Deck 14: Taxation of Personal Income in the United States

Question 1

A tax deduction allowed for an activity for which positive externalities are not likely to exist such as home ownership) is likely to cause the marginal social cost of the activity to exceed its marginal social benefit.

Answer 1

True

Question 2

If a progressive income tax is replaced with an equal-yield, flat-rate tax, then work effort will unequivocally increase.

Answer 2

False

Question 3

The highest statutory marginal tax rate under the federal personal income tax is 50 percent.

Answer 3

False

Question 4

The earned income tax credit is a negative tax the subsidizes the earnings of low-income workers.

Question 5

Income-in-kind is not considered a tax preference.

Question 6

Tax preferences are exclusions, exemptions, and deductions from the tax base.

Question 7

The value of a personal exemption to a taxpayer varies with his or her marginal tax rate.

Question 8

Tax credits vary with a person's marginal tax rate.

Question 9

Taxable income in the United States amounts to less than 50 percent of personal income.

Question 10

Under current rules, only real interest earned is subject to income tax.

Question 11

As of 2012, there is no marriage penalty for an adjusted gross income of $60,000.

Question 12

The tax base under the personal income tax in the United States is the Haig-Simons definition of comprehensive income.

Question 13

Taxable income in the United States includes all capital gains earned, whether or not they are realized.

Question 14

Taxable income in the United States exceeds adjusted gross income.

Question 15

The cuts in marginal tax rates initiated in 2001 are likely to reduce the excess burden of tax pref?erences.

Question 16

The U.S. personal income tax is not a progressive tax.

Question 17

Tax preferences are really subsidies to certain activities.

Question 18

Adjusted gross income, as defined by the United States Tax Code,

A) exceeds taxable income.
B) equals taxable income.
C) is less than taxable income.
D) is greater than comprehensive income.

Question 19

Realized, long-term capital gains that reflect inflation are currently exempt from taxation.

Question 20

Tax preferences:

A) are exclusions, exemptions, and deductions from the tax base.
B) are in the tax code by accident.
C) are extra taxes on certain taxpayers.
D) increase the amount of income that is taxable.
E) both a and d

Question 21

Tax expenditures are:

A) expenditures made to collect taxes.
B) losses in revenue due to tax preferences.
C) less than 1 percent of tax revenue.
D) both b and c

Question 22

Currently, the tax treatment of capital gains in the United States is such that:

A) all capital gains are taxed.
B) all realized capital gains are taxed.
C) most realized capital gains are taxed.
D) only capital gains adjusted for inflation are taxed.

Question 23

Which is an example of an itemized deduction under the U.S. code as of 2012?

A) state and local income tax
B) state and local property tax
C) all medical expenses
D) both a and b

Question 24

The excess burden of tax preferences:

A) depends on average tax rates.
B) will be higher, the higher the marginal tax rate is.
C) will be lower, the higher the marginal tax rate is.
D) is independent of marginal tax rates.

Question 25

Because of the Earned Income Tax Credit, the effective tax rate for the lowest-income taxpayers in the United States is:

A) only 15 percent.
B) higher than that paid by upper-income taxpayers.
C) zero.
D) negative.

Question 26

As of 2012, the highest marginal tax rate is:

A) 39.6%
B) 38%
C) 35%
D) 32.5%

Question 27

If the excess burden from tax is $10 million, lowering marginal tax rates should make the excess burden:

A) more than $10 million.
B) less than $10 million.
C) remain at $10 million.
D) none of the above is certain to occur

Question 28

A shift to an equal-yield, flat-rate personal income tax from the current progressive income tax rate structure will:

A) reduce the tax burden on upper-income groups.
B) increase the tax burden on upper-income groups.
C) increase the share of taxes paid by lower-income groups.
D) both a and c

Question 29

The reduction in marginal tax rates will:

A) increase the excess burden of tax preferences.
B) increase tax expenditures.
C) decrease the excess burden of tax preferences.
D) have no effect of tax expenditures.

Question 30

The exclusion of interest of state and local bonds from taxation by the federal government:

A) decreases interest costs for state and local governments.
B) increases interest costs for state and local governments.
C) benefits lower-income taxpayers more than upper-income taxpayers.
D) discourages borrowing by local governments.

Question 31

A taxpayer is in a 33-percent tax bracket and itemizes deductions. He obtains a mortgage from a bank at 9-percent interest. The actual rate of interest he pays is:

A) 6 percent.
B) 9 percent.
C) 20 percent.
D) 25 percent.

Question 32

The personal income tax in the United States is very different from a comprehensive income tax. How would income distribution and resource use change if a flat-rate tax on comprehensive income were substituted for the current progressive income tax?

Question 33

Which of the following is the result of The Economic Growth and Tax Relief Reconciliation Act enacted in 2001?

A) reduction of the highest marginal tax rate
B) increased the marriage penalty
C) created a new 40% tax bracket
D) both a and c

Question 34

Removing savings from the tax base of the personal income tax is likely to:

A) increase work effort.
B) decrease work effort.
C) lower market equilibrium interest rates by increasing the supply of loanable funds.
D) increase market equilibrium interest rates, thereby increasing the demand for loanable funds.

Question 35

Under the federal personal income tax rules prevailing as of 2012,

A) all interest expense is tax deductible.
B) the interest expense for mortgages on first and second homes is tax deductible.
C) the interest expense for mortgages only on first homes is tax deductible.
D) no interest is tax deductible.

Question 36

Which is a justification for tax preferences?

A) administrative difficulties
B) improving equity
C) encouraging private expenditures that create external benefits
D) all of the above

Question 37

Which of the following is true for the federal income tax in the United States?

A) All income irrespective of its source or use is taxed at the same rate.
B) Comprehensive income is the tax base.
C) The tax base is less than 50 percent of comprehensive income.
D) All realized and unrealized capital gains are included in the tax base.

Question 38

The value of personal exemptions in terms of taxes saved:

A) is the same for all taxpayers.
B) varies with family size.
C) varies with taxpayers' marginal tax rates.
D) both b and c

Question 39

"Bracket creep" is no longer a problem in the United States because:

A) the tax brackets are indexed.
B) capital gains are now fully taxable.
C) only real interest is taxed.
D) capital gains are indexed.