Question 1

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

Accepted Answer

The marginal tax rate on labour income for many workers in Australia is almost 50 per cent, which means that for every extra dollar earned, almost 50 cents will go towards income taxes. However, it should be noted that the actual marginal tax rate may vary depending on factors such as income level, deductions, and other factors.

Question 2

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

Accepted Answer

According to Milton Friedman, a tax on the value of unimproved land is the 'least bad' tax because it does not distort economic behaviour and does not discourage productivity. This is because the supply of land is fixed, and so taxing it does not affect the amount of land available for production. Additionally, since land values are determined by location and natural resources, taxing land values is less likely to discourage investment and entrepreneurship compared to other forms of taxation.

Question 3

As the size of a tax decreases:

Accepted Answer

As the size of a tax decreases, it creates less of a distortion in the market and reduces the incentive for consumers and producers to change their behavior. This results in a smaller deadweight loss from the tax.

Question 4

If the labour supply curve is nearly vertical:

Accepted Answer

A nearly vertical labour supply curve indicates that the quantity of labour supplied is relatively unresponsive to changes in wages. Therefore, a tax on labour would have a small deadweight loss and little impact on the amount of work labour is willing to do.

Question 5

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

Accepted Answer

A tax on land is a type of property tax that is imposed on the owners of the land. Landowners are the only ones who can pass on the cost of the tax to their tenants or users of the land. However, the amount of the tax cannot be passed on fully, since it is limited by the competition in the rental or user market. Therefore, the tax burden falls entirely on the owners of the land.

Question 6

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

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 7

The Laffer curve:

Accepted Answer

The Laffer curve is a graphical representation of the relationship between tax rates and the total amount of tax revenue collected by the government. It suggests that there is a point at which increasing tax rates will lead to a decrease in tax revenue due to decreased incentives for individuals and businesses to work and invest.

Question 8

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

Accepted Answer

If people have less freedom to choose their retirement date, then the supply of labour becomes less elastic. This is because people are constrained to work for a certain period of time, which means that they are less likely to respond to changes in the labour market, such as changes in wages or working conditions. As a result, the labour supply curve becomes less sensitive to changes in the wage rate, and becomes less elastic.

Question 9

The 'underground' economy includes:

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 10

Taxes on labour encourage all of the following, except:

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 11

A tax on land:

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 12

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

Accepted Answer

Studies indicate that if income tax rates are lowered, people are more likely to work harder and earn more, leading to an increase in income tax collections. Therefore, if income tax rates in Sweden had been reduced, income tax collections would have risen.

Question 13

The Laffer curve indicates that income tax collections:

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 14

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

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 15

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

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 16

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

Accepted Answer

The amount of land is fixed, meaning that it cannot be changed in response to changes in demand or price. This makes the supply of land perfectly inelastic.

Question 17

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:

Accepted Answer

The deadweight loss from imposing a tax is proportional to the price elasticity of demand. Because the demand for salt is relatively inelastic, a tax on salt would cause a relatively smaller decrease in the quantity demanded and a relatively smaller deadweight loss compared to a tax on orange juice, which has a relatively elastic demand. Therefore, the deadweight loss from imposing a tax on salt would be lesser than the deadweight loss from the same percentage tax on orange juice.

Question 18

'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:

Accepted Answer

An inelastic supply implies that producers are unable to increase the quantity supplied even if the price increases. In the case of forest products, a tax would not deter producers from supplying the product, resulting in a relatively small loss of producer surplus. However, the elastic supply of coffee means that producers can easily increase the quantity supplied in response to an increase in price. Therefore, a tax on coffee will cause a relatively large loss of producer surplus as producers reduce the quantity supplied due to increased costs.

Question 19

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

Accepted Answer

This is because when taxes are tripled, the price of the cameras will also increase. As a result, consumers will reduce their purchases of cameras, causing a decrease in market activity and a greater loss of consumer and producer surplus. This increase in deadweight loss will be more than proportional to the increase in taxes.

Question 20

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

Accepted Answer

When there is greater social pressure for mothers to be housekeepers and stay out of the labour force, it implies that the labour supply is less elastic. This is because social norms and expectations restrict the number of individuals who are willing to join the labour force. As a result, a change in the wage rate will have a smaller impact on the number of individuals entering or leaving the workforce.

Quiz 8: Application: The Costs of Taxation