Review 5 Economics of Taxation

Question 1

Tax incidence

Answer 1

The way the burden of a tax is distributed among economic units (consumers, producers, employees, employers, and so on). The actual tax burden does not always fall on those who are statutorily assigned to pay the tax.

Question 2

Tax base

Answer 2

The level or quantity of an economic activity that is taxed. Higher tax rates reduce the level of the tax base because they make the activity less attractive.

Question 3

Tax rate

Answer 3

The per-unit amount of the tax or the percentage rate at which the economic activity is taxed.

Question 4

Deadweight loss

Answer 4

The loss of gains from trade to buyers and sellers that occurs when a tax is imposed. The deadweight loss imposes a burden on both buyers and sellers over and above the actual payment of the tax.

Question 5

Excess burden of taxation

Answer 5

Another term for deadweight loss. It reflects losses that occur when beneficial activities are forgone because they are taxed.

Question 6

Subsidy

Answer 6

A payment the government makes to either the buyer or the seller, usually on a per-unit basis, when a good or service is purchased or sold.

Question 7

Whichever is more ________________ (elastic or inelastic) among supply and demand will bear a larger share of the tax burden.

Answer 7

inelastic

Question 8

How do price elasticities affect the deadweight loss of a tax?

Answer 8

The more inelastic at least one of the curves is (supply or demand), the smaller the deadweight loss.

Question 9

How do price elasticities affect the amount of tax revenue?

Answer 9

The more inelastic at least one the curves is (supply or demand), the larger the tax revenue

Question 10

If there is no tax on the sale of widgets, the price of widgets is $13 and there are 90 widgets sold weekly. When the government imposes a $3 per widget tax on the sale of widgets sales dropped to 70 widgets per week. How much revenue, per week, did the government collect from this tax?

Answer 10

70x3= $210

Question 11

If there is no tax on the sale of widgets, the price of widgets is $13 and there are 90 widgets sold weekly. When the government imposes a $3 per widget tax on the sale of widgets, the buyer’s price of widgets increased to $15 and sales dropped to 70 widgets per week. What was the buyers’ tax burden from this tax?

Answer 11

(15-13)70=$140

Question 12

If there is no tax on the sale of widgets, the price of widgets is $13 and there are 90 widgets sold weekly. When the government imposes a $3 per widget tax on the sale of widgets, the buyers’ price of widgets increased to $15 and sales dropped to 70 widgets per week. What is the sellers’ tax burden from this tax?

Answer 12

buyer’s payed $2 more per unit leaving $1 more per unit for seller.
1x70-=$70

Question 13

If there is no tax on the sale of widgets, the price of widgets is $13 and there are 90 widgets sold weekly. When the government imposes a $3 per widget tax on the sale of widgets, the buyers’ price of widgets increased to $15 and sales dropped to 70 widgets per week. What is the deadweight loss of this tax?

Answer 13

1/2(90-70)(3)=$30

Question 14

Is the buyers’ price higher when the state imposes a tax when the demand for widgets is elastic or inelastic?

Answer 14

inelastic

Question 15

Is the buyers’ price higher when the state imposes a tax when the supply for widgets is elastic or inelastic?

Answer 15

elastic

Question 16

Is the sellers’ price higher when the state imposes a tax when the demand for widgets is elastic or inelastic?

Answer 16

elastic

Question 17

Is the sellers’ price higher when the state imposes a tax when the supply for widgets is elastic or inelastic?

Answer 17

inelastic

Question 18

When the state impose a tax on widgets, would more widgets be sold if the demand was elastic or inelastic?

Answer 18

inelastic

Question 19

When the state impose a tax on widgets, would more widgets be sold if the supply was elastic or inelastic?

Answer 19

inelastic

Question 20

When the state imposes a tax on widgets, will it generate more revenue if demand is elastic or inelastic?

Answer 20

inelastic

Question 21

When the state imposes a tax on widgets, will it generate more revenue if supply is elastic or inelastic?

Answer 21

inelastic

Question 22

When the state imposes a tax on widgets, will the buyers pay a greater share of the tax burden if demand is elastic or inelastic?

Answer 22

inelastic

Question 23

When the state imposes a tax on widgets, will the buyers pay a greater share of the tax burden if supply is elastic or inelastic?

Answer 23

elastic

Question 24

Progressive tax

Answer 24

a tax in which the average tax rate rises with income. People with higher incomes will pay a higher percentage of their income in taxes.

Question 25

Proportional tax

Answer 25

a tax in which the average tax rate is the same at all income levels.

Question 26

Regressive tax

Answer 26

A tax in which the average tax rate falls with income. People with higher incomes will pay a lower percentage of their income in taxes.

Question 27

Which US tax is progressive?

Answer 27

Personal income tax

Question 28

Which US tax is regressive?

Answer 28

Payroll taxes

Question 29

Average tax rate

Answer 29

Tax liability divided by taxable income. It is the percentage of income paid in tax.

Question 30

Marginal tax rate

Answer 30

The additional tax liability a person faces divided by their additional taxable income. It is the percentage of an extra dollar of income earned that must be paid in taxes. It is the marginal tax rate that is relevant in personal decision making.

Question 31

Laffer Curve

Answer 31

A curve illustrating the relationship between the tax rate and tax revenue. Tax revenues will be low at both very high and very low tax rates. When tax rates are quite high, lowering them can increase tax revenue.

Question 32

Equation for tax revenue

Answer 32

Tax base x tax rate

Question 33

What are the primary forms of tax revenue for the federal government?

Answer 33

Personal income tax (greatest)
Payroll tax (2/3 of PIT)
Corporate Income Tax (much less than other two)

Question 34

A tax is more efficient if what is small?

Answer 34

Deadweight loss

Question 35

Given a table of quantity, buyer’s price, and seller’s price, what do you do to find the new equilibrium price when a tax is imposed on the sellers?

Answer 35

Add the amount of the tax to the seller’s price at all quantities. Find out where the buyers’ price and sellers’ price now intersect. This is the equilibrium price.

Question 36

Tax shifting

Answer 36

Aa kind of economic phenomenon in which the taxpayer transfers the tax burden to the purchaser or supplier by increasing the sales price or depressing the purchase price during the process of commodity exchange.