1. Chapter 6: Funding the Public Sector

2. The main source of government funding is
user fees.
taxes.
borrowing.
transfer payments.
Answer: B

3. 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?
Family A: marginal 10 percent; average 10 percent; Family B: marginal 30 percent; average 30 percent.
Family A: marginal 20 percent; average 10 percent; Family B: marginal 40 percent; average 23 percent.
Family A: marginal 20 percent; average 20 percent; Family B: marginal 40 percent; average 40 percent.
Family A: marginal 20 percent; average 15 percent; Family B: marginal 40 percent; average 20 percent.
Answer: B

4. a progressive tax system. a regressive tax system.
A tax rate system characterized by higher marginal tax rates as income increases is known as
a progressive tax system.
a regressive tax system.
a proportional tax system.
a flat-rate tax system.
Answer: A

5. the change in taxes due divided by the change in taxable income
The average tax rate can be calculated by which of the following formulas?
the change in taxes due divided by the change in taxable income
the change in taxable income divided by the change in taxes due
total taxes due divided by total taxable income
total taxable income divided by total taxes due
Answer: C

6. indeterminate without knowing the inflation rate.
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
$39,200.
$16,800.
indeterminate without knowing the inflation rate.
indeterminate without knowing the personal income tax rate.
Answer: B

7. Tax incidence refers to
determining who sends the taxes into the government.
the tendency of some people to avoid paying taxes at all.
the distribution of tax burdens among groups, or who really pays a tax.
determining the marginal tax rate applied to any increase in income.
Answer: C

8. State and local governments receive most of their revenue from
sales and excise taxes, revenue from the federal government, and property taxes.
individual income taxes, social insurance contributions, and property taxes.
corporate income taxes, property taxes, and personal income taxes.
property taxes, sales and excise taxes, and Social Security contribution.
Answer: A

9. individual income taxes property taxes
Which of the following is NOT an important source of revenue for the federal government?
individual income taxes
property taxes
social insurance taxes and contributions
corporate income taxes
Answer: B

10. For all earnings subject to Social Security taxes, what is the current Social Security tax rate?
0.8%
2.9%
6.2%
9.1%
Answer: C

11. tax revenue collections will eventually decline.
Dynamic tax analysis is based on the recognition that as tax rates are increased,
tax revenue collections will eventually decline.
tax revenue collections will continually increase.
tax revenue collections will change at the same rate as the tax rates.
tax revenue collections will increase at a faster rate than the tax rate change.
Answer: A

12. The total revenue will be zero.
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?
The total revenue will be zero.
The total revenue will be between $0 and $2,000.
The total revenue will be $2,000.
There is not enough information to determine what revenues will equal.
Answer: C

13. 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
raised above 6 percent.
kept at 5 percent.
raised to 6 percent.
abolished.
Answer: B

14. Refer to the figures below
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?
Panel 1
Panel 2
Panel 3
Panel 4
Answer: A

15. cause an increase in the tax base. have no impact on the tax base.
According to dynamic tax analysis, continually increasing the tax rate will eventually
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.
Answer: C

16. Unit excise taxes imposed on gasoline, alcohol, and cigarettes are
largely paid by the producers because they want to maintain their level of sales.
largely paid by consumers because they are not very responsive to price changes.
shared equally between the producer and the consumer.
paid by the wholesalers of these products.
Answer: B

17. is based on the value of the good being sold.
A unit tax
is based on the value of the good being sold.
is a constant tax assessed on each unit of a good sold.
is the primary tax studied in dynamic tax analysis.
does not influence equilibrium price and quantity.
Answer: B

18. None of the diagrams reflect the effect of the tax.
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?
Panel 1
Panel 2
Panel 3
None of the diagrams reflect the effect of the tax.
Answer: A

19. Refer to the above figure. A unit tax has been placed on the good
Refer to the above figure. A unit tax has been placed on the good. The consumer pays what amount of the tax?
None of the tax.
P2 – P0
P2 – P1
P1 – P0
Answer: C

20. Which of the following statements about excise taxes is TRUE?
The producer will increase the price of the good by the amount of the excise tax.
The equilibrium price will increase and the equilibrium quantity will remain unchanged.
Both the consumer and producer pay part of the excise tax.
Consumers will refuse to pay excise taxes forcing the producers to pay it.
Answer: C

21. producer will bear most of the tax.
Refer to the figure below. An excise tax of $0.50 was imposed on this good. From the figure we can see that the
producer will bear most of the tax.
consumer will bear most of the tax.
consumer and producer will share the tax.
amount of the tax collected is less than $0.50.
Answer: B