Deck 19: The Equity Implications of Taxation- Tax Incidence

Question 1

A tax levied on producers is fully shifted to consumers when:

A) demand is perfectly elastic.
B) demand is perfectly inelastic.
C) supply is perfectly inelastic.
D) supply and demand are both relatively elastic.

Answer 1

demand is perfectly inelastic.

Question 2

Which statement is TRUE?

A) In labor markets,workers always bear the full burden of a tax.
B) In labor markets,workers bear the full burden of a tax only when the tax is levied on workers.
C) In labor markets,workers bear more of the burden of a payroll tax if labor supply is highly inelastic.
D) Tax incidence is based on which party has the legal obligation to pay a tax.

Answer 2

In labor markets,workers bear more of the burden of a payroll tax if labor supply is highly inelastic.

Question 3

The difference between what consumers pay and what producers receive (net of tax)from a transaction is called the:

A) statutory incidence.
B) tax wedge.
C) tax incidence.
D) producer burden.

Answer 3

tax wedge.

Question 4

Suppose the pretax price of gasoline is $1 per gallon.A tax of $1.50 is imposed and is paid by producers to the government.What must the post-tax price of gasoline in order for the consumer tax burden to be equal to one-half of the tax wedge?

A) $1
B) $1.25
C) $1.75
D) $2.25

Question 5

Tax incidence focuses on who:

A) has the most elastic demand.
B) has the most inelastic supply.
C) bears the economic burden of a tax.
D) bears the statutory or legal burden of a tax.

Question 6

Suppose the government were to impose a $3 tax on high-speed Internet connections.The law states that $2/connection is to be paid to the government by the producer,and the remaining $1 to be paid by the consumer.Which statement regarding the tax is TRUE?

A) It shifts the supply curve of high-speed Internet connections to the left.
B) It shifts the supply curve of high-speed Internet connections to the right.
C) It shifts the demand curve for high-speed Internet connections to the right.
D) It does not shift either the supply curve or the demand curve.

Question 7

Suppose the pre-tax price of cigarettes is $3.00 per pack and the post-tax price is $4.00 per pack.The tax is $1.50 per pack and is paid to the government by cigarette retailers.Six hundred packs were sold prior to the tax increase; 500 were sold after the tax.What is the producer tax burden?

A) $0.50
B) 100 packs
C) $150
D) $1.50

Question 8

Suppose the pre-tax price of gasoline is $1/gallon.An imposed tax of $0.50/gallon is paid by producers to the government,increasing the price of gasoline to $1.30/gallon.The gross price after the tax is _____; the after-tax price is _____.

A) $1.30; $0.80
B) $1.30; $1.80
C) $1.80; $1.30
D) $1.80; $0.80

Question 9

Which statement regarding the source of federal government tax receipts from 1960 to 2005 is TRUE?

A) The share of revenues coming from the individual income tax has risen significantly.
B) The share of revenues coming from payroll taxes has risen significantly.
C) The share of revenues coming from the corporate income tax has risen significantly.
D) The share of revenues coming from each type of tax has remained unchanged.

Question 10

All things equal,producers bear more of a tax when supply is _____.All things equal,consumers bear more of a tax when demand is _____.

A) unit elastic; unit elastic
B) elastic; elastic
C) inelastic; inelastic
D) elastic; inelastic

Question 11

In a labor market in which demand is perfectly elastic and supply is neither perfectly elastic nor perfectly inelastic,who bears a tax if the statutory incidence is placed on the firms?

A) only the workers
B) only the firms
C) both the workers and the firms,although the workers bear more of the tax
D) both the workers and the firms,although the firms bear more of the tax

Question 12

Which statement related to elasticity and tax incidence is NOT true?

A) For products with an inelastic demand,the burden of the tax is borne almost entirely by the consumer.
B) For products with an inelastic supply,the burden of the tax is borne almost entirely by the producers.
C) For products with an elastic demand,the burden of the tax is borne almost entirely by the producers.
D) Parties with elastic demand or supply bear taxes; parties with inelastic demand or supply avoid them.

Question 13

A tax levied on producers is fully shifted to producers when:

A) demand is perfectly inelastic.
B) supply is perfectly elastic.
C) supply is perfectly inelastic.
D) supply and demand have the same elasticity coefficients.

Question 14

Which statement is TRUE regarding a $1 per gallon tax on gasoline?

A) The consumer tax burden is greater when the tax is imposed on consumers.
B) The consumer tax burden is greater when the tax is imposed on the producers.
C) The producer tax burden is the same no matter on whom the tax is imposed.
D) The producer tax burden depends both on whom the tax is imposed and on the demand and supply elasticities.

Question 15

Which statement is TRUE regarding a $1 per gallon tax on gasoline imposed on consumers?

A) It shifts the supply of gasoline to the left.
B) It shifts the supply of gasoline to the right.
C) It shifts the demand for gasoline to the left.
D) It shifts the demand for gasoline to the right.

Question 16

All other things equal,consumers bear more of a tax as demand becomes more _____ and supply becomes more _____.

A) unit elastic; unit elastic
B) elastic; elastic
C) inelastic; inelastic
D) inelastic; elastic

Question 17

Suppose the pre-tax price of cigarettes is $3.00 per pack and the post-tax price is $4.00 per pack.The tax is $1.50 per pack and is paid by the retailers of cigarettes to the government.Six hundred packs were sold prior to the tax increase; 500 packs were sold after the tax.What is the statutory incidence of the tax on consumers?

A) $0
B) $1
C) $1.50
D) $150

Question 18

Suppose the pretax price of gasoline is $1 per gallon.A tax of $0.50 is imposed and is paid by consumers to the government.What must the gross price of gasoline be after the tax so that the consumer tax burden is equal to the producer tax burden?

A) $0.50
B) $0.75
C) $1.00
D) $1.25

Question 19

Suppose the pre-tax price of cigarettes is $3 per pack and the post-tax price is $4 per pack.The tax is $1.50 per pack and is paid by the retailers of cigarettes to the government.Prior to the tax,600 packs were sold; after the tax 500 packs were sold.What is the consumer tax burden?

A) $1
B) $1.50
C) $2.50
D) $3

Question 20

Which statement is TRUE regarding a $1 per pack tax on cigarettes that is imposed on producers?

A) It shifts the supply of cigarettes to the left.
B) It shifts the supply of cigarettes to the right.
C) It shifts the demand for cigarettes to the left.
D) It shifts the demand for cigarettes to the right.

Question 21

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

A) Producers bear the entire tax burden.
B) Consumers bear the entire tax burden.
C) Producers and consumers each bear part of the tax burden.
D) The owners of the capital used to produce the taxed goods bear all of the tax burden.

Question 22

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?

A) People buy fewer computers because they are now more expensive.
B) People buy fewer computers because people have less income.
C) People buy more books because they spend less money on computers.
D) People buy fewer computer printers because of the tax.

Question 23

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 _____.

A) workers; does not affect the tax burden of workers
B) workers; reduces the tax burden of workers
C) firms; reduces the tax burden of firms
D) firms; does not affect the tax burden of firms.

Question 24

Which statement is TRUE?

A) Effective excise tax rates have risen for high-income groups over the last 20 years.
B) Effective excise tax rates have risen for low-income groups over the last 20 years.
C) Effective corporate tax rates are higher than effective income tax rates for all households.
D) Effective income tax rates have not changed over the last 20 years.

Question 25

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.

A) car wash employees; capital owners
B) land owners and capital owners; land owners
C) capital owners; land owners and capital owners
D) land owners and capital owners; land owners and capital owners

Question 26

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?

A) only the workers
B) only the firms
C) both the workers and the firms,although the workers bear more of the tax
D) both the workers and the firms,although the firms bear more of the tax

Question 27

Balanced budget incidence takes into account:

A) the benefits of the spending financed out of the tax revenues.
B) the extent to which the tax helps balance the federal budget.
C) the benefits received by taxpayers when the federal government's budget is balanced.
D) whether the business firms being taxed are perfectly competitive or monopolists.

Question 28

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.

A) more; less
B) more; more
C) less; more
D) less; less

Question 29

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

A) Consumers of the corporations' products bear the entire tax burden.
B) Consumers of the corporations' products bear half the tax burden and the owners of capital bear half the tax burden.
C) Employees at the corporation bear half the tax burden and the owners of the capital bear half the tax burden.
D) Owners of the capital bear the entire tax burden.

Question 30

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?

A) People buy more pencils because they have less after-tax income.
B) People buy fewer books because they have less after-tax income.
C) People buy more pencils because pencils are now cheaper compared with pens.
D) People buy more ink pens because sellers bear the tax.

Question 31

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

A) The payroll tax must be levied only on employers.
B) The payroll tax must be levied evenly on employers and employees.
C) Labor supply must be inelastic.
D) Demand for labor must be inelastic.

Question 32

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?

A) The total average tax rate on the bottom quintile fell sharply in the recession to only 1.1%.
B) The average tax rate on the top quintile was 23.8% in 2011.
C) Average corporate tax rates are small relative to income and payroll tax rates.
D) Average excise tax has fallen for the bottom of the income distribution while rising for the top.

Question 33

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.

A) fall; fall
B) fall; rise
C) rise; rise
D) rise; fall

Question 34

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.

A) consumers; table factories
B) table factories; table factories
C) consumers; capital owners
D) table factories; capital owners

Question 35

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

A) Monopolists bear more of the tax when the tax is imposed on consumers than if the tax is levied on the monopolist.
B) Monopolists bear more of the tax when the tax is levied on the monopolist than if the tax is levied on consumers.
C) The tax burden of consumers is the same whether the tax is levied on the monopolist or on consumers.
D) Consumers bear more of the tax when the tax is levied on the monopolist than if the tax is levied on consumers.

Question 36

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

A) only the workers
B) only the firms
C) both the workers and the firms,although the workers bear more of the tax
D) both the workers and the firms,although the firms bear more of the tax

Question 37

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

A) The statutory burden generally does not describe who really bears the tax.
B) If there are impediments to reducing wages,such as a minimum wage,firms are more likely to bear the burden of a tax on earnings.
C) The incidence of taxation on producers and consumers is ultimately determined by the elasticities of supply and demand in most cases.
D) When there are barriers to reaching the competitive market equilibrium,the side of the market on which the tax is levied does not matter.

Question 38

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

A) the elasticity of demand for labor
B) the percentage of the statutory burden placed on employers
C) the percentage of the statutory burden placed on workers
D) how the statutory burden of the tax is divided between employers and workers

Question 39

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?

A) People buy fewer pencils because they have less income.
B) People buy less paper as a result of the tax.
C) People buy more pencils because pencils are now cheaper compared with pens.
D) People buy more ink pens because sellers bear the tax.

Question 40

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

A) the elasticity of demand for the product
B) the elasticity of supply of the inputs used to make the product
C) the percentage of the tax consumers are required to pay.
D) the percentage of the tax producers are required to pay.

Question 41

Suppose that a monopolist has a cost function given by C(q)= 10 + 2q + 0.5q².The (inverse)demand for the product is given by P(q)= 47 - q.The government levies a tax of $9 per unit,to be paid to the government by the monopolist.
(a)What is the market quantity and price?
(b)The government levies a tax of $9 per unit,to be paid to the government by the monopolist.What is the new market price and quantity?
(c)How much of the tax do the consumers bear? How much does the monopolist bear?

Question 42

Why is general equilibrium analysis called a game of "follow the tax burden"?

Question 43

Suppose that the demand for apples is perfectly elastic and the government levies a tax on apple producers.Assume that the supply of apples is neither perfectly elastic nor perfectly inelastic.
(a)How will the price paid by consumers change? Is this change bigger or smaller than the price change that would result if the demand for apples were not perfectly elastic?
(b)How will the quantity of apples consumed change because of the tax? Is this change in quantity larger or smaller than the change that would result if the demand for apples were not perfectly elastic?
(c)Explain the significance of your answers in both part (a)and part (b)in terms of how the tax affects the welfare of consumers in the apple market.

Question 44

Suppose that Jean is an unskilled worker who is making the market wage of $5 per hour and that the market for unskilled labor is competitive.Suppose further that the government is proposing to increase a payroll tax to fund changes to Social Security and is debating whether to levy the tax on employers or workers.
(a)Assume there is no minimum wage.If Jean could lobby the government,what position should she take regarding whether the tax should be levied on employers or employees? Explain.
(b)Should a $5.15-per-hour minimum wage change Jean's position? Why or why not?

Question 45

Discuss how the sources of federal government revenue evolved in the past half-century.Do you think the change can be regarded as an equitable shift in the burden of taxation?

Question 46

Is it possible for the government to impose a tax that causes the market price of the good to fall? Explain why you think it is or is not possible.

Question 47

In the United States,there is a lot of variation in how cigarettes are taxed across different states.The excise tax on cigarettes varies from a low of 17¢ per pack in Missouri to a high of $4.35 per pack in New York.Explain how this variation in taxation allows for quasi-experimental estimation of the impact of excise taxes on product prices.

Question 48

Recall that Social Security is funded through payroll taxes levied on both employers and employees.Suppose a politician were to state that since large corporations can better afford paying such taxes,the payroll tax levied on employees should be shifted to employers.Would this change cause the economic burden of the tax to be shifted from employees to employers? Explain your response.