The Ohio State University

Economics 4300, Government Finance in the American Economy

William J. White
Autumn, 2017
Answers to Final Exam Practice Questions

Multiple Choice 50 Points Total

(2 points each). Please select the best response to these 25 questions.

1. Which of the following best describes an ad valorem tax?

a) A fixed tax levied on all people, regardless of any purchases.
b) A tax levied as a percentage of the price of a good purchased.
c) A constant tax levied on each unit produced.
d) None of the above.

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2. According to the benefit principle:

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a) taxes should be distributed according to ability to pay.
b) user charges are an ideal source of finance for government goods and services.

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c) the progressive income tax represents the ideal way of distributing taxes among citizens.
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flat-rate taxes are always the best kind.
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3. A tax on the value of real estate holdings is a:
a) selective tax on wealth.
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b) general tax on wealth.

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c) general tax on income.

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d) selective tax on income.

4. A proportional income tax ('flat tax') has an average tax rate that:
a) always is less than the marginal tax rate.
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b) always exceeds the marginal tax rate.

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c) equals the marginal tax rate at first and then becomes less than the marginal tax rate.
d) always equals the marginal tax rate.
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5. If the average tax rate under a progressive tax rate structure is 35%, a possible marginal
tax rate is:
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a) 30%.
b) 25%.
c) 42%.
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d) not able to be determined.

6. Other things being equal, the more inelastic the demand for a taxed good,
a) the greater the portion of the tax paid by sellers.
b) the greater the excess burden of the tax.
c) the greater the portion of the tax paid by buyers.
d) the less the portion of a tax on sellers that can be shifted to buyers.

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 7. A bridge becomes congested after 100 vehicles per hour use it on any day. To achieve
efficiency, a toll:
a) should be imposed that charges all users of the bridge, no matter how many vehicles use
it per hour.
b) on additional users in excess of 100 per hour should be imposed.
c) on all users should be imposed, if more than 100 users per hour are expected.
d) is not required.

8. Which of the following is most true assuming an identical tax on two products with
identical constant marginal cost curves and initial prices?
a) The resulting excess burden for the more (demand) elastic good will be larger than the
excess burden for the less (demand) elastic good.
b) The resulting excess burden for the less (demand) elastic good will be larger than the
excess burden for the more (demand) elastic good.
c) There will be no excess burden in either case.
d) The excess burden will be equal across the two goods.

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9. The supply of new cars is perfectly elastic. A $400 per car tax is levied on buyers. As a

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result of the tax,
a) the price received by sellers will fall by $400.

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b) the price paid by buyers, including the tax, will increase by $400.
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the quantity of cars sold per year will be unchanged.
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d) the excess burden of the tax will be zero.

10. Suppose an economy is comprised of only two markets: one for food and the other for
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housing. A tax on housing used to finance transfer payments is likely to:

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a) decrease the price of food.

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b) increase the price of food.

c) decrease the price of housing.
d) have no effect on either the price of food or housing.
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11. Most studies show that the price elasticity of demand for gasoline is –0.2. If the price
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elasticity of supply is 2, then a tax on gasoline will:

a) cause the market equilibrium price of gasoline to fall.
b) cause the market equilibrium price paid by buyers to rise.
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c) cause the net price received by sellers to fall.

d) both b) and c) are correct.
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12. Assume that an increase in government borrowing has no effect on the willingness of
citizens to save or on the demand for credit. Increased borrowing to cover deficits will
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therefore:
a) reduce interest rates.
b) increase interest rates.
c) have no effect on interest rates.
d) not require increased taxes in the future.

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 13. Which of the following is not true about a unit tax?
a) It prevents efficiency from being attained in competitive markets.
b) It causes substitution effects.
c) It causes income effects.
d) All of the above are true of a unit tax. .

14. The efficiency-loss ratio relative to tax is:

a) the deadweight loss less the tax revenue.
b) the deadweight loss divided by the tax revenue reduced by one.
c) the excess burden divided by the tax revenue.
d) None of the above.

15. The outstanding federal debt will decline in value if:

a) budget deficits continue.
b) the government runs a budget surplus.
c) the market rate of interest decreases.

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d) either (b) or (c)

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16. Other things being equal, a government budget surplus:
a) increases the demand for loanable funds.

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b) increases the supply of loanable funds.
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is likely to increase market equilibrium interest rates.
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d) is unlikely to affect market equilibrium interest rates.

17. A bond that is backed by the tolls collected from a bridge to be constructed from the
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proceeds of the bond is an example of:

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a) a general obligation bond.

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b) a non-obligation bond.
c) a revenue bond.
d) none of the above.
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18. Assuming that investors seek to maximize the return on their investment, the long-run
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effect of a national tax on real estate will be to:

a) reduce the return to investment in real estate only.
b) reduce the return to investment in all assets.
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c) reduce wages only.

d) increase the return to all investors.
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19. Which of the following would not be included in a comprehensive wealth tax base?
a) real estate
b) personal property
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c) intangible assets
d) residential rents

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 20. The tax base for the corporate income tax in the United States is:
a) the sum of normal and economic profits of corporations.
b) economic profits of corporations.
c) normal profits of corporations.
d) retained earnings of corporations.

21. If the supply of savings is not perfectly elastic, the corporate income tax is likely to:
a) increase investment.
b) decrease investment.
c) increase the supply of labor.
d) decrease the supply of labor.

22. Under the corporate income tax,

a) dividends paid out to shareholders are deducted from corporate income.
b) dividends are included in corporate income.
c) retained earnings are included in corporate income.

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d) both (b) and (c)

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23. Assuming no change in the payout structure, what measure would reduce corporate
financing costs?

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a) allowing dividends to be deducted from income prior to assessing tax.
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a reduction in the tax rate.
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c) limiting the amount of interest that can be deducted from income prior to assessing tax.
d) both (a) and (b)
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24. Currently, the tax treatment of capital gains in the United States is such that:
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a) all capital gains are taxed.

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b) all realized capital gains are taxed.

c) most realized capital gains are taxed.
d) only capital gains adjusted for inflation are taxed.
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25. The excess burden of tax preferences:

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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.
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d) is independent of marginal tax rates.

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 Short Answers on the Tax Bill 30 Points Total

26. One of the significant differences between the House and Senate versions of the tax bill
currently being reconciled in Congress is the elimination of the ACA Individual Mandate.
Please develop a force field analysis highlighting some of the winners and losers. (10 pts)

__________IMPACT OF ELIMINATION OF THE INDIVIDUAL MANDATE__________

(These economic actors would be helped) | (These economic actors would be harmed)
Young, healthy people who are currently over- | Insurance companies who have based their
paying for health insurance | premiums on the large, healthy pool
|
(If this makes full repeal of the ACA more | The US Treasury, which will lose the 'fines'
likely) those harmed by provisions of ACA |
| Those whose taxes would increase to make up
John Roberts, whose majority decision in the | for the revenue lost – probably AMT payers
Supreme Court was widely ridiculed, most |

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notably the tax/fine distinction | Those people currently insured by firms who
| will face adverse selection and will therefore

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| raise their premiums
|

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|
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|
|
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27. For four of your entries in the above force field diagram, provide a couple of sentences
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explaining why you believe these economic actors would be winners or losers (5 points each)

A. __________________________________________________________________________
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_____________________________________________________________________________
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_____________________________________________________________________________
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B. __________________________________________________________________________
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_____________________________________________________________________________

_____________________________________________________________________________
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C. __________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________

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 D. __________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________

Essay Questions 40 Points Total

Three out these five questions will appear on Monday's exam; you will be expected to answer
two of them in the space provided. (20 points each)

E1. Explain why there is no excess burden for a lump-sum tax. Why is the payroll tax not
a lump-sum tax? Describe how a payroll tax affects wages and labor supply.

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E2. What effects do government borrowing and deficit finance have on the distribution of

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income and well-being? In your answer discuss the intergenerational effects of deficits

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and the impact of deficits on saving, investment, interest rates, and economic growth.

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E3. Explain how our current income tax system could easily be converted into a system
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which taxes consumption. How would these two tax systems impact savings and
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investment? Discuss at least one distributional impact from this change.

E4. Taxes on wealth are favored by those who want to increase the taxes paid by the rich. Is
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the incidence of a comprehensive wealth tax likely to be progressive? Is the property

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tax, as used in the United States, a comprehensive wealth tax? Evaluate the incidence and
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effects on efficiency of the property tax in the United States.

E5. Your text makes the point that corporate profits are taxed differently based on whether
they are retained or paid out as dividends. Briefly describe this difference and identify
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which economic actors are double taxed. Discuss the impact of this taxation on corporate
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balance sheets and their subsequent investment decisions.

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