Question 1

The most appropriate measure of the sacrifice made by a taxpayer is the:

Accepted Answer

The average tax rate, which is the total tax paid divided by the total income, best represents the sacrifice made by a taxpayer because it reflects the proportion of income that is paid in taxes, giving a clear picture of the taxpayer's burden.

Question 2

According to the information provided, assume that the government places a tax of $4 on each bottle of micro-brewed beer.What is Celia's consumer surplus from micro-brewed beer?

Accepted Answer

If the tax is equal to the consumer's willingness to pay, the consumer surplus is zero because the consumer is not willing to pay more than the taxed price.

Question 3

Large deadweight losses and large administrative burdens are characteristic of a tax system that is best defined as:

Accepted Answer

Large deadweight losses and large administrative burdens indicate that the tax system is inefficient, meaning that it is not achieving its intended goals in the most effective way possible.

Question 4

The extra tax that is paid by a taxpayer on their next additional dollar of income is called:

Accepted Answer

The definition provided matches the concept of marginal tax rate, which refers to the extra tax that a taxpayer has to pay on the next dollar earned. The other options are not directly related to this definition. Deadweight loss is a loss of economic efficiency due to market inefficiencies, a consumption tax is a tax based on consumption rather than income, and the average tax rate is the total amount of taxes paid divided by the taxable income.

Question 5

According to the information provided, how much total consumer surplus do Celia and Jim collectively receive from consuming micro-brewed beer when it is priced at $3 a bottle?

Accepted Answer

Celia and Jim's total consumer surplus is calculated by adding the difference between their maximum willingness to pay and the market price for each bottle they purchase. If both are willing to pay more than $3 for each bottle they buy, their combined consumer surplus is the sum of these differences for all the bottles they purchase at $3.

Question 6

According to the information provided, if a tax of $4 is levied on each bottle of micro-brewed beer:

Accepted Answer

The answer of According to the information provided, if a...

Question 7

The marginal tax rate is equal to:

Accepted Answer

The marginal tax rate is the extra tax paid on each additional dollar of income earned. It is expressed as a percentage and can vary based on the tax bracket an individual falls into. A and D are not related to the marginal tax rate and C is incorrect as it divides extra taxes paid by total income, rather than extra taxes paid on each additional dollar earned.

Question 8

Policymakers consider two main objectives when designing a taxation system:

Accepted Answer

Policymakers aim for equity and efficiency in taxation systems to ensure fairness among taxpayers and to promote economic growth through efficient allocation of resources. Revenue and debt reduction, revenue and expenditures, and expenditures and efficiency are also important factors in tax design, but equity and efficiency are the two main objectives.

Question 9

According to the information provided, if a tax of $4 is levied on each bottle of micro-brewed beer, what is the total deadweight loss of the tax?

Accepted Answer

The answer of According to the information provided, if a...

Question 10

The average tax rate measures the:

Accepted Answer

The average tax rate is represented by the fraction of income paid in taxes. This is calculated by dividing the amount of taxes paid by the total income earned. Therefore, choice B is the correct answer.

Question 11

According to the information provided, if a tax of $4 is levied on each bottle of micro-brewed beer, how much tax revenue will be generated from sales to Jim and Celia?

Accepted Answer

Jim and Celia bought 4 bottles of micro-brewed beer each, which means a total of 8 bottles. 
If a tax of $4 is levied on each bottle, the tax revenue generated from sales to Jim and Celia would be:
8 bottles x $4/bottle = $32
Therefore, the correct answer is C, $8.

Question 12

One tax system is less efficient than another if it:

Accepted Answer

A less efficient tax system raises the same amount of revenue but at a higher cost to taxpayers. Therefore, option C is the correct answer. Options A and B refer to the equity or fairness of the tax system, not its efficiency. Option D describes a more efficient tax system.

Question 13

An efficient tax system has low:

Accepted Answer

Deadweight losses are the economic costs associated with taxation, such as reduced economic activity and efficiency. A low deadweight loss indicates that the tax system is efficient because it is not unnecessarily hindering economic activity.

Question 14

According to the information provided, if a tax of $2 is levied on each bottle of micro-brewed beer, what is the deadweight loss of the tax?

Accepted Answer

The deadweight loss of a tax is the loss of consumer and producer surplus that results from the imposition of the tax. In this case, the tax on micro-brewed beer will reduce the quantity of beer that is produced and consumed, leading to a loss of consumer and producer surplus. The deadweight loss is the area of the triangle formed by the demand and supply curves and the tax wedge. In this case, the deadweight loss is $4.

Question 15

Suppose the government imposes a tax of 15 per cent on the first $70 000 of income and
20 per cent on all incomes above $70 000, what are the tax liability and the marginal tax rate for a person whose income is $80 000?

Accepted Answer

For the first $70 000 of income, the tax rate is 15%. Therefore, the tax liability for the first $70 000 is $10 500. 
For the remaining $10 000 ($80 000 - $70 000), the tax rate is 20%. Therefore, the tax liability for the additional $10 000 is $2 000. 
Therefore, the total tax liability is $12 500. 
The marginal tax rate is the tax rate that applies to the last dollar of income earned. In this case, the marginal tax rate for a person earning $80 000 is 20%.

Question 16

Which of the following statements is most correct?

Accepted Answer

Deadweight loss refers to the inefficiency that arises from a tax, as it distorts the allocation of resources by changing incentives, leading individuals to make decisions based on the tax rather than purely on market incentives.

Question 17

Suppose the government imposes a tax of 32 per cent on the first $40 000 of income, and 45 per cent on all income above $40 000, what is the marginal tax rate when income is $80 000?

Accepted Answer

The marginal tax rate is the rate at which additional income is taxed. Since the tax rate increases from 32% to 45% on income above $40,000, the marginal tax rate at $80,000 would be 45%.

Question 18

If we are trying to gauge how much the income tax system distorts incentives, then:

Accepted Answer

The marginal tax rate refers to the tax rate paid on an additional unit of income, which is the rate that affects people's decisions to work and earn more. It is therefore the most meaningful measure for gauging how much the income tax system distorts incentives. The average tax rate and total tax revenue collected do not give as much information on how the system affects people's behavior, and the administrative burden of the tax is a separate issue from its incentive effects.

Question 19

Suppose the government imposes a tax of 10 per cent on the first $24 000 of income and
20 per cent on all incomes above $24 000, what are the tax liability and the average tax rate for a person whose income is $48 000?

Accepted Answer

The tax liability for the first $24,000 is 10% of $24,000 = $2,400. For the remaining $24,000 (since the total income is $48,000), the tax rate is 20%, which equals $4,800. Therefore, the total tax liability is $2,400 + $4,800 = $7,200. The average tax rate is the total tax liability divided by the total income: $7,200 / $48,000 = 15%.

Question 20

One of the benefits from switching taxation away from income towards consumption is that:

Accepted Answer

Switching taxation away from income towards consumption can eliminate disincentives to save because income used for saving will not be taxed until it is consumed. This can encourage individuals to save more, invest in the economy, and promote long-term growth. However, it is not guaranteed to increase tax revenues or always administratively simpler, and it can distort incentives to earn income for those who rely on high levels of consumption.

Quiz 12: The Design of the Tax System