Economics 251

Review Questions Chapter 33 – Taxes: Equity versus Efficiency

(1) If the area between the diagonal line and the Lorenz curve were greater for the United States than for Japan, we could conclude:

(a) the distribution of income in Japan is more equal than the United States.

(b) the distribution of income in Japan is less equal than the United States.

(c) the distribution of income in Japan is as equal as in the United States.

(d) the relative distribution of income between the two countries is the same.

(2) The marginal tax rate indicates:

(a) changes in the average tax rate as income increases.

(b) the tax rate imposed on total income.

(c) the tax rate imposed on taxable income.

(d) what percent of the last dollar of income is paid in taxes.

(3) In general, lower marginal tax rates provide incentives to:

(a) work less.

(b) produce more.

(c) invest less.

(d) All of the above.

(4) If an individual is taxes at a 30 percent rate for each extra dollar earned, the reference is to the:

(a) marginal tax rate.

(b) nominal tax rate.

(c) average tax rate.

(d) effective tax rate.

(5) To make a tax more progressive, policy makers could:

(a) raise marginal tax rates for higher incomes.

(b) narrow the tax base.

(c) allow interest expenses to be deductible, not just interest on mortgages.

(d) All of the above.

(6) High marginal tax rates can:

(a) reduce work effort.

(b) reduce government tax receipts.

(c) reduce the rate of saving.

(d) All of the above.

(7) Assume that the marginal tax rate is 10% for the first $15,000 of income, 20% for income between $15,000 and $45,000, and 30% for any income over $45,000. If Ms. Brown had taxable income equal to $62,000 for 2001, what was her tax bill?

(a) $7,500

(b) $17,500

(c) $12,600

(d) $18,000

(8) If a lawyer makes $100,000 and pays $5,000 in taxes on a taxable income of $50,000, while a teacher makes $25,000 and pays $4,000 in taxes on a taxable income of $20,000, this is and example of:

(a) a progressive tax system.

(b) horizontal inequity.

(c) constant marginal tax rates.

(d) vertical inequity.

(9) In Question (8), what is the teacher’s effective tax rate?

(a) 25%

(b) 8%

(c) 20%

(d) 80%

(10) In Question (8), what is the lawyer’s nominal tax rate?

(a) 5%

(b) 10%

(c) 50%

(d) 8%

(11) A flat tax is:

(a) a tax system in which tax rates rise as income rises.

(b) a tax system in which tax rates are constant.

(c) a tax system in which tax rates fall as income rises.

(d) the tax rate imposed on the last dollar of income.

(12) According to Figure 1, what is the cost to the firm after the imposition of the payroll tax, and how many workers will be hired?

(a) W(1) and L(1)

(b) W(2) and L(1)

(c) W(3) and L(1)

(d) W(2) and L(2)

(13) According to Figure 1, what is the wage rate received by workers after the imposition of the payroll tax?

(a) W(1)

(b) W(2)

(c) W(3)

(d) None of the above.

(14) According to Figure 1, what is the burden of the tax on the workers?

(a) The wage reduction from W(1) to W(2).

(b) The wage reduction from W(2) to W(3).

(c) The wage reduction from W(1) to W(3).

(d) None of the above.

(15) According to Figure 1, what is the burden of the tax on employers?

(a) The wage increase from W(3) to W(2).

(b) The wage increase from W(2) to W(1).

(c) The wage increase from W(3) to W(1).

(d) None of the above.

Utilize Figure 1 to answer Questions (12) to (15).

Figure 1

Quantity of

Labor

L(1) L(2)