Deck 16: Efficient and Equitable Taxation

Question 1

Optimal commodity taxation would

A)put a tax on leisure time,which is currently untaxed.
B)have the smallest amount of excess burden possible for a given amount of tax revenue.
C)optimize tax rates on the wealthiest Americans.
D)eliminate tax evasion in the United States.

Answer 1

have the smallest amount of excess burden possible for a given amount of tax revenue.

Question 2

Tax avoidance is

A)illegal in the United States.
B)changing your behavior so as to reduce your tax liability.
C)the same as tax evasion.
D)a minor source of concern in the United States.

Answer 2

changing your behavior so as to reduce your tax liability.

Question 3

Natural monopolies have U-shaped cost curves.

Answer 3

False

Question 4

A situation in which the government cannot implement an optimal tax policy because the policy is inconsistent with the government's incentives over time is known as

A)government tax problem.
B)time inconsistency of optimal policy.
C)the double?counting game.
D)Wagner's Law.

Question 5

Average cost pricing is found

A)when supply equals demand.
B)when AC = MR.
C)when P = 0.
D)where AC = AR.

Question 6

-Refer to Figure 16.3 .When the MC_z line crosses the D_z line,profits for the firm are

A)0.
B)greater than 1.
C)less than 0.
D)( $\infty$ ).

Question 7

The Ramsey Rule implies that goods be __________ in consumption.

A)unrelated
B)equal
C)opposite
D)moderate

Question 8

Horizontal equity incorporates the notion that

A)those earning higher incomes should pay more in taxes.
B)those earning equal incomes should pay the same in taxes.
C)taxes paid should be unassociated with income levels.
D)there should be no excess burden created by a tax.

Question 9

Vertical equity incorporates the notion that

A)those earning higher incomes should pay more in taxes.
B)those earning equal incomes should pay the same in taxes.
C)taxes paid should be unassociated with income levels.
D)there should be no excess burden created by a tax.

Question 10

Choosing optimal user fees for government produced services is similar to choosing optimal taxes.

Question 11

A natural monopoly has

A)many producers of the same product.
B)easy access to the market.
C)a single firm providing the industry's output.
D)one buyer of output.

Question 12

Income is a poor measure of relative position when attempting to determine horizontal equity.

Question 13

The idea of two individuals being equally well off in the absence and existence of taxation is

A)time consistency of optimal taxation.
B)flat tax income schedule.
C)benefits received principle.
D)utility definition of horizontal equity.

Question 14

Neutral taxation is taxing different commodities at the same tax rate.

Question 15

Deciding to engage in tax evasion requires consideration of all of the following,except the

A)probability of being caught.
B)probability of conviction if caught.
C)probability of winning extra money.
D)costs of defending oneself.

Question 16

"For goods that are unrelated in consumption,efficiency requires that tax rates be inversely proportional to elasticities." This is the definition of

A)the benefits-received principle.
B)the Ramsey Rule.
C)the second best principle.
D)the inverse elasticity rule.

Question 17

When the minimum marginal penalty for tax evasion is greater than the maximum marginal tax rate,theory suggests that tax evasion will be

A)greater than 1.
B)( $\infty$ ).
C)0.
D)100.

Question 18

A linear income tax schedule is known as

A)a flat income tax.
B)a regressive tax.
C)a Haig-Simons tax.
D)a user fee.

Question 19

Tax evasion is

A)an illegal act.
B)prevalent in the United States.
C)failing to pay legally due taxes.
D)all of the above.

Question 20

A time endowment is

A)the number of hours in a day.
B)a gift of time that a person receives.
C)the maximum number of hours in a year that a person can work.
D)the largest amount of time that can be spent at leisure.
E)all of the above.

Question 21

In 2009,President Obama proposed raising the income tax on those making over $250,000 per year.Discuss the merits of this plan.

Question 22

Suppose the demand for good X can be represented by the following equation: X_d = 22-(1/4)P.Furthermore,suppose that the demand for good Y can be represented by Y_d = 50-P.
(A)Find the elasticity of demand for both good X and good Y when the price is $10.
(B)Suppose that an ad valorem tax is placed on both goods.Good Y is taxed at a rate of 5%.To ensure that the inverse elasticity rule holds,what must be the rate at which good X is taxed?
Reminder: Elasticity at a given price is found using the formula $\varepsilon$ = -(1/S)(P/X),where S is the slope of the demand curve,X is the quantity demanded,and P is the price.

Question 23

Changing tax regimes can sometimes be difficult and lead to inequities.

Question 24

One of the conditions mentioned in our formulation of the Ramsey Rule is that goods be unrelated in consumption.Do you think this is a reasonable assumption? If this condition does not hold,will the Ramsey Rule still work?

Question 25

Refer to the figure below.If the equation of MC of unreported income is MC = 4 + 2X,and the MB of unreported income is MB = 44 - 3X,what will be the amount of unreported income? How much of a change will there be if enforcement becomes more strict,resulting in MC = 9 + 2X?

Question 26

It is easier to under-report income in industries that deal with a lot of cash.

Question 27

Ms.Mahmood is a retired schoolteacher whose pension income is $25,000 per year.She also receives Social Security income of $5,000 per year.Mr.Little is a young man who does not choose to work.He inherited $600,000 from his Aunt Clara,which he invested in a bond fund that provides a 5 percent return,generating $30,000 income per year.If we are concerned about the equity of taxation,should we consider these two people as equals and tax them equally? Explain why or why not.

Question 28

Natural monopolies occur when a single or a few firms can take advantage of economies of scale and supply the entire industry output.

Question 29

If a tax is efficient,it will necessarily be equitable.

Question 30

Refer to Figure 16.1 in your textbook.Assume that the equation of D_x is P = 50 - 2Q_d.
(A)If the original price of the good was $10 and a $4 tax was imposed,what is the tax income? What is the excess burden?
(B)How much marginal excess burden will be created if an additional dollar of tax is levied?
(C)How much additional tax is collected?

Question 31

Working fewer hours to reduce your tax burden is tax evasion.

Question 32

Refer to Figure 16.5 in your textbook.If the marginal cost of underreporting can be written as MC = X² + 0.4.
(A)What is the maximum marginal tax level (t)possible that will ensure tax evasion is zero?
(B)If the Marginal Tax rate is equal to 0.56,how much income will be evaded?

Question 33

Optimal user fees are paid only by the consumers of the good or service produced.

Question 34

Consider a monopolist that has a total cost curve of TC=110Q - (0.25)Q².The market demand equation is Q_d = 155 - P.
(A)What are the total revenue,marginal revenue,marginal cost,equilibrium quantity,equilibrium price,and profits for the monopolist in this market?
(B)Suppose the government instructs the firm to produce using average cost pricing.What are the equilibrium quantity,equilibrium price,and profits?
(C)Suppose further that the government wants the firm to produce where supply equals demand.What will be the equilibrium quantity,equilibrium price,and profits?