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Chapter 6: Funding the Public Sector
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.
The main source of government funding is
A.
B.
C.
D.
user fees.
taxes.
borrowing.
transfer payments.
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.
Suppose the tax rate on the first $10,000 income is 0
percent; 10 percent on the next $20,000; 20 percent on
the next $20,000; 30 percent on the next $30,000; and
40 percent on any income over $80,000. Family A has
income of $40,000 and Family B has income of
$100,000. What is the marginal and average tax rate for
each family?
A. Family A: marginal 10 percent; average 10 percent;
Family B: marginal 30 percent; average 30 percent.
B. Family A: marginal 20 percent; average 10 percent;
Family B: marginal 40 percent; average 23 percent.
C. Family A: marginal 20 percent; average 20 percent;
Family B: marginal 40 percent; average 40 percent.
D. Family A: marginal 20 percent; average 15 percent;
Family B: marginal 40 percent; average 20 percent.
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.
A tax rate system characterized by higher marginal
tax rates as income increases is known as
A.
B.
C.
D.
a progressive tax system.
a regressive tax system.
a proportional tax system.
a flat-rate tax system.
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.
The average tax rate can be calculated by which of
the following formulas?
A. the change in taxes due divided by the change
in taxable income
B. the change in taxable income divided by the
change in taxes due
C. total taxes due divided by total taxable income
D. total taxable income divided by total taxes due
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.
Suppose the capital gains tax is 28 percent and
you purchased a house ten years ago for $80,000.
If you sold the house today you would get
$140,000. Your tax liability would be
A.
B.
C.
D.
$39,200.
$16,800.
indeterminate without knowing the inflation rate.
indeterminate without knowing the personal
income tax rate.
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.
Tax incidence refers to
A. determining who sends the taxes into the
government.
B. the tendency of some people to avoid paying
taxes at all.
C. the distribution of tax burdens among groups,
or who really pays a tax.
D. determining the marginal tax rate applied to any
increase in income.
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.
State and local governments receive most of their
revenue from
A. sales and excise taxes, revenue from the
federal government, and property taxes.
B. individual income taxes, social insurance
contributions, and property taxes.
C. corporate income taxes, property taxes, and
personal income taxes.
D. property taxes, sales and excise taxes, and
Social Security contribution.
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.
Which of the following is NOT an important source
of revenue for the federal government?
A.
B.
C.
D.
individual income taxes
property taxes
social insurance taxes and contributions
corporate income taxes
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.
For all earnings subject to Social Security taxes,
what is the current Social Security tax rate?
A.
B.
C.
D.
0.8%
2.9%
6.2%
9.1%
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.
Dynamic tax analysis is based on the recognition
that as tax rates are increased,
A. tax revenue collections will eventually decline.
B. tax revenue collections will continually
increase.
C. tax revenue collections will change at the same
rate as the tax rates.
D. tax revenue collections will increase at a faster
rate than the tax rate change.
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.
A 2 percent tax is going to be applied to a
$100,000 tax base. What can be said about the
revenue collected assuming static tax analysis?
A. The total revenue will be zero.
B. The total revenue will be between $0 and
$2,000.
C. The total revenue will be $2,000.
D. There is not enough information to determine
what revenues will equal.
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.
A local government currently has a tax base of $4
billion and a tax rate of 5 percent. If the tax rate is
increased to 6 percent, the tax base will decrease
to $3.2 billion. If the goal is to maximize tax
revenues the tax rate should be
A.
B.
C.
D.
raised above 6 percent.
kept at 5 percent.
raised to 6 percent.
abolished.
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.
Refer to the figures below. Which panel represents
the expected relationship between tax revenue
and the sales tax rate if static tax analysis is used?
A.
B.
C.
D.
Panel 1
Panel 2
Panel 3
Panel 4
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.
According to dynamic tax analysis, continually
increasing the tax rate will eventually
A.
B.
C.
D.
cause an increase in the tax base.
have no impact on the tax base.
cause a decrease in the tax base.
result in an initial decrease in the tax base
followed ultimately by a rise in the tax base.
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.
Unit excise taxes imposed on gasoline, alcohol,
and cigarettes are
A. largely paid by the producers because they
want to maintain their level of sales.
B. largely paid by consumers because they are
not very responsive to price changes.
C. shared equally between the producer and the
consumer.
D. paid by the wholesalers of these products.
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.
A unit tax
A. is based on the value of the good being sold.
B. is a constant tax assessed on each unit of a
good sold.
C. is the primary tax studied in dynamic tax
analysis.
D. does not influence equilibrium price and
quantity.
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.
Refer to the figures below. A unit tax of $2 has
been levied on a good. Which of the panels depict
the effect of the taxes?
A.
B.
C.
D.
Panel 1
Panel 2
Panel 3
None of the diagrams
reflect the effect of the
tax.
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.
Refer to the above figure. A unit tax has been
placed on the good. The consumer pays what
amount of the tax?
A.
B.
C.
D.
None of the tax.
P2 – P0
P2 – P1
P1 – P0
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.
Which of the following statements about excise
taxes is TRUE?
A. The producer will increase the price of the good
by the amount of the excise tax.
B. The equilibrium price will increase and the
equilibrium quantity will remain unchanged.
C. Both the consumer and producer pay part of
the excise tax.
D. Consumers will refuse to pay excise taxes
forcing the producers to pay it.
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.
Refer to the figure below. An excise tax of $0.50
was imposed on this good. From the figure we can
see that the
A. producer will bear most of
the tax.
B. consumer will bear most of
the tax.
C. consumer and producer
will share the tax.
D. amount of the tax collected
is less than $0.50.
Roger LeRoy Miller
Economics Today, Sixteenth Edition
© 2012 Pearson Addison-Wesley. All rights reserved.

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