question 3

Suppose the wage of unskilled workers is equal to the minimum wage.If a tax on labor is levied on _____,the presence of the minimum wage _____.

Accepted Answer

When a tax on labor is levied on workers, the presence of the minimum wage means that the wage cannot legally go below a certain level. Therefore, if the wage of unskilled workers is already at the minimum wage, imposing a tax on these workers does not change their wage; instead, the tax effectively reduces their take-home pay without altering the minimum wage itself. Thus, the presence of the minimum wage does not affect the tax burden of workers in this scenario, as their wages cannot decrease below the minimum wage due to the tax.

Question 4

Which statement is TRUE?

Accepted Answer

Effective excise tax rates have indeed risen for low-income groups over the last 20 years. Excise taxes are often considered regressive, meaning they take a larger percentage of income from low-income earners than from high-income earners. This is because excise taxes are typically levied on goods and services that make up a larger proportion of the spending of low-income individuals. Over time, as these taxes increase or as the consumption patterns of low-income groups remain constant or grow, the effective rate of these taxes on low-income groups can rise.

Question 5

Suppose the government were to tax all car wash businesses in your town.Assume that the demand for car washes is perfectly elastic,demand for car wash employees is perfectly elastic in the short run,and the supply and demand of capital (i.e.,the car wash equipment)is elastic (but not perfectly so)in the short run and perfectly elastic in the long run.According to general equilibrium tax incidence analysis,______ bear the tax in the short run and ________ bear the tax in the long run.

Accepted Answer

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Question 6

In a labor market in which demand is inelastic (but not perfectly inelastic)and supply is elastic (but not perfectly elastic),who bears a tax levied on the firms?

Accepted Answer

In this scenario, since demand is inelastic, firms have some market power to pass on the tax burden to consumers in the form of higher prices. However, since supply is elastic, firms cannot pass on the entire tax burden to workers in the form of lower wages. Therefore, both the workers and the firms share the burden of the tax, with the firms bearing more of the burden relative to the workers.

Question 7

Balanced budget incidence takes into account:

Accepted Answer

Balanced budget incidence refers to the distributional effects of balancing the federal budget through taxation and spending policies. It takes into account the benefits of the spending financed out of the tax revenues, such as the provision of public goods and services that benefit society as a whole. Therefore, option A is the correct choice. Option B is incorrect because balanced budget incidence is not concerned with the extent to which taxes help balance the federal budget. Option C is also incorrect because it is not a benefit that taxpayers receive directly from a balanced federal budget. Option D is irrelevant to the concept of balanced budget incidence.

Question 8

Suppose your city's government is considering levying a tax on all commercial car washes within the city limits.The state government is also considering levying a tax on all commercial car washes in the state.In the short run,consumers bear _____ of the tax burden under the local tax than under the state tax.In the long run,car wash employees bear _______ of the tax burden under the local tax than under the state tax.

Accepted Answer

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Question 9

What does the Congressional Budget Office assume with respect to the tax incidence of corporate taxes?

Accepted Answer

Owners of the capital bear the entire tax burden because corporate taxes are ultimately borne by the owners of capital in the form of lower returns on their investments.

Question 10

Suppose the government levies a tax on all ink pens sold in the country.Assume all goods are normal goods.Which of the following is a spillover income effect of the tax?

Accepted Answer

The spillover income effect of the tax is the change in demand for other goods due to the change in after-tax income. Option A is incorrect because buying fewer pencils would be a substitution effect, not a spillover income effect. Option C is incorrect because the change in the relative prices of pencils and pens would be a substitution effect, not a spillover income effect. Option D is incorrect because if sellers bear the tax, the demand for ink pens would decrease, not increase. Therefore, option B is the correct choice because people may have less after-tax income and choose to buy fewer books as a result. This is a spillover income effect, as it is a change in demand for a different good due to the tax on pens.

Question 11

Which condition must be TRUE for the Congressional Budget Office's assumption about the tax incidence of payroll taxes to be correct?

Accepted Answer

The assumption regarding tax incidence applies to the payroll tax only when labor supply is inelastic. Payroll taxes are assumed to be passed on to workers in the form of decreased wages when labor supply is inelastic. If labor supply were elastic, the payroll tax burden would fall mostly on employers, as they would not be able to pass on the tax in the form of lower wages.

Question 12

According to analysis by the Congressional Budget Office and Urban Institute's Tax Policy Center,which statement related to the effective tax rates by income group for the last half century is NOT true?

Accepted Answer

Excise taxes are generally considered regressive, meaning they take a larger percentage of income from low-income earners than from high-income earners. The statement that excise tax has fallen for the bottom of the income distribution while rising for the top contradicts the general understanding of how excise taxes work, as they typically burden lower-income groups more due to their regressive nature.

Question 13

If a tax on labor is levied on workers,the gross wage will _______ and the after-tax wage will _______.Assume that supply and demand are neither perfectly elastic nor perfectly inelastic.

Accepted Answer

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Question 14

Suppose a tax is imposed on the producers of kitchen tables.Assume that demand for kitchen tables is perfectly elastic and that the supply is elastic,but not perfectly elastic.The tables are produced in a factory using capital equipment (e.g.,lathes)and labor.The demand for labor is perfectly elastic and the demand for capital equipment is inelastic in the short run.In the short run,partial equilibrium tax incidence analysis suggests that _____ bear the tax; general equilibrium tax incidence analysis suggests that _____ bear the tax.

Accepted Answer

In the short run, with perfectly elastic demand, producers (table factories) cannot pass the tax onto consumers and must bear it themselves. In the general equilibrium analysis, considering the inelastic demand for capital equipment, the burden shifts to capital owners as their demand is less responsive to price changes, making it harder for them to avoid the tax burden.

Question 15

Which statement is TRUE of a tax imposed on a product sold by a monopolist?

Accepted Answer

The tax incidence, or burden, depends on the relative elasticities of demand and supply, not on who the tax is initially levied upon. In a monopoly, the monopolist can adjust prices, so the burden is shared based on elasticity, making the burden the same regardless of who is initially taxed.

Question 16

In a labor market in which demand is perfectly elastic and supply is perfectly inelastic,who bears a tax levied on the firms?

Accepted Answer

In a labor market with perfectly elastic demand and perfectly inelastic supply, the burden of a tax levied on firms falls entirely on the workers. This is because firms can easily find alternative labor or resources without changing the wage they are willing to pay, while workers, having a perfectly inelastic supply, are unable to adjust their labor supply in response to the tax, leading to a decrease in their net wages.

Question 17

Which of the following rules related to the economic tax incidence is NOT true?

Accepted Answer

This rule is not true. When there are barriers to reaching the competitive market equilibrium (such as monopoly power, externalities, or incomplete information), the side of the market on which the tax is levied can significantly affect the tax incidence. In these cases, the tax burden may fall primarily on one side of the market, and the other side may be able to pass on most or all of the tax to consumers or producers, depending on the relative elasticities of supply and demand.

Question 18

What information must you know to determine the tax burdens on firms and workers for a tax on labor?

Accepted Answer

The answer of What information must you know to determine...

Question 19

Suppose the government levies a tax on all ink pens sold in the country.Assume all goods are normal goods.Which of the following is a spillover complementary effect of the tax?

Accepted Answer

CB) The tax on ink pens makes them more expensive, leading to a decrease in their consumption. Since pens and paper are often used together, the decrease in pen usage can lead to a decrease in paper usage as well, demonstrating a spillover complementary effect.C) With the tax making ink pens more expensive, consumers might shift their preference to pencils, which become relatively cheaper in comparison. This substitution effect is another example of a spillover complementary effect, where the demand for a related good (pencils) increases as a result of the tax on pens.

Question 20

Which piece of information is necessary for general equilibrium tax incidence analysis but not for partial equilibrium tax incidence analysis?

Accepted Answer

In partial equilibrium analysis, only the specific market under consideration is analyzed, and thus the elasticity of supply of inputs is not relevant. In general equilibrium analysis, the tax incidence can shift to other markets and affect factors of production, making the elasticity of supply of inputs necessary. The elasticity of demand, as well as the percentage of the tax paid by consumers and producers, are relevant for both types of analysis.

Quiz 19: The Equity Implications of Taxation- Tax Incidence