Economics of Taxation Study Guide Questions
Course Introduction
Economics of Taxation explores the principles, policies, and impacts of taxation in modern economies. The course examines the rationale behind different types of taxes, the criteria for efficient and equitable tax systems, and the effects of tax policies on resource allocation, income distribution, and economic growth. Students will analyze tax incidence, behavioral responses to taxation, and the interactions between taxation and government spending. Case studies and comparative frameworks are used to understand real-world tax systems and contemporary policy debates, equipping students with analytical tools to critically assess the role of taxation in public finance and economic development.
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Public Finance 10th Edition by Harvey S. Rosen
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Page 2
Chapter 1: Introduction
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Q1) In a pure market economy,
A) there is no role for government.
B) government intervention might be needed.
C) large markets where people meet to buy and sell are required.
D) all of these answer options are correct.
Answer: B
Q2) Payroll taxes are a major financing tool at the federal level.
A) True
B) False
C) Uncertain
Answer: A
Q3) State and local governments receive the largest amount of revenue from A) personal income taxes.
B) property taxes.
C) sales taxes.
D) payroll taxes.
Answer: C
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Chapter 2: Tools of Positive Analysis
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Q1) Positive economics
A) does not depend on market interactions.
B) only looks at the best parts of the economy.
C) examines how the economy actually works (as opposed to how it should work).
D) is very subjective.
Answer: C
Q2) Economists attempt,with moderate success,to perform controlled experiments making policy analysis helpful.
A) True
B) False
C) Uncertain
Answer: A
Q3) Econometrics is the statistical analysis of economic data.
A) True
B) False
C) Uncertain
Answer: A
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Chapter 3: Tools of Normative Analysis
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Q1) When the First Fundamental Theorem of Welfare Economics doesn't hold,there is a market failure.
A) True
B) False
C) Uncertain
Answer: A
Q2) Merit goods
A) are provided for those who behave themselves and play nice.
B) should be provided even if there is no demand for them.
C) increase in costs along with demand.
D) none of these answer options are correct.
Answer: B
Q3) A public good is
A) a good that the public must pay for.
B) nonexcludable in consumption.
C) more costly than a private good.
D) paid for by the government.
Answer: B
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Chapter 4: Public Goods
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Q1) Vertical summation of demand curves yield results equivalent to those of horizontal summation.
A) True
B) False
C) Uncertain
Q2) Equilibrium for public goods is characterized by
A) MSB = MSB.
B) SMRS = MRT.
C) MRS<sub>1</sub> = MRS<sub>2</sub> = MRS<sub>3</sub> = = MRS<sub>n</sub> = MRT.
D) MC = MB.
E) MRS - MRT = MSB.
Q3) Public goods can be
A) provided privately.
B) provided publicly.
C) subject to free rider problems.
D) all of these answer options are correct.
Q4) Use the answer you found when adding market demand curves vertically in Question 18 above to find the market equilibrium quantity if the market supply is constant at 4 units.
6
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Chapter 5: Externalities
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Q1) As a general rule,zero pollution is not socially desirable because A) there would be no production.
B) the Environmental Protection Agency (EPA)needs to have something to do.
C) no pollution would lead to global warming.
D) all of these answer options are correct.
Q2) Why are command- and -control regulations less flexible than incentive based systems?
Q3) Pollution rights can be traded and are always efficient.
A) True
B) False
C) Uncertain
Q4) The private marginal benefit for commodity X is given by 15 - X,where X is the number of units consumed.The private marginal cost of producing X is constant at 10.In the absence of any government intervention,how much X is produced? What is the gain to society involved in moving from the inefficient to the efficient level of production?
Q5) List and discuss three problems that might arise when using the Coase theorem.
Q6) Which policy is more effective when handling externalities: Cap-and-trade or emissions fee?
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Chapter 6: Political Economy
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Q1) Rent seeking involves
A) finding reasonable rent rates.
B) price floors.
C) price ceilings.
D) citizen groups lobbying elected officials to manipulate government policy.
Q2) A deadweight loss is never
A) found when people are still living.
B) found when marginal benefits equal marginal costs.
C) found in open economies.
D) allowed in the U.S.
Q3) Government bureaucrats want larger budgets
A) because salaries are sometimes tied to budget size.
B) to fulfill an "empire building" tendency.
C) because it may be necessary to ensure marginal benefits of output equal marginal costs.
D) all of these answer options are correct.
Q4) Special interest groups are a determent to the political process.
A) True
B) False
C) Uncertain
Page 8
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Chapter 7: Education
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Q1) Human capital is increased when a firm makes investments that raise workers' productivity.
A) True
B) False
C) Uncertain
Q2) Refer to Table 7.1 below.By what percentage does real annual expenditures in public elementary and secondary schools rise between 1980 and 1985? Between 2005 and 2010? What can be said about the rate of change?
Q3) Does increasing reliance on student loans distort students' career choices?
Q4) Increases in spending on education will lead to an increase in student performance.
A) True
B) False
C) Uncertain
Q5) All students should go on to college.
A) True
B) False
C) Uncertain
Q6) Do you believe that class size reductions will help student performance?
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Chapter 8: Cost-Benefit Analysis
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Q1) Suppose in a certain city the demand for low-cost housing can be characterized by the equation P = 500 - 2Q,where Q is housing measured in square feet.Further,suppose that supply is characterized by the equation: P = 25 + 3Q.Suppose that the government feels that the grant is not enough and,in addition,imposes a price ceiling of $270.What will happen to consumer surplus? What are the drawbacks?
Q2) Inflation favors
A) lenders.
B) borrowers.
C) neither borrowers nor lenders.
D) both borrowers and lenders.
Q3) In cost-benefit analysis,there is no problem created by inflation.
A) True
B) False
C) Uncertain
Q4) The term "future value"
A) can be determined by inverting the formula for present value.
B) is not used in modern public finance analysis.
C) refers to the present value of future money.
D) includes the shadow prices of all goods used in a project.
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Chapter 9: The Health Care Market
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Q1) President Obama has suggested some form or universal health coverage for all Americans.How do you feel about this?
Q2) A co-payment and coinsurance are the same thing.
A) True
B) False
C) Uncertain
Q3) Expected values
A) are calculated as the average value.
B) are calculated over all possible outcomes.
C) are weighted by the probability of an even occurring.
D) all of these answer options are correct.
Q4) What percentage of African Americans are uninsured?
A) 80
B) 3
C) 37
D) 21
Q5) We have read in this chapter that people with insurance may be more likely to engage in risky behavior because they are insured.Does it make sense then that there should be an "insurance tax" on people that engage in these types of activities?
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Chapter 10: Government and the Market for Health Care
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Q1) The __________ level of government accounts for the largest share of health care spending.
A) regional
B) state
C) municipal
D) federal
Q2) With the aging of the American population,it might be necessary to reduce the medical benefits to elderly.How do you feel about this idea?
Q3) What was the percentage of GDP that was expended,in total,on health care?
A) 0.132%
B) 12%
C) 13.2%
D) 16%
Q4) Generally,managed care means
A) health care is provided by teams,not by an individual doctor.
B) limits are placed on utilization of health care services.
C) health care is provided by the government to all citizens.
D) doctors pick which patients they want to see.
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Page 12
Chapter 11: Social Security
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Q1) Social Security wealth is the future value of the Social Security system.
A) True
B) False
C) Uncertain
Q2) A pay-as-you-go system means
A) you pay for your dinner as you go to the table to eat.
B) current working citizens pay for current retired citizens.
C) there is no need for taxes since current workers pay for current retirees.
D) retirees are paid from accounts that have accumulated with interest over their working lives.
Q3) The Social Security Administration has which program(s)to administer?
A) Disability payments
B) Health benefits
C) Pensions
D) Survivors' benefits
E) All of the answer options are correct.
Q4) Social Security is used to redistribute income.
A) True
B) False
C) Uncertain
Page 13
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Chapter 12: Income Redistribution: Conceptual Issues
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Q1) The group comprising the highest percentage of the poor is
A) the disabled.
B) elderly.
C) male heads of households.
D) children.
Q2) Changing the price of good Y will
A) only affect the demand for that good.
B) have effects across some markets.
C) keep prices down in all markets.
D) have no effect.
Q3) An imaginary situation in which people have no knowledge of what their place in society is to be is?
A) first position
B) start position
C) original position
D) pole position
Q4) Income is the only factor used to measure a person's wealth.
A) True
B) False
C) Uncertain
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Chapter 13: Expenditure Programs for the Poor
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Q1) The Head Start program
A) has been successful in fostering better levels of school attainment.
B) began in 1965.
C) provides preschool activities for 4 and 5 year old disadvantaged students.
D) all of these answer options are correct.
Q2) A dollar reduction in benefits as a result of a dollar income from working is a
A) 50% tax rate.
B) 75% tax rate.
C) 22.5% tax rate.
D) 100% tax rate.
Q3) Providing housing decreases the incentive for the poor to find their own.
A) True
B) False
C) Uncertain
Q4) All of the following are in-kind benefit programs,except
A) food stamps.
B) Medicaid.
C) energy assistance.
D) SSI.
Q5) What are some of the drawbacks,as you see them,to a program like Workfare?
Page 15
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Chapter 14: Taxation and Income Distribution
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Q1) Why is it the case that a commodity tax on goods like food and shelter is sometimes seen as being regressive?
Q2) Unit taxes cause shifts,while ad valorem taxes cause pivots.
A) True
B) False
C) Uncertain
Q3) In a general equilibrium model,a tax on a single factor in its use only in a particular sector can affect returns to all factors in all sectors.
A) True
B) False
C) Uncertain
Q4) A tax wedge causes
A) consumer prices to equal producer prices.
B) producer prices to rise above consumer prices.
C) consumer prices to separate from producer prices.
D) all prices to fall.
Q5) Why is it the case that taxes in one market can have impacts on supply and demand in others and should policy makers take this into account when setting taxes?
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Chapter 15: Taxation and Efficiency
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Q1) The marginal rate of substitution is
A) the slope of the utility curve.
B) the slope of the contract curve.
C) the slope of the utility possibilities curve.
D) none of these answer options are correct.
Q2) The Double Dividend Effect requires
A) double credit on airline miles.
B) two different taxes.
C) no taxes on stock dividends.
D) Pigouvian taxes.
Q3) The compensated demand curve
A) shows how the quantity demanded changes when the price changes.
B) shows how income is compensated,so that the individual's commodity bundle stays on the same indifference curve.
C) is sometimes referred to as the Hicksian demand curve.
D) all of these answer options are correct.
Q4) Is it possible to design a tax that does all of the following: i)leaves behavior unchanged so that the quantity demanded of goods and services does not change,ii)creates no excess burden,iii)is not regressive,and iv)is welfare enhancing?
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Chapter 16: Efficient and Equitable Taxation
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Q1) 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.
Q2) Income is a poor measure of relative position when attempting to determine horizontal equity.
A) True
B) False
C) Uncertain
Q3) 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.
Q4) Changing tax regimes can sometimes be difficult and lead to inequities.
A) True
B) False
C) Uncertain
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Chapter 17: The Personal Income Tax
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Q1) Inflation
A) has no impact on taxing strategies.
B) can be temporarily offset with tax cuts.
C) only became a tax problem in the late 1990s.
D) generally affects state governments most severely.
Q2) Flat taxes are more equitable than graduated tax schedules.
A) True
B) False
C) Uncertain
Q3) Only realized capital gains are included in taxable income.
A) True
B) False
C) Uncertain
Q4) The standard deduction for two individuals is higher than the standard deduction for a married couple,causing a "marriage tax."
A) True
B) False
C) Uncertain
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Chapter 18: Personal Taxation and Behavior
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Q1) Sometimes increases in the wage rate will cause individuals to work more hours.It is also the case that this same increase could cause people to work fewer hours.What is happening to cause this variance?
Q2) An income effect
A) is measured as the change in prices over time.
B) is not possible when people are unemployed.
C) requires interest rates to remain constant.
D) is the change in the quantity demand due to the fact that real income changes when prices change.
Q3) On the Laffer curve,an increase in tax rates causes tax revenue to increase if the starting point is
A) to the right of the top.
B) exactly at the top.
C) to the left of the top.
D) to the farthest point to the right.
Q4) Returns to investments in human capital can be calculated with great accuracy.
A) True
B) False
C) Uncertain
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Chapter 19: The Corporation Tax
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Q1) Before applying the 35 percent tax rate,firms may deduct
A) employee compensation.
B) interest payments.
C) depreciation allowances.
D) all of these answer options are correct.
Q2) Cash flow is the difference between assets and revenues.
A) True
B) False
C) Uncertain
Q3) The excess burden of the corporate income tax is
A) almost zero.
B) greatest when the interest elasticity of saving is zero.
C) a result of the combined distortion in the pattern of investment and a reduction in total investment.
D) none of these answer options are correct.
Q4) Interest deductibility does not provide an incentive for debt finance.
A) True
B) False C) Uncertain
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Chapter 20: Deficit Finance
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Q1) When government borrowing decreases private investment by raising the market interest rate,this is known as
A) the Director's Law.
B) crowding out.
C) positive economics.
D) the Ramsey Rule.
Q2) Because of the differing account conventions,there is a great deal of arbitrariness in a number that purports to be
A) the deficit.
B) the surplus.
C) the debt.
D) all of these answer options are correct.
Q3) Ricardian view on debt is that the form of government finance is irrelevant.
A) True
B) False
C) Uncertain
Q4) The burden of debt is borne by future generations.
A) True
B) False
C) Uncertain
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Chapter 21: Fundamental Tax Reform: Taxes on Consumption
and Wealth
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Q1) Why might an individual set up trusts?
A) as a strategy to avoid taxes on wealth.
B) for lower insurance premiums.
C) to insure the security of a loan.
D) to have a steady stream of income during retirement.
Q2) A wealth tax can be justified because it
A) helps to correct certain (inevitable)problems that arise in the administration of an income tax.
B) the higher an individual's wealth,the greater his or her ability to pay,other thingsincluding income - being the same.
C) reduces the concentration of wealth,which is desirable socially and politically.
D) are payments for benefits that wealth holders receive from government.
E) all of these answer options are correct.
Q3) A tax on consumption for those who are nonsavers
A) is equivalent to a tax on income.
B) causes income gains to increase dramatically.
C) would be preferred to a tax on wealth.
D) makes it difficult to tell what the result for the nonsavers would be.
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Chapter 22: Public Finance in a Federal System
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Q1) When a tax is based on the difference between the market value of the taxpayer's assets and liabilities,it is called
A) a difference tax.
B) a wedge tax.
C) a personal net worth tax.
D) an implied liability tax.
Q2) Which of the following is not a political jurisdiction?
A) Cook County
B) Alabama
C) New York City
D) California research triangle
Q3) Lump sum grants are sometimes referred to as categorical grants.
A) True
B) False
C) Uncertain
Q4) A Tiebout model involves
A) completely mobile individuals.
B) governments generating no externalities.
C) perfect information.
D) all of these answer options are correct.
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