Question 1

According to the famous economist Milton Friedman, the 'least bad' tax is a tax on:
A)income received from profits and interest
B)the value of unimproved land
C)labour income
D)the value of land including the improvements to the land

Accepted Answer

According to Milton Friedman, a tax on the value of unimproved land is the 'least bad' tax as it does not discourage productive activity or investment but rather only taxes the value of a scarce resource that is not created by individual effort. This tax also encourages efficient use of land and discourages land speculation.

Question 2

The marginal tax rate on labour income for many workers in Australia is almost:
A)30 per cent
B)40 per cent
C)50 per cent
D)60 per cent

Accepted Answer

The marginal tax rate on labour income for many workers in Australia is almost 50 per cent, which means that for every additional dollar earned, half of it goes to paying taxes. This is because of Australia's progressive tax system, where individuals with higher incomes pay a higher percentage of tax.

Question 3

The higher a country's tax rates, the more likely that country will be:
A)on the top of the Laffer curve
B)on the positively sloped part of the Laffer curve
C)above the Laffer curve
D)on the negatively sloped part of the Laffer curve

Accepted Answer

The Laffer curve depicts the relationship between tax rates and government revenue. The curve is shaped like an upside-down U, with the peak representing the tax rate at which revenue is maximized. If a country's tax rates are too high, it will be on the negatively sloped part of the Laffer curve, meaning that further increases in tax rates will actually lead to a decrease in government revenue as a result of decreased economic activity and tax base erosion.

Question 4

Suppose supply is perfectly inelastic, while demand is relatively elastic.A tax of $1.00 is levied on the purchasers of the good.Which of the following statements is correct?
A)the government will fail to raise any tax revenue
B)there will be a positive deadweight loss
C)there will be no deadweight loss
D)government revenue will be less than the deadweight loss of the tax.

Accepted Answer

When supply is perfectly inelastic, it means that the quantity supplied does not change in response to changes in price. Therefore, the entire burden of the tax will be borne by the buyers, and there will be no change in the quantity sold. Since demand is relatively elastic, it means that buyers are responsive to changes in price, and the tax will result in a higher price, but not a significant decrease in the quantity sold. Therefore, the tax incidence falls entirely on the buyers, and there is no deadweight loss. The government will raise tax revenue equal to the amount of the tax ($1.00).

Question 5

Assume that the demand for salt is relatively inelastic and the demand for orange juice is relatively elastic.Compared to the deadweight loss from the same percentage tax on orange juice, the deadweight loss from imposing a tax on salt would be:
A)greater
B)lesser
C)neither greater nor lesser
D)either greater or lesser

Accepted Answer

Since the demand for salt is relatively inelastic, consumers are not as responsive to changes in price. Therefore, a tax on salt would result in less of a decrease in quantity demanded compared to a tax on orange juice, which has a relatively elastic demand. This means that the deadweight loss from a tax on salt would be less than the deadweight loss from the same percentage tax on orange juice. Therefore, the answer is B- lesser.

Question 6

Taxes on labour encourage all of the following, except:
A)older workers to take early retirement from the labour force
B)mothers to stay at home rather than work in the labour force
C)workers to work overtime
D)people to be paid under the table

Accepted Answer

Taxes on labour can discourage people from working more hours because the additional income would be subject to taxation, making overtime less financially rewarding. Choices A, B, and D are effects that can be encouraged by taxes on labour, as they can make formal employment less attractive or financially viable.

Question 7

Studies indicate that if income tax rates in Sweden had been reduced, income tax collections would have:
A)fallen
B)risen
C)remained constant
D)risen, fallen or remained constant (the studies were inconclusive)

Accepted Answer

Reducing income tax rates can lead to increased economic activity, potentially broadening the tax base and increasing overall tax collections, a concept supported by the Laffer Curve theory.

Question 8

A tax on land:
A)would result in a huge deadweight tax loss
B)would result in no deadweight tax loss
C)causes resource allocation to not be guided by market forces
D)would result in none of the above

Accepted Answer

A tax on land typically results in no deadweight loss because the supply of land is perfectly inelastic. Since the quantity of land does not change in response to the tax, it does not distort market behavior or resource allocation.

Question 9

Economists generally agree that the most important tax in the Australian economy is the tax on:
A)property
B)consumption
C)labour
D)income

Accepted Answer

Labor is considered the most important tax in the Australian economy because it directly impacts the workforce and influences employment levels, wages and productivity. It is the main source of revenue for the government as Australia has a progressive income tax system where higher earners pay a larger proportion of their income in taxes. This tax revenue is used to fund public services and infrastructure, which are essential for economic growth and development. Additionally, taxes on property and consumption also play important roles, but they are not considered as critical as labor taxation in terms of their impact on the economy.

Question 10

The less freedom people are given to choose the date of their retirement the:
A)more elastic the supply of labour
B)less elastic the supply of labour
C)flatter the labour supply curve
D)larger the reduction in output caused by a tax on labour

Accepted Answer

If people are not free to choose their retirement date, the supply of labor becomes less elastic, meaning that the quantity of labor supplied does not respond as much to changes in wage rates. This is because people are forced to work longer regardless of changes in wage rates, reducing the flexibility of the labor market.

Question 11

The 'underground' economy includes:
A)the mining industry
B)the illegal drug trade
C)working in a legitimate job
D)both B and C

Accepted Answer

The underground economy refers to economic activities that are illegal or unregulated, which includes the illegal drug trade. Working in a legitimate job, as mentioned in option C, is not part of the underground economy. Option A is incorrect because the mining industry is a legal and regulated industry. Therefore, the best choice is option B.

Question 12

The Laffer curve indicates that income tax collections:
A)will be very low if income tax rates are very low
B)will be very low if income tax rates are very high
C)will be at a maximum if income tax rates are at some intermediate level between very low and very high
D)all of the above are correct

Accepted Answer

The Laffer curve illustrates that tax revenue will be low at both very low and very high tax rates, and at an intermediate rate, tax revenue can be maximized. This is because at very high tax rates, incentives to earn taxable income decrease, leading to lower revenue, while at very low rates, the government doesn't collect much revenue despite potentially high economic activity.

Question 13

'Assume that the supply of forest products is relatively inelastic and the supply of coffee is relatively elastic'.According to this statement, a tax levied on coffee will cause the loss of producer surplus to be:
A)relatively large
B)relatively small
C)zero
D)either small or large, depending on the elasticity of demand

Accepted Answer

When the supply of a good is relatively elastic, the producer can quickly adjust their production to changes in price. However, when the supply of a product is relatively inelastic, producers are unable to adjust their production to changes in price. If a tax is imposed on coffee, the producer of coffee will be unable to adjust their production to minimize the impact of the tax on their revenue. As a result, the loss of producer surplus will be relatively large.

Question 14

Since the amount of land is fixed, the total supply of land is:
A)relatively elastic
B)perfectly elastic
C)perfectly inelastic
D)relatively inelastic

Accepted Answer

The supply of land is considered to be perfectly inelastic because the quantity supplied cannot be changed in response to changes in price. The amount of land available is fixed, so regardless of the price, the supply cannot be increased or decreased.

Question 15

As the size of a tax decreases:
A)the deadweight loss from the tax declines
B)the deadweight loss from the tax remains constant
C)the deadweight loss from the tax increases
D)the deadweight loss could increase or decrease depending on the relative elasticities of demand and supply

Accepted Answer

As the size of a tax decreases, the deadweight loss from the tax declines. This is because a smaller tax means that consumers and producers can adjust their behavior and transactions to a lesser extent, resulting in less distortion in market outcomes. Therefore, the reduction in the tax leads to a reduction in the amount of deadweight loss incurred.

Question 16

The Laffer curve:
A)relates income tax rates to total income taxes collected
B)was so ridiculous that economists took it as a joke, hence the name, Laffer Curve
C)relates tax rates to deadweight welfare losses
D)relates government welfare payments to the birth rate

Accepted Answer

The Laffer curve shows the relationship between tax rates and total income taxes collected. It suggests that beyond a certain point, as tax rates increase, government revenue will actually decrease because high taxes discourage work and investment, leading to lower economic output and ultimately less taxable income.

Question 17

When the size of a tax is doubled, the deadweight loss from the tax:
A)increases by the size of the tax
B)doubles
C)remains constant
D)increases by four times

Accepted Answer

The deadweight loss from a tax increases with the square of the size of the tax. Therefore, if the size of the tax is doubled, the deadweight loss increases by four times.

Question 18

If the government tripled the taxes on new cameras, the deadweight loss from the camera tax would:
A)more than triple
B)triple
C)increase by less than triple
D)be unchanged

Accepted Answer

When taxes are increased, the deadweight loss increases as well. However, the increase in deadweight loss is not directly proportional to the increase in taxes. In this case, tripling the taxes on new cameras would likely result in a more than triple increase in deadweight loss, as consumers may choose to forgo purchasing cameras altogether, leading to a larger loss in consumer surplus and producer surplus.

Question 19

The greater the social pressure for mothers to be housekeepers and stay out of the labour force the:
A)more elastic the supply of labour
B)less elastic the supply of labour
C)flatter the labour supply curve
D)greater the reduction in output caused by a tax on labour

Accepted Answer

The greater the social pressure for mothers to be housekeepers and stay out of the labour force, the less elastic the supply of labour will be. This is because women are less likely to enter the labour force if they feel it goes against societal expectations or if they will face discrimination and difficulty balancing their work and home life. As a result, the labour supply curve becomes less responsive to changes in wages or other incentives.

Question 20

If the supply of land is fixed, a tax on land would be paid:
A)entirely by the landowners
B)entirely by the renters or users of the land
C)partly by landowners and partly by land users
D)only by workers

Accepted Answer

If the supply of land is fixed, a tax on land would be paid entirely by the landowners because they have no choice but to pay the tax as the supply of land is fixed and they cannot decrease their supply to avoid the tax. Therefore, they will pass on the tax burden to the renters or users of the land by increasing the rent or price of the land.

Quiz 8: Application: the Costs of Taxation

According to the famous economist Milton Friedman, the 'least bad' tax is a tax on:

The marginal tax rate on labour income for many workers in Australia is almost:

The higher a country's tax rates, the more likely that country will be:

Suppose supply is perfectly inelastic, while demand is relatively elastic.A tax of $1.00 is levied on the purchasers of the good.Which of the following statements is correct?

Assume that the demand for salt is relatively inelastic and the demand for orange juice is relatively elastic.Compared to the deadweight loss from the same percentage tax on orange juice, the deadweight loss from imposing a tax on salt would be:

Taxes on labour encourage all of the following, except:

Studies indicate that if income tax rates in Sweden had been reduced, income tax collections would have:

A tax on land:

Economists generally agree that the most important tax in the Australian economy is the tax on:

The less freedom people are given to choose the date of their retirement the:

The 'underground' economy includes:

The Laffer curve indicates that income tax collections:

'Assume that the supply of forest products is relatively inelastic and the supply of coffee is relatively elastic'.According to this statement, a tax levied on coffee will cause the loss of producer surplus to be:

Since the amount of land is fixed, the total supply of land is:

As the size of a tax decreases:

The Laffer curve:

When the size of a tax is doubled, the deadweight loss from the tax:

If the government tripled the taxes on new cameras, the deadweight loss from the camera tax would:

The greater the social pressure for mothers to be housekeepers and stay out of the labour force the:

If the supply of land is fixed, a tax on land would be paid: