ECO 450 Week 9 Quiz – Strayer

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Quiz 7 Chapter 13 and 14

C H A P T E R 1 3

The Theory of Income Taxation

TRUE /FALSE QUESTIONS

1. The actual federal income tax currently taxes all income irrespective of its source or use at the same tax rate. 

2. Comprehensive income excludes unrealized capital gains. 

3. Under a comprehensive income tax, transfer payments received by Social Security recipients would be fully taxable. 

4. Homeowners earn rental income-in-kind from their home that would be taxable under a comprehensive income tax. 

5. A comprehensive income tax is a lump-sum tax. 

6. A comprehensive income tax will result in a divergence between gross wages paid by employers and net wages received by workers. 

7. A comprehensive income tax will always reduce work effort by taxpayers. 

8. The substitution effect of a tax-induced decline in wages always leads workers to work less. 

9. The market wage elasticity of labor is zero. If this is the case, the excess burden of a tax on labor income will also be zero. 

10. Points on a compensated labor supply curve are always more elastic than points for corresponding wage levels on a regular labor supply curve. 

11. Comprehensive income is the sum of annual consumption and the change in net worth. 

12. A tax on interest income does not prevent credit market from efficiently allocating resources. 

13. If an individual is subject to a 30-percent income tax, then the net interest on a certificate of deposit yielding 5 percent would be 3.5 percent after taxes. 

14. Because a tax on interest income results in income and substitution effects, it is not possible to predict the effect it will have on saving. 

15. Most empirical studies indicate that the interest elasticity of supply of savings is close to zero. 

16. Income tax became a permanent fixture in the United States starting in the early nineteenth century.

17. The Haig-Simons definition of income is different from comprehensive income.

18. Comprehensive income equals consumption plus the change in net worth.

MULTIPLE CHOICE QUESTIONS

1. Comprehensive income:a. is the sum of annual consumption and realized capital gains.b. is the sum of annual consumption and changes in net worth.c. excludes corporation income.d. is the sum of annual consumption and net worth.

2. A tax on labor income:a. results only in an income effect that always decreases hours worked per

year.b. results in a substitution effect that always decreases hours worked per

year.c. results in an income effect that increases hours worked per year if

leisure is a normal good.d. both (a) and (b)e. both (b) and (c)

3. The market supply of labor is perfectly inelastic. Then it follows that:a. the substitution effect of wage changes is zero.b. the income effect of wage changes is zero.c. leisure is a normal good and the income effect of wage changes exactly

offsets the substitution effect.d. the excess burden of a tax on labor income will be zero.

4. The compensated labor supply curve:a. will always be vertical.b. will always be upward sloping.c. will always be downward sloping.d. reflects both the income and substitution effects of wage changes.

5. Using a regular labor supply curve instead of a compensated supply curve to calculate the excess burden of a tax on labor income will:a. result in an accurate estimate of the excess burden.b. overestimate the excess burden.c. underestimate the excess burden.d. accurately estimate the excess burden only if the market supply of labor

is perfectly inelastic.

6. Most empirical research indicates that the market supply curve of labor hours by prime-age males is:a. very elastic.b. almost perfectly inelastic.c. always upward sloping.d. perfectly elastic.

7. A flat-rate tax on labor income will:a. always reduce hours worked per year.b. always increase hours worked per year.c. either increase or decrease hours worked per year.d. never have any effect on the amount of leisure hours per year.

8. A tax on interest income:a. causes the gross interest rate paid by investors to exceed the net interest

rate received by savers.b. will always reduce saving.c. will always increase saving.d. is equivalent to a lump-sum tax.

9. If the market supply curve of savings is upward sloping, a tax on interest income will:a. increase the amount of saving.b. increase the market rate of interest.c. decrease the market rate of interest.d. have no effect on the market rate of interest.

10. If the supply of labor is perfectly inelastic, then the incidence of a payroll tax levied entirely on employers will be:a. borne by employers as a reduction in profits.b. split between workers and employers.c. paid entirely by workers.d. shifted forward to consumers.

11. Which of the following is true about comprehensive income?a. Only labor income is included.b. Only capital income is included.c. Capital gains are not included.d. Both realized and unrealized capital gains are included.

12. Which of the following will increase a person’s comprehensive income?a. an increase in the market value of the person’s homeb. a decrease in the value of the person’s stock portfolioc. a decrease in labor incomed. a decrease in consumption

13. A tax on labor income will:a. increase the net wage received by workers.b. decrease the net wage received by workers.c. cause that net wage received by workers to decline below the gross

wage paid by employers.d. both (b) and (c)

14. If the return to savings, r, is subject to taxation at rate t, then in equilibrium a saver’s marginal rate of time preference will equal:

a. rb. tc. (1 + r)d. [1 + r(1 – t)]

15. The higher the compensated elasticity of supply of savings,a. the lower the excess burden of a tax on capital income.b. the higher the excess burden of a tax on capital income.c. the higher the excess burden of a tax on labor income.d. both (b) and (c)

16. The Haig-Simons definition of income:a. is the sum of annual consumption and realized capital gains.b. is the sum of annual consumption and changes in net worth.c. excludes corporation income.d. is the sum of annual consumption and net worth.

17 Comprehensive income:a. includes realized capital gains, but not unrealized capital gainsb. includes both realized and unrealized capital gains.c. excludes cash from the sale of assets.d. excludes increases in the value of assets.

18. Income-in-kind:a. is exemplified by nonpecuniary returns.b. is generally non-taxable because there is no monetary transaction.c. is generally taxable.d. both (a) and (b).

19. An example of a nonpecuniary return is:a. job satisfaction.b. unemployment benefits.c. employer contributions to a retirement plan.

d. both (b) and (c).

20. Income from labor services (wages) account for what percentage of gross income in the U.S.?a. 90%b. 75%c. 60%d. 50%

C H A P T E R 1 4

Taxation of Personal Incomein the United States

TRUE /FALSE QUESTIONS

1. Taxable income in the United States exceeds adjusted gross income. 

2. Taxable income in the United States includes all capital gains earned, whether or not they are realized. 

3. Taxable income in the United States amounts to less than 50 percent of personal income. 

4. Tax preferences are really subsidies to certain activities. 

5. A tax deduction allowed for an activity for which positive externalities are not likely to exist (such as home ownership) is likely to cause the marginal social cost of the activity to exceed its marginal social benefit. 

6. The value of a personal exemption to a taxpayer varies with his or her marginal tax rate. 

7. The U.S. personal income tax is not a progressive tax. 

8. The highest statutory marginal tax rate under the federal personal income tax is 50 percent. 

9. Under current rules, only real interest earned is subject to income tax. 

10. Realized, long-term capital gains that reflect inflation are currently exempt from taxation. 

11. The tax base under the personal income tax in the United States is the Haig-Simons definition of comprehensive income. 

12. Tax credits vary with a person’s marginal tax rate. 

13. The cuts in marginal tax rates initiated in 2001 are likely to reduce the excess burden of tax preferences. 

14. The earned income tax credit is a negative tax the subsidizes the earnings of low-income workers. 

15. If a progressive income tax is replaced with an equal-yield, flat-rate tax, then work effort will unequivocally increase. 

16. As of 2009, there is no marriage penalty for an adjusted gross income of $60,000.

17. Tax preferences are exclusions, exemptions, and deductions from the tax base.

18. Income-in-kind is not considered a tax preference.

MULTIPLE CHOICE QUESTIONS

1. Adjusted gross income, as defined by the United States Tax Code,a. exceeds taxable income.b. equals taxable income.c. is less than taxable income.d. is greater than comprehensive income.

2. Tax preferences:a. are exclusions, exemptions, and deductions from the tax base.b. are in the tax code by accident.c. are extra taxes on certain taxpayers.d. increase the amount of income that is taxable.e. both (a) and (d)

3. Currently, the tax treatment of capital gains in the United States is such that:a. all capital gains are taxed.b. all realized capital gains are taxed.c. most realized capital gains are taxed.d. only capital gains adjusted for inflation are taxed.

4. The exclusion of interest of state and local bonds from taxation by the federal government:a. decreases interest costs for state and local governments.b. increases interest costs for state and local governments.c. benefits lower-income taxpayers more than upper-income taxpayers.d. discourages borrowing by local governments.

5. The value of personal exemptions in terms of taxes saved:a. is the same for all taxpayers.b. varies with family size.

c. varies with taxpayers’ marginal tax rates.d. both (b) and (c)

6. A taxpayer is in a 33-percent tax bracket and itemizes deductions. He obtains a mortgage from a bank at 9-percent interest. The actual rate of interest he pays is:a. 6 percent.b. 9 percent.c. 20 percent.d. 25 percent.

7. Tax expenditures are:a. expenditures made to collect taxes.b. losses in revenue due to tax preferences.c. less than 1 percent of tax revenue.d. both (b) and (c)

8. Under the federal personal income tax rules prevailing as of 2009,a. all interest expense is tax deductible.b. the interest expense for mortgages on first and second homes is tax

deductible.c. the interest expense for mortgages only on first homes is tax deductible.d. no interest is tax deductible.

9. The reduction in marginal tax rates will:a. increase the excess burden of tax preferences.b. increase tax expenditures.c. decrease the excess burden of tax preferences.d. have no effect of tax expenditures.

10. “Bracket creep” is no longer a problem in the United States because:a. the tax brackets are indexed.b. capital gains are now fully taxable.c. only real interest is taxed.d. capital gains are indexed.

11. Which of the following is true for the federal income tax in the United States?a. All income irrespective of its source or use is taxed at the same rate.b. Comprehensive income is the tax base.c. The tax base is less than 50 percent of comprehensive income.d. All realized and unrealized capital gains are included in the tax base.

12. Because of the Earned Income Tax Credit, the effective tax rate for the lowest-income taxpayers in the United States is:a. only 15 percent.b. higher than that paid by upper-income taxpayers.c. zero.d. negative.

13. The excess burden of tax preferences:a. depends on average tax rates.b. will be higher, the higher the marginal tax rate is.c. will be lower, the higher the marginal tax rate is.d. is independent of marginal tax rates.

14. A shift to an equal-yield, flat-rate personal income tax from the current progressive income tax rate structure will:a. reduce the tax burden on upper-income groups.b. increase the tax burden on upper-income groups.c. increase the share of taxes paid by lower-income groups.d. both (a) and (c)

15. Removing savings from the tax base of the personal income tax is likely to:a. increase work effort.b. decrease work effort.c. lower market equilibrium interest rates by increasing the supply of

loanable funds.d. increase market equilibrium interest rates, thereby increasing the

demand for loanable funds.

16. Which is a justification for tax preferences?a. administrative difficultiesb. improving equityc. encouraging private expenditures that create external benefitsd. all of the above

17. If the excess burden from tax is $10 million, lowering marginal tax rates should make the excess burden:a. more than $10 million.b. less than $10 million.c. remain at $10 million.d. none of the above is certain to occur

18. Which of the following is the result of The Economic Growth and Tax Relief Reconciliation Act enacted in 2001?a. reduction of the highest marginal tax rateb. increased the marriage penaltyc. created a new 40% tax bracketd. both (a) and (c)

19. As of 2009, the highest marginal tax rate is:a. 39.6%b. 38%c. 35%d. 32.5%

20. Which is an example of an itemized deduction under the U.S. code as of 2009?a. state and local income taxb. state and local property taxc. all medical expensesd. both (a) and (b)