Deck 21: Fundamental Tax Reform: Taxes on Consumption and Wealth

Question 1

When each firm is liable for taxes on total sales but can claim the taxes already paid by suppliers as a credit against liability we are using the

A)reserve method.
B)chain method.
C)invoice method.
D)VAT method.

Answer 1

invoice method.

Question 2

A trust that is the legal owner of a life insurance policy is

A)a policy holder.
B)a insurance trust.
C)a trust fund.
D)none of the above.

Answer 2

a insurance trust.

Question 3

A tax,in which amounts transferred as gifts and bequests are jointly taken into account,is known as

A)inheritance tax.
B)death tax.
C)accessions tax.
D)unified transfer tax.

Answer 3

unified transfer tax.

Question 4

The Value Added Tax (VAT)is

A)not often used in the United States.
B)a percentage tax.
C)added at each stage to production.
D)all of the above.

Question 5

President Obama has proposed making the _____ estate tax rate permanent.

A)13.0%
B)45.0%
C)51.3%
D)55.0%

Question 6

A tax levied on an individual's total lifetime acquisitions from inheritances and gifts is known as

A)inheritance tax.
B)death tax.
C)accessions tax.
D)unified transfer tax.

Question 7

The largest source of tax revenues for states is

A)general sales.
B)motor fuel.
C)alcoholic beverages.
D)tobacco.

Question 8

A wealth tax can be justified because it

A)helps to correct certain (inevitable)problems that arise in the administration of an income tax.
B)the higher an individuals wealth,the greater his or her ability to pay,other things- including income - being the same.
C)reduces the concentration of wealth,which is desirable socially and politically.
D)are payments for benefits that wealth holders receive from government.
E)all of the above.

Question 9

The gross estate is

A)very disgusting.
B)all property owned by decedent at time of death.
C)general property that is held in a trust.
D)being phased out of current tax law.

Question 10

Sale taxes are

A)easy to administer at lower rates.
B)correctives for externalities.
C)substitutes for user fees.
D)all of the above.

Question 11

Which of the following is a unit excise tax?

A)a tax of 15%
B)an admission fee of $2.00 on each ticket purchased
C)an ad valorem tax of $3.00
D)an income tax of $3.00

Question 12

Optimal commodity taxation would

A)put a tax on leisure time,which is currently untaxed.
B)have the smallest amount of excess burden possible for a given amount of tax revenue.
C)optimize tax rates on the wealthiest Americans.
D)eliminate tax evasion in the United States.

Question 13

Wealth taxes are assessed on a stock of assets instead of a flow such as income or sales.

Question 14

Disadvantages of a consumption tax are

A)the administrative problems.
B)the transitional problems.
C)dealing with gifts and bequests.
D)all of the above.

Question 15

Why might an individual set up trusts?

A)as a strategy to avoid taxes on wealth.
B)for lower insurance premiums.
C)to insure the security of a loan.
D)to have a steady stream of income during retirement.

Question 16

Consumption taxes are generally viewed as

A)regressive.
B)progressive.
C)simple to calculate.
D)multiplicative.

Question 17

A tax on consumption for those who are nonsavers

A)is equivalent to a tax on income.
B)causes income gains to increase dramatically.
C)would be preferred to a tax on wealth.
D)makes it difficult to tell what the result for the nonsavers would be.

Question 18

A unit tax is

A)levied at different rates on the purchase of different commodities.
B)less than 0.
C)a percentage of the value of the purchase.
D)a given amount for each unit purchased.

Question 19

Who pays a consumption tax?

A)people who purchase goods
B)firms who purchase goods
C)the elderly when they purchase goods
D)all of the above

Question 20

Excise taxes are distortionary taxes.

Question 21

A gross estate is all of the taxable assets of a person at the time of death.

Question 22

A differential commodity tax is the same as an excise tax.

Question 23

This chapter has spent a lot of time dealing with issues of wealth and consumption.One suggestion has been to have a tax on wealth.What are some of the benefits of this proposal?

Question 24

Refer to Question 22 above.Your textbook points out the importance of not deducting payments made as wages.What difference would it make in total tax revenue collected using the consumption-type VAT if this deduction were allowed at the firm level,but individuals were subject to the same tax on their wages?

Question 25

Value-added taxes (VAT)are very popular in the United States.

Question 26

Refer to Figure 16.1 in your textbook.Suppose that the total number of hours (T)is 720 and the wage rate is $10.Suppose further that all income is spent on consumption,so that the vertical axis is also total consumption.
(A)Sketch this graph.
(B)Sketch the graph if a 5% consumption tax is imposed.
(C)Can you say conclusively that a consumption tax will lower hours worked?

Question 27

Assume two people,Tom and Rose,live for two periods and are taxed on consumption in both periods.In period 0,Rose has consumption of 50.In period 1,Rose has consumption of 50.Tom has consumption of 40 in period 0.Use the formula below for lifetime consumption tax liability,Rⁱ,to find out what Tom's period 1 consumption must be,to ensure that tax liabilities between the two are equal,if the consumption tax rate is 9% and the rate of interest is 4%,

Question 28

One advantage of a consumption tax is that there are fewer problems with inflation.

Question 29

General sales taxes totaled 226.7 billion dollars as a source of state revenue in 2008.

Question 30

The general tax can be considered a retail sales tax.

Question 31

Many states have no state-level personal income tax.How do you think that effects expenditure decisions?

Question 32

A publisher sells $400,000 worth of books,magazines,and other reading materials in a given year.The publisher earns a profit of $100,000 that year.Her purchase invoices indicate that she bought $100,000 worth of glue,paper,and other materials during the year.Her labor costs were $150,000,and she purchased $45,000 of new equipment that year.Calculate her tax liability under a 12% consumption-type,value-added tax.

Question 33

Under a consumption tax,only current expenditures are taxed.

Question 34

A consumption tax generally will be borne according to labor earnings.

Question 35

Sales taxes are generally progressive.

Question 36

Throughout this discussion of taxes,there has been repeated mention of the need for progressivity in the tax system.Why is this an important goal for tax systems in most societies?

Question 37

Little Percy lives in two periods.His earnings in the present are 150;in the future he will earn 10% more than today.The interest rate is 5 percent.If his consumption today is 160,what is the most he can consume in the future?