Question 1

Jurisdiction F levies a 10% excise tax on the purchase of golf carts. The annual revenue from this tax averages $800,000 (10% * $8 million average annual golf cart purchases). Jurisdiction F is considering raising the tax rate to 12%. Which of the following statements is true?

Accepted Answer

The static forecast assumes that the increase in tax rate will not affect the quantity demanded of golf carts. Therefore, the additional revenue generated by the 2% increase in tax rate would be 2%* $8 million = $160,000. A dynamic forecast, on the other hand, would account for the possible decrease in demand for golf carts as the tax rate increases. However, since the question only asks for a static forecast, the answer is C. A is incorrect because it does not take into account the percentage increase in tax rate. B is incorrect because it mentions a dynamic forecast, which is not requested in the question. D is incorrect because the statement in option C is, in fact, true based on a static forecast.

Question 2

Government J decides that it must increase its tax revenue. Which of the strategies could result in more revenue?

Accepted Answer

All of these strategies could result in more revenue for Government J.

A) Increasing the rate of an existing tax would generate more revenue from the same base of taxpayers.

B) Expanding the base of an existing tax could result in more taxpayers being subject to the tax, and therefore more revenue.

C) Enacting a tax on a new base would create a new source of revenue for the government.

Question 3

Which of the following statements about the income effect of an income tax rate increase is true?

Accepted Answer

The income effect of an income tax rate increase is theoretically stronger for low-income taxpayers than for high-income taxpayers because a larger proportion of their income is taken up by taxes. Additionally, the income effect motivates individuals to find ways to increase their before-tax income, as they seek to offset the reduction in after-tax income caused by the tax increase. Therefore, both statements are true.

Question 4

Which of the following statements concerning the federal Social Security tax is true?

Accepted Answer

The Social Security tax burden increases annually because the base generally increases annually. As of 2021, the Social Security tax rate has remained the same at 6.2% for employees and employers, but the maximum taxable earnings increased from $137,700 in 2020 to $142,800 in 2021.

Question 5

Government officials of Country Z estimate that next year's public programs will cost $19 million but that tax revenues will be only $15 million. Which of the following statements is false?

Accepted Answer

If Country Z's tax system was sufficient, tax revenues would cover the cost of public programs. However, in this scenario, tax revenues are projected to fall short of program costs, indicating a need for either deficit spending or budget cuts.

Question 6

Individuals who believe that a tax system is fair are less likely to cheat on their taxes than individuals who believe that the system is unfair.

Accepted Answer

Research has shown that individuals who perceive the tax system as fair are more likely to comply with tax laws, while those who perceive the system as unfair are more likely to cheat. This is because a perceived fairness in the system fosters a sense of obligation and duty towards paying taxes.

Question 7

If a tax has a progressive rate structure, a taxpayer's average rate is greater than her marginal rate.

Accepted Answer

In a progressive tax system, a taxpayer's marginal rate (the rate on the last dollar of income) is higher than the average rate (total tax paid divided by total income), because as income increases, the tax rate on additional income also increases.

Question 8

The declining marginal utility of income across individuals can be measured empirically.

Accepted Answer

The answer of The declining marginal utility of income across...

Question 9

If a tax has a proportionate rate structure, a taxpayer's marginal rate and average rate are equal.

Accepted Answer

A proportionate rate structure is also known as a flat tax, where the tax rate is the same for all levels of income. In this case, the marginal rate and average rate would be equal, as both would be the flat tax rate.

Question 10

Which of the following statements about the substitution effect of an income tax rate increase is false?

Accepted Answer

All the statements provided accurately describe scenarios where the substitution effect of an income tax rate increase could be theoretically stronger, reflecting the nuances in how different groups might respond to changes in income tax rates.

Question 11

A progressive rate structure and a proportionate rate structure both result in vertical equity across taxpayers.

Accepted Answer

Both progressive and proportionate rate structures take into consideration a taxpayer's ability to pay and thus result in vertical equity. However, progressive rate structures usually result in a more equitable distribution of tax burden.

Question 12

A static forecast of the incremental revenue from a tax rate increase presumes that:

Accepted Answer

A static forecast assumes that there will be no change in the tax base due to the tax rate increase. It assumes that all other factors influencing the tax base will remain constant. Therefore, the incremental revenue generated by the tax rate increase will solely be due to the change in the tax rate.

Question 13

The city of Belleview operated at an $865,000 surplus this year. The surplus suggests that the municipal tax system is:

Accepted Answer

The fact that the city operated at a surplus of $865,000 suggests that the municipal tax system is generating more revenue than necessary to operate the city, indicating that it is sufficient. However, we cannot infer whether it is fair, efficient, or convenient based solely on the information provided.

Question 14

The theory of distributional justice is a rationale for a progressive income tax system.

Accepted Answer

Distributional justice theory argues that individuals should be taxed based on their ability to pay, and those with more resources should contribute more to society. This supports the idea of a progressive income tax system, where individuals with higher incomes are taxed at a higher percentage compared to those with lower incomes.

Question 15

Tax liability divided by taxable income equals marginal tax rate.

Accepted Answer

Tax liability divided by taxable income equals the average tax rate, not the marginal tax rate. The marginal tax rate is the rate at which your last dollar of income is taxed.

Question 16

A dynamic forecast of the incremental revenue from a tax rate increase presumes that:

Accepted Answer

A dynamic forecast of the incremental revenue from a tax rate increase takes into account that taxpayers may change their behavior due to the rate increase, which can affect the tax base. This implies a correlation between the tax rate and the tax base, as changes in the tax rate can lead to changes in the tax base, contrary to static forecasting which assumes no behavioral changes.

Question 17

The U.S. individual income tax has always used a progressive rate structure.

Accepted Answer

This is true, the U.S. individual income tax has always used a progressive rate structure. This means that the tax rate increases as an individual's income increases.

Question 18

The government of Nation C operated at a $32 billion deficit this year. The deficit suggests that Nation C's tax system is:

Accepted Answer

A deficit means that the government is spending more money than it is collecting in taxes. This suggests that Nation C's tax system is not bringing in enough revenue to cover its expenses, making it insufficient.

Question 19

Last year, Government G levied a 35% tax on individual income, and Mr. Slate paid $35,000 tax on his $100,000 income. This year, the government increased the tax rate to 40%. Which of the following statements is false?

Accepted Answer

The answer of Last year, Government G levied a 35%...

Question 20

Which of the following statements about the income and substitution effects of an income tax rate increase is true?

Accepted Answer

The income and substitution effects are contradictory because the income effect suggests people will work more to maintain their income after a tax increase, while the substitution effect suggests they will work less because leisure becomes relatively cheaper compared to work.

Quiz 2: Policy Standards for a Good Tax

Jurisdiction F levies a 10% excise tax on the purchase of golf carts. The annual revenue from this tax averages $800,000 (10% * $8 million average annual golf cart purchases) . Jurisdiction F is considering raising the tax rate to 12%. Which of the following statements is true?