Problem Set 1

Econ 362(01) Fall 2002

(Dr. Tin-Chun Lin)

1. According to the benefit principle,

(A) Taxes should be distinguished according to ability to pay.
(B) User charges are an ideal source of finance for government goods and services.
(C) The progressive income tax represents the ideal way of distributing taxes among
citizens.
(D) Flat-rate taxes are always the best kind.
(Answer: (B))

2. The tax base of a payroll tax is

(A) Consumer expenditures.
(B) Interest income.
(C) Labor income.
(D) Both (B) and (C).
(Answer: (C))

3. A proportional income tax has an average rate that

(A) Always is less than the marginal tax rate.
(B) Always exceeds the marginal tax rate.
(C) Equals the marginal tax rate at first and then becomes less than the marginal tax
rate.
(D) Always equals the marginal tax rate.
(Answer: (D))

4. A payroll tax taxes a worker’s wages at 14 percent until the worker earns $60,000 per
year. All labor earnings in excess of $60,000 are not subject to tax. The tax rate
structure of the payroll tax is therefore
(A) Proportional
(B) Progressive.
(C) Regressive.
(D) Flat-rate.
(Answer: (C))

5. A government prints money to finance its expenditures. As a result,

(A) The economy can operate at a point outside its production possibility curve.
(B) Inflation will occur.
(C) Consumers will give up private goods to finance the increased government
expenditures.
(D) Both (B) and (C)
(Answer: (D))

6. A tax that taxes all of the components of an economic base, with no exclusions,
exemptions, or deductions is
 (A) An excise tax.
(B) A selective tax.
(C) A general tax.
(D) Equitable.
(E) None of the above.
(Answer: (C))

7. Suppose that you currently earn taxable income of $100,000 per year. You are subject
to a marginal tax rate of 50 percent. Currently, your average tax rate is 35 percent.
Calculate your annual tax. Calculate the extra tax that you would pay per year if your
annual income increased to $110,000. What is your average tax rate when your
annual income is $110,000? (Answer: Annual tax is $35,000. The extra tax on
$10,000 additional income is $5000. The average tax rate on $110,000 would be
36.36%)

8. (True or False) Taxes simultaneous ration and finance government and services
(Answer: False)

9. Which of the following is an example of a user charge?

(A) An admission fee to a public museum.
(B) A toll on a superhighway.
(C) A building permit fee.
(D) The fare on a commuter train.
(E) All of the above.
(Answer: (E))

10. (True or False) The marginal tax rate for a payroll tax is 7 percent on all wages up to
$60,000 per year. The marginal tax rate for wages in excess of $60,000 per year is
zero. The payroll tax is therefore a regressive tax.
(Answer: True)