TEST BANK Principles of Taxation for Business and Investment Planning, 2023 26th Edition by Jones, Shelley, Sandra and Kubick
CHAPTER 1
1) Ms. Penser resides in the city of Lanock, Tennessee. She owns 100% of the stock of PSW Incorporated, which is incorporated under Tennessee law and conducts business in six different local jurisdictions in Tennessee. A.How many taxpayers are identified in the above statement of facts? B.Identify the governments with jurisdiction to tax each of these taxpayers.
2) Forrest Township levies a tax on the assessed value of real property located within the town limits. The tax equals 1.4% of the value up to $300,000 plus 2% of any value in excess of $300,000. Mildred Payne owns real estate with a $983,500 assessed value. Compute her property tax.
3) Richton Company operates its business solely in Jurisdiction H, which levies a 6% sales and use tax. This year, Richton paid $1,438,000 to purchase tangible property from a dealer located in Jurisdiction W. This purchase was subject to W's 3.5% sales tax. The property was shipped to Richton's office in Jurisdiction H for use in its business. Compute Richton's sales or use tax with respect to this transaction.
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4) Grant Wilson is an employee of Market Enterprises, a corporation operating in State A. Identify the different types of potential taxes to be paid by both Grant and Market Enterprises with respect to this employment relationship.
5)
Which of the following is not characteristic of a tax? A) A tax is compulsory. B) A tax is intended to punish unacceptable behavior. C) A tax is levied by a government. D) All of these choices are characteristics of a tax.
6) The state of Virginia charges motorists 50 cents for every trip across a toll bridge over the James River. This charge is an example of a(n): A) User's fee B) Transaction-based tax C) Activity-based tax D) Excise tax
7) The city of Mayfield charges individuals convicted of DWI (driving while intoxicated) $500 for the first conviction and $2,000 for any subsequent conviction. These charges are an example of a(n): A) User's fee B) Transaction-based tax C) Activity-based tax D) Government penalty
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8) The property tax on a rental house owned by Mr. Janey increased by $1,200 this year. Mr. Janey increased the monthly rent charged to his tenant, Ms. Lacey, by $45. Who bears the incidence of the property tax increase? A) Mr. Janey B) Ms. Lacey C) Both Mr. Janey and Ms. Lacey D) Neither Mr. Janey nor Ms. Lacey
9) Acme Incorporated's federal income tax increased by $100,000 this year. As a result, Acme reduced the annual dividend paid on its common stock by $100,000. Who bears the incidence of the corporate tax increase? A) Acme Incorporated B) Acme's customers C) Acme's employees D) Acme's shareholders
10) Acme Incorporated's property taxes increased by $65,000 this year. As a result, Acme increased the sale prices of its products to generate $65,000 more revenue. Who bears the incidence of the corporate tax increase? A) Acme Incorporated B) Acme's customers. C) Acme's employees. D) Acme's shareholders.
11) Acme Incorporated's property taxes increased by $19,000 this year. As a result, Acme eliminated $19,000 from its budget for the employee Christmas party. Who bears the incidence of the corporate tax increase?
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A) Acme Incorporated B) Acme's customers. C) Acme's employees. D) Acme's shareholders.
12)
Mr. Bilboa is a citizen of Portugal. Which of the following statements is true? A) The U.S. government has no jurisdiction to tax Mr. Bilboa because he is not a U.S.
citizen. B) The U.S. government has jurisdiction to tax Mr. Bilboa if he is a permanent resident of the United States. C) The U.S. government has jurisdiction to tax Mr. Bilboa if he earns income from a business he operates in Florida. D) Both the U.S. government has jurisdiction to tax Mr. Bilboa if he is a permanent resident of the United States and the U.S. government has jurisdiction to tax Mr. Bilboa if he earns income from a business he operates in Florida are true.
13) Mrs. King is a U.S. citizen who permanently resides in South Africa. Which of the following statements is true? A) The U.S. government has jurisdiction to tax Mrs. King. B) The U.S. government has no jurisdiction to tax Mrs. King because she does not live in the United States. C) The U.S. government has no jurisdiction to tax Mrs. King because she does not earn any income from a source within the United States. D) Mrs. King can elect whether to pay tax to the United States or to South Africa.
14) Mrs. Renfru is a Brazilian citizen who permanently resides in Houston, Texas. Which of the following statements is true?
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A) The U.S. government has no jurisdiction to tax Mrs. Renfru because she is not a U.S. citizen. B) The U.S. government has jurisdiction to tax Mrs. Renfru only on income that she earns from a source within the United States. C) The U.S. government has jurisdiction to tax Mrs. Renfru. D) Mrs. Renfru can elect whether to pay tax to the United States or to Brazil.
15)
Which of the following statements regarding tax systems is false?
A) A single percentage that applies to the entire tax base is described as a flat rate. B) When designing a tax, governments try to identify tax bases that taxpayers can easily avoid or conceal. C) A tax base is an item, occurrence, transaction, or activity with respect to which a tax is levied. D) With regard to tax systems, the term revenue refers to the total tax collected by the government.
16)
Which of the following is an example of a transaction-based tax? A) A tax on net business income B) An excise tax C) An estate tax on the transfer of assets at death D) Both an excise tax and an estate tax on the transfer of assets at death.
17)
Which of the following is an example of an activity-based tax? A) A tax on business' net income B) An excise tax C) A gift tax on the transfer of assets by gift D) Both a tax on business' net income and a gift tax on the transfer of assets by gift
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18)
Which of the following is an earmarked tax?
A) A tax imposed on the purchase of specific items such as liquor or cigarettes B) A tax that generates revenues that the government can spend only to build more National Parks C) A tax imposed only on individuals who earn more than $1 million annually D) A tax that generates revenues that the government can spend for any purpose
19)
Which of the following characterizes a good tax base? A) The base can be easily expressed in monetary terms. B) Taxpayers cannot easily avoid or conceal the base. C) Taxpayers cannot easily move the base from one jurisdiction to another. D) All of these choices characterize a good tax base.
20) The city of Springvale imposes a net income tax on businesses operating within its jurisdiction. The tax equals 1% of income up to $100,000 and 1.5% of income in excess of $100,000. The Springvale Bar and Grill generated $782,000 net income this year. Compute its city income tax. A) $10,230 B) $11,230 C) $11,730 D) None of these choices are correct
21) Government Q imposes a net income tax on businesses operating within its jurisdiction. The tax equals 3% of income up to $500,000 and 5% of income in excess of $500,000. Company K generated $782,000 net income this year. Compute the income tax that Company K owes to Q.
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A) $29,100 B) $14,100 C) $39,100 D) None of these choices are correct
22) Which of the following taxes is not a significant source of revenue for local governments? A) Real property tax B) Personal property tax C) Employment tax D) All of these choices are correct
23) Which of the following taxes is generally the most significant source of revenue for local governments? A) Real property tax B) Employment tax C) Income tax D) None of these choices are correct
24)
Which of the following statements concerning property taxes is false? A) Property taxes are ad valorem taxes. B) Property taxes are the primary source of revenue for local governments. C) Property taxes can be levied on realty or personalty. D) None of these choices are false.
25)
A sales tax can best be described as a(n):
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A) Consumption tax B) Income tax C) Activity tax D) Ad valorem tax
26)
Which of the following statements concerning sales taxes is false? A) Sales taxes apply to the purchase of most types of consumer goods. B) Sales taxes apply to the purchase of most types of consumer services. C) Sales taxes are collected by the seller when the sale is made. D) Sales taxes imposed on the purchaser of retail items are consumption taxes.
27)
The incidence of a state sales tax levied on the purchase of retail goods is: A) Borne by the ultimate purchaser of the goods. B) Borne by the seller who must collect and remit the tax. C) Borne by the government that levies the tax. D) None of these choices are correct.
28) Mr. Dodd resides in a state with a 6% sales and use tax. He recently traveled to another state to buy furniture and paid that state's 4% sales tax. Which of the following statements is true? A) Mr. Dodd's use tax liability to his home state equals 2% of the purchase price of the furniture. B) Mr. Dodd does not owe a use tax to his home state. C) Mr. Dodd's use tax liability to his home state equals 6% of the purchase price of the furniture. D) None of these choices are true.
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29) Mr. Smith resides in a state with a 6% sales and use tax. He recently traveled to another state to buy furniture and paid that state's 7% sales tax. Which of the following statements is true? A) Mr. Smith is entitled to a refund of 1% of the purchase price of the furniture. B) Mr. Smith does not owe a use tax to his home state. C) Mr. Smith's use tax liability to his home state equals 6% of the purchase price of the furniture. D) None of these choices are true.
30)
Which of the following statements about sales and use taxes is true?
A) If an individual pays a sales tax on the purchase of an item, she will not have to pay a use tax on the purchase. B) If an individual pays a sales tax on the purchase of an item, she will also have to pay a use tax on the purchase. C) Many states that impose a sales tax do not impose a complementary use tax. D) None of these choices are true.
31)
Which of the following taxes is a significant source of revenue for state governments? A) General sales tax B) Individual income tax C) Corporate income tax D) All of these choices are correct
32)
Which of the following is not characteristic of an excise tax?
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A) An excise tax is levied on the retail sale of specific goods. B) Excise tax rates typically are higher than general sales tax rates. C) The purchaser is responsible for paying any excise tax directly to the government. D) All of these choices are characteristics of an excise tax.
33)
What is the major difference between a sales tax and an excise tax?
A) Sales taxes are levied by state governments, while excise taxes are levied only by the federal government. B) Sales taxes are imposed on the purchase of a wide variety of items, while excise taxes are imposed on the purchase of a few specific items. C) Sales taxes must be collected by the seller, while excise taxes must be paid directly by the purchaser. D) Sales taxes are imposed on the purchase of tangible goods, while excise taxes are imposed on the purchase of services.
34) Which of the following is not an advantage of state conformity to federal corporate income tax laws? A) States have complete control over their corporate income tax revenues. B) States do not have to enact comprehensive corporate income tax statutes. C) Conformity eases the compliance burden of corporate taxpayers. D) All of these choices are advantages of state conformity.
35)
Which tax raises the most revenue for the federal government? A) Corporate income tax B) Individual income tax C) Excise taxes D) Transfer taxes
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36)
Which of the following federal taxes is earmarked for a specific purpose? A) Corporate income tax B) Employment taxes C) Unemployment taxes D) Both employment taxes and unemployment taxes are earmarked taxes.
37)
Which of the following federal taxes is not earmarked for a specific purpose? A) Employment taxes B) Unemployment taxes C) Transfer taxes D) All of these choices are earmarked taxes.
38) What gives the federal government the right to impose a tax on individual and corporate income? A) Internal Revenue Code of 1986 B) Revenue Act of 1913 C) Sixteenth Amendment to the U.S. Constitution D) Bill of Rights
39)
When did the federal income tax become a permanent tax? A) Immediately after the Revolutionary War B) During the Civil War C) In 1913 when the Sixteenth Amendment to the U.S. Constitution was ratified D) In 1939 when Congress enacted the first Internal Revenue Code
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40)
Which of the following does not characterize federal transfer taxes?
A) The tax is imposed on the value of wealth transferred by an individual as a gift. B) The tax is imposed on the value of wealth transferred because of the death of an individual. C) The tax is imposed on the value of wealth transferred by an individual to charity. D) All of these choices characterize federal transfer taxes.
41)
Which of the following does not characterize federal transfer taxes? A) The tax is imposed on individuals but not on corporations. B) The tax is based on the value of property transferred by gift or at death. C) The tax is a transaction tax. D) All of these choices characterize federal transfer taxes.
42) Company D, which has its home office in Raleigh, North Carolina, conducts business in the United States, Canada, and Mexico. Which of the following statements is true? A) Because Company D must pay income tax to North Carolina, it is not required to pay tax to any other state. B) Because Company D must pay income tax to North Carolina, it is not required to pay federal income tax. C) Because Company D must pay income tax to the United States, it is not required to pay tax to Canada or Mexico. D) None of these choices are true.
43) SJF Incorporated, which has its corporate offices in Boise, Idaho, conducts business in Idaho, Oregon, California, and British Columbia, Canada. Which of the following statements is true?
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A) SJF must pay income tax only to Idaho and the United States. B) SJF may be required to pay income tax to Idaho, Oregon, California, British Columbia, the United States, and Canada. C) SJF must pay income tax only to Idaho, Oregon, California, and the United States. D) SJF may be required to pay income tax to either the United States or to Canada, but not to both.
44)
Which type of tax is not levied by the federal government? A) Corporate income tax B) Individual income tax C) Employment taxes D) General sales tax
45) Company N operates a mail order business out of its headquarters in Tulsa, Oklahoma. This year, it mailed $892,000 worth of product to customers residing in Oklahoma and $489,300 worth of product to customers residing in Missouri. Which of the following statements is true? A) Company N must collect Oklahoma sales tax from its Oklahoma customers. Missouri may require Company N to collect Missouri sales tax from its Missouri customers. B) Company N must collect Oklahoma sales tax from both its Oklahoma and Missouri customers. C) Company N is not required to collect Oklahoma sales tax from its Oklahoma customers. D) Company N is not required to collect sales tax on any mail order sales.
46)
Which of the following does not contribute to the dynamic nature of the tax law?
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A) The political pressure from professional lobbyists B) Changes in the economic and social climate C) Changes in revenue needs of the government D) All of these choices contribute to the dynamic nature of the tax law
47) Which of the following statements regarding the political process of creating tax law is false? A) The political process contributes to the dynamic nature of the tax law. B) Special interest groups have little effect on the tax legislative process. C) When taxpayers devise a new tactic for reducing their tax burdens, governments respond by enacting a new rule to render the tactic ineffective. D) Changes in political philosophy often reflect shifts in the public attitude about the proper role of taxes in society.
48)
Which of the following is/are not a primary source of authority for the tax law? A) A revenue ruling published by the Internal Revenue Service B) Section 162 of the Internal Revenue Code C) Treasury Reg. §1.351-2 D) All of these choices are primary sources of authority
49)
Which of the following statements about the Internal Revenue Code is false? A) The Internal Revenue Code has not been amended since 1986. B) The Internal Revenue Code is part of federal statutory law. C) The Internal Revenue Code consists of numerically organized sections. D) Only Congress has the authority to amend the Internal Revenue Code.
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50)
How often does Congress amend the Internal Revenue Code? A) Rarely (the Internal Revenue Code has not been amended since 1986) B) Occasionally (perhaps once every decade) C) Regularly (at least once every five years) D) Constantly (at least once a year)
51)
Which of the following statements about Treasury regulations is false?
A) Treasury regulations are written to interpret and explain the Internal Revenue Code. B) Treasury regulations are part of the statutory law. C) A federal court can invalidate a Treasury regulation if the court concludes that the regulation incorrectly interprets the Internal Revenue Code. D) None of these choices are false.
52)
Revenue rulings and revenue procedures are written by: A) The Internal Revenue Service B) The Department of the Treasury C) The United States Congress D) The Supreme Court
53)
Which of the following is not considered administrative authority? A) Treasury regulations B) Revenue rulings C) Tax Court decisions D) All of these choices are administrative authorities
54)
A revenue ruling is an example of:
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A) Judicial authority B) Administrative authority C) Legislative authority D) Editorial authority
55)
Which of the following statements concerning judicial authority is false? A) Appellate court decisions have more authority than trial court decisions. B) Supreme Court decisions have more authority than appellate court decisions. C) Supreme Court decisions are the equivalent of law. D) None of these statements are false.
56)
Which of the following sources of tax law carries the most authority? A) Revenue procedure B) Treasury regulation C) Supreme Court decision D) The three sources of tax law have equal authority
57)
Which of the following sources of tax law carries the least authority? A) Revenue ruling B) Treasury regulation C) Section 736 of the Internal Revenue Code D) The three sources of tax law have equal authority
58)
Payment of a tax entitles the payer to a specific good or service from the government. ⊚ true ⊚ false
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59)
A user fee entitles the payer to a specific good or service from the government. ⊚ true ⊚ false
60)
A tax is intended to deter or punish unacceptable behavior. ⊚ true ⊚ false
61)
A tax is a payment to support the cost of government. ⊚ true ⊚ false
62) Under U.S. tax law, corporations are entities separate and distinct from their shareholders. ⊚ true ⊚ false
63) The person who pays a tax directly to the government always bears the economic incidence of the tax. ⊚ true ⊚ false
64) In some cases, the payer of a tax can shift the economic incidence of the tax to a third party. ⊚ true ⊚ false
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65) The U.S. government has jurisdiction to tax individuals who are not U.S. citizens but who are permanent U.S. residents. ⊚ true ⊚ false
66) The U.S. government has jurisdiction to tax individuals who are not U.S. citizens or permanent U.S. residents but who earn income from a source within the United States. ⊚ ⊚
true false
67) The U.S. government does not have jurisdiction to tax U.S. citizens who are permanent residents of another country. ⊚ ⊚
68)
A tax with a graduated rate structure must have at least two brackets of tax base. ⊚ ⊚
69)
true false
A sales tax is an example of a transaction-based tax. ⊚ ⊚
70)
true false
true false
A tax on net income is an example of a transaction-based tax.
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⊚ ⊚
71)
A sales tax is an example of an activity-based tax. ⊚ ⊚
72)
true false
true false
Ad valorem property taxes are the major source of revenue for local governments. ⊚ true ⊚ false
73) Taxes on personal property are more difficult to administer and enforce than taxes on real property. ⊚ true ⊚ false
74)
A state government may levy either a sales tax or a use tax on consumers but not both. ⊚ true ⊚ false
75) Sellers of retail goods are responsible for collecting sales tax from their customers and remitting the tax to the state government. ⊚ true ⊚ false
76) Purchasers of consumer goods through the mail are responsible for paying use tax on goods for which sales tax was not collected by the seller.
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⊚ ⊚
true false
77) The majority of state governments raise revenue from both personal and corporate income taxes. ⊚ true ⊚ false
78) The federal government imposed the first income tax to raise money to fight the War of 1812. ⊚ true ⊚ false
79) The U.S. Constitution gives the federal government the power to impose a tax on income from whatever source derived. ⊚ ⊚
true false
80) The federal government collects more revenue from the corporate income tax than from the individual income tax. ⊚ true ⊚ false
81)
The federal government does not levy property taxes or a general sales tax. ⊚ true ⊚ false
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82) A business that operates in more than one state is required to pay state income tax only to the state in which it is incorporated. ⊚ true ⊚ false
83) The potential for conflict among taxing jurisdictions is greatest for businesses operating on a global scale. ⊚ true ⊚ false
84) Fewer than half of the state governments depend on some form of gambling as a source of revenue. ⊚ true ⊚ false
85) According to the U.S. Supreme Court, states may require businesses to collect sales tax based on the residency of the purchaser. ⊚ ⊚
true false
86)
The Internal Revenue Code is written by the Internal Revenue Service. ⊚ true ⊚ false
87)
The U.S. Constitution requires that federal tax legislation begins in the Senate. ⊚ ⊚
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88) The U. S. House Ways and Means Committee is responsible for drafting new federal tax legislation. ⊚ ⊚
true false
89) Both the U.S. House of Representatives and the U.S. Senate must vote to approve a new federal tax bill before the bill is signed into law by the President. ⊚ ⊚
90)
true false
Treasury regulations are tax laws written by the Treasury Department. ⊚ true ⊚ false
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Answer Key Test name: Chap 01_2023 5) B 6) A 7) D 8) C 9) D 10) B 11) C 12) D 13) A 14) C 15) B 16) D 17) A 18) B 19) D 20) B 21) A 22) C 23) A 24) D 25) A 26) B 27) A 28) A 29) B 30) D Version 1
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31) D 32) C 33) B 34) A 35) B 36) D 37) C 38) C 39) C 40) C 41) D 42) D 43) B 44) D 45) A 46) D 47) B 48) D 49) A 50) D 51) B 52) A 53) C 54) B 55) D 56) C 57) A 58) FALSE 59) TRUE 60) FALSE Version 1
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61) TRUE 62) TRUE 63) FALSE 64) TRUE 65) TRUE 66) TRUE 67) FALSE 68) TRUE 69) TRUE 70) FALSE 71) FALSE 72) TRUE 73) TRUE 74) FALSE 75) TRUE 76) TRUE 77) TRUE 78) FALSE 79) TRUE 80) FALSE 81) TRUE 82) FALSE 83) TRUE 84) FALSE 85) TRUE 86) FALSE 87) FALSE 88) TRUE 89) TRUE 90) FALSE Version 1
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CHAPTER 2 1) Mr. and Mrs. Boln earn $63,000 annual income and pay 20% in state and federal income tax. If tax rates increase so that the couple's annual rate increases to 25%, how much additional income must they earn to maintain their after-tax standard of living?
2) Mr. Ohno owns and operates a part-time service business that generates $80,000 annual taxable income. Assume that the federal tax rate on this income is 17%. Because of recent legislation, this rate will increase to 25% next year. A.Based on a static forecast, how much additional revenue will the federal government collect from Mr. Ohno next year? B.How much additional revenue will the federal government collect if Mr. Ohno decides to work fewer hours and consequently earns only $50,000 next year?
3) The City of Willford levies a flat 7% tax on individual income in excess of $55,000. Individuals who earn $55,000 or less pay no income tax. A.Ms. Vello earned $127,200 income this year. Compute city income tax and determine average tax rate. B.Mr. Sui earned $68,900 income this year. Compute city income tax determine his average tax rate. C.Does Willford have a proportionate, progressive, or regressive tax rate structure?
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4)
The country of Valhalla levies an income tax with the following rate structure. Rate 5% + 10% + 20%
Income bracket $-0- to $50,000 $50,001 to $150,000 $150,001 and above
A.Mrs. Greene's annual income is $125,000. Compute the tax on this income, the average tax rate, and the marginal tax rate. B.Mr. Chen's annual income is $220,000. Compute the tax on this income, the average tax rate, and the marginal tax rate. C.Does Valhalla have a proportionate, progressive, or regressive tax rate structure?
5) Government officials of Country Z estimate that next year's public programs will cost $19 million but that tax revenues will be only $15 million. The officials could avoid a deficit next year by adopting which of the following fiscal strategies? A) Reduce the cost of public programs by $4 million. B) Increase taxes by $4 million. C) Borrow $4 million by issuing new government bonds. D) All of these strategies will avoid a deficit.
6) Government officials of Country Z estimate that next year's public programs will cost $19 million but that tax revenues will be only $15 million. Which of the following statements is false?
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A) Country Z's tax system is sufficient. B) Country Z's government is engaging in deficit spending. C) If Country Z must borrow $4 million to pay for its public programs, its national debt will increase by $4 million. D) Country Z's government could balance its budget by eliminating a program that costs $4 million.
7) Government J decides that it must increase its tax revenue. Which of the strategies could result in more revenue? A) Increase the rate of an existing tax. B) Expand the base of an existing tax. C) Enact a tax on a new base. D) All of these strategies could result in more revenue for Government J.
8) The government of Nation C operated at a $32 billion deficit this year. The deficit suggests that Nation C's tax system is: A) Inefficient B) Insufficient C) Unfair D) Inconvenient
9) The city of Belleview operated at an $865,000 surplus this year. The surplus suggests that the municipal tax system is: A) Fair B) Efficient C) Sufficient D) Convenient
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10)
Which of the following statements concerning the federal Social Security tax is true? A) The tax burden increases annually because the rate generally increases annually. B) The tax burden increases annually because the base generally increases annually. C) Both the rate and the base generally increase annually. D) The Social Security tax burden has not increased since 1990.
11)
A static forecast of the incremental revenue from a tax rate increase presumes that: A) The tax base will not change because of the rate increase. B) The tax base will increase by the same proportion as the rate increase. C) The tax base will decrease by the same proportion as the rate increase. D) The tax rate and the tax base are correlated.
12)
A dynamic forecast of the incremental revenue from a tax rate increase presumes that: A) Taxpayers will not change their behavior because of the rate increase. B) The tax base will increase by the same proportion as the rate increase. C) The tax base will decrease by the same proportion as the rate increase. D) The tax rate and the tax base are correlated.
13) Jurisdiction F levies a 10% excise tax on the purchase of golf carts. The annual revenue from this tax averages $800,000 (10% * $8 million average annual golf cart purchases). Jurisdiction F is considering raising the tax rate to 12%. Which of the following statements is true? A) The rate increase will increase revenue by $160,000. B) Based on a dynamic forecast, the rate increase will increase revenue by $160,000. C) Based on a static forecast, the rate increase will increase revenue by $160,000. D) None of these choices are true.
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14) Last year, Government G levied a 35% tax on individual income, and Mr. Slate paid $35,000 tax on $100,000 income. This year, the government increased the tax rate to 40%. Which of the following statements is false? A) Based on a static forecast, government G should collect $5,000 additional tax from Mr. Slate this year. B) If Mr. Slate took a second job to maintain his after-tax disposable income, this behavior illustrates a substitution effect of the rate increase. C) If Mr. Slate took a second job to maintain his after-tax disposable income, government G should collect more than $5,000 additional tax this year. D) If Mr. Slate sold an income-generating investment and used the money for personal consumption, this behavior illustrates a substitution effect of the rate increase.
15) Which of the following statements about the substitution effect of an income tax rate increase is false? A) The substitution effect is theoretically stronger for high-income taxpayers than for low-income taxpayers. B) The substitution effect is theoretically stronger for a family's secondary wage earner than for the family's primary wage earner. C) The substitution effect is theoretically stronger for self-employed individuals who control their own time than for employees whose work schedules are controlled by their employers. D) None of these choices are false.
16) Which of the following statements about the income effect of an income tax rate increase is true?
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A) The income effect is theoretically stronger for low-income taxpayers than for highincome taxpayers. B) The income effect is theoretically stronger for a family's secondary wage earner than for the family's primary wage earner. C) The income effect motivates individuals to find ways to increase their before-tax income. D) Both the income effect is theoretically stronger for low-income taxpayers than for high-income taxpayers and the income effect motivates individuals to find ways to increase their before-tax income are true.
17) Which of the following statements about the income and substitution effects of an income tax rate increase is true? A) The income and substitution effects are contradictory behavioral reactions. B) From the government's perspective, the substitution effect is more desirable than the income effect. C) Faith in the income effect is the foundation for supply-side economic theory. D) Dynamic forecasts of incremental tax revenues must consider the potential income effect but not the potential substitution effect of a rate increase.
18)
Supply-side economic theory:
A) Predicts that a decrease in the highest income tax rates will cause an increase in government revenues. B) Is inconsistent with the substitution effect. C) Was a clear failure following the Reagan administration tax cuts of the 1980s. D) Predicts that taxpayers will save their tax windfall from a rate cut rather than spend or investment the windfall.
19)
Which of the following describes a tax that meets the standard of convenience?
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A) A tax that the government can administer without excessive cost. B) A tax that is easy for taxpayers to compute and pay. C) A tax that minimizes the opportunity for noncompliance. D) All of these describe a convenient tax.
20)
Which of the following taxes is most convenient for individuals (purchasers) to pay? A) Sales tax B) Use tax C) Federal income tax D) Real property tax
21)
Which of the following statements regarding a convenient tax is false?
A) From the government's viewpoint, a good tax should be convenient to administer. B) From the taxpayer's viewpoint, a good tax should be convenient to pay. C) A convenient tax should have a method of collection that offers maximum opportunity for noncompliance. D) A convenient tax should permit taxpayers to compute their tax with reasonable certainty without incurring undue costs.
22) Which of the following statements does not describe the classical standard of tax efficiency? A) An efficient tax is a neutral factor in a free market economy. B) An efficient tax does not change taxpayer behavior. C) An efficient tax encourages full employment. D) An efficient tax favors a laissez-faire economy policy.
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23)
The statement that "an old tax is a good tax" means that: A) Changes in the tax law create uncertainty in the business environment. B) Changes in the tax law disrupt traditional planning strategies. C) Changes in the tax law increase the compliance burden on businesses. D) All of these choices are correct.
24) The city of Hartwell spends about $3 million annually on snow removal. The city is considering amending its real property tax law to allow homeowners to offset the cost of private snow removal against their annual property tax liability. This amendment would affect the: A) Fairness of the tax B) Efficiency of the tax C) Sufficiency of the tax D) Convenience of the tax
25) Which of the following statements does not describe the Keynesian standard of tax efficiency? A) An efficient tax encourages economic growth. B) An efficient tax encourages full employment. C) An efficient tax encourages price-level stability. D) All of these describe the Keynesian standard of tax efficiency.
26) Government L levies a 4% excise tax on restaurant meals. It is considering reducing the rate to 2% on meals served in restaurants that ban cigarette and cigar smoking and to increase the rate to 5% in restaurants that allow smoking. Which of the following statements is true?
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A) The rate change would improve the neutrality of the excise tax. B) The rate change would improve the convenience of the tax. C) The rate change is intended to affect social behavior. D) Both the rate change would improve the convenience of the tax and the rate change is intended to affect social behavior are true.
27) Assume the state of California plans to amend its personal income tax laws to allow parents to reduce their tax by the cost of infant car seats. Which of the following statements is true? A) The amendment creates a tax preference for parents who purchase infant car seats. B) The amendment is intended to change social behavior. C) The amendment increases the neutrality of the tax law. D) Both the amendment creates a tax preference for parents who purchase infant car seats and is also intended to change social behavior are true.
28)
Which of the following statements concerning tax preferences is false? A) Tax preferences increase the complexity of the law. B) Tax preferences raise additional revenue for the government. C) Tax preferences are government subsidies for targeted taxpayer activities. D) Tax preferences do not improve the accurate measurement of the tax base.
29)
Which of the following statements concerning tax preferences is true?
A) The annual revenue loss from federal tax preferences is quantified in the Tax Expenditures Budget. B) Tax preferences increase the fairness of the tax law. C) Tax preferences simplify the tax law. D) Tax preferences make the tax law more neutral across taxpayers.
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30)
Which of the following statements about horizontal equity is false?
A) Horizontal equity focuses on a rational and impartial measurement of the tax base. B) Horizontal equity focuses on the measurement of taxpayers' ability to pay. C) If persons with equal ability to pay a tax owe an equal amount of tax, the tax is horizontally equitable. D) None of these choices are false.
31) The federal income tax law allows individuals whose property is destroyed by a natural disaster such as a fire or hurricane to reduce their taxable income by the amount of their financial loss. This rule is intended to improve the: A) Convenience of the tax B) Efficiency of the tax C) Horizontal equity of the tax D) Vertical equity of the tax
32) The sales tax laws of many states exempt the purchase of groceries and prescription drugs from tax. Such exemptions are intended to improve the: A) Convenience of the tax B) Equity of the tax C) Sufficiency of the tax D) Neutrality of the tax
33)
Which of the following statements about vertical equity is false?
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A) Vertical equity focuses on a fair rate structure instead of a fair measurement of the tax base. B) If persons with greater ability to pay owe more tax than persons with lesser ability to pay, the tax is vertically equitable. C) A tax with a single percentage rate is not vertically equitable. D) None of these choices are false.
34)
Jurisdiction M imposes an individual income tax based on the following schedule. Rate 5% + 8% + 12%
Income bracket $-0- to $50,000 $50,001 to $200,000 $200,001 and above
Which of the following statements is true? A) The schedule provides no information as to whether Jurisdiction M's tax is horizontally equitable. B) Jurisdiction M's tax is vertically equitable. C) Jurisdiction M's tax is vertically equitable only for individuals with $50,000 or less taxable income. D) Both "The schedule provides no information as to whether Jurisdiction M's tax is horizontally equitable" and "Jurisdiction M's tax is vertically equitable" are true.
35)
Which of the following statements about a regressive tax rate structure is false?
A) A regressive rate structure cannot result in vertical equity. B) Regressive rates decrease as the tax base increases. C) A regressive rate structure places a proportionally heavier tax burden on taxpayers with smaller tax bases than persons with greater tax bases. D) None of these choices are false.
36)
Vervet County levies a real property tax based on the following schedule.
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Rate
Assessed value 3%
$-0- to $250,000
+ 1%
$250,001 and above
Which type of rate structure does this tax use? A) Proportionate B) Regressive C) Progressive D) Dual-bracket
37)
Vervet County levies a real property tax based on the following schedule. Rate
Assessed value 3%
$-0- to $250,000
+ 1%
$250,001 and above
Bilex Incorporated owns real property valued at $629,800. Compute Bilex's tax on this property. A) $13,798 B) $7,500 C) $6,298 D) None of the choices are correct.
38)
Vervet County levies a real property tax based on the following schedule. Rate 3% + 1%
Assessed value $-0- to $250,000 $250,001 and above
Which of the following statements is false? A) If Mr. Clem owns real property valued at $112,500, the average tax rate is 3%. B) If Ms. Barker owns real property valued at $455,650, the average tax rate is 2.1%. C) If Ms. Lumley owns real property valued at $750,000, the marginal tax rate is 1%. D) None of the choices are false.
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39)
Which of the following statements about tax rate structures is true? A) Regressive rate structures are illegal in the United States. B) A tax with a graduated rate structure must be either regressive or progressive. C) A proportionate rate structure is the only structure resulting in vertical equity. D) None of the choices are true.
40)
Jurisdiction M imposes an individual income tax based on the following schedule. Rate 5% + 8% + 12%
Income bracket $-0- to $50,000 $50,001 to $200,000 $200,001 and above
Which type of rate structure does this tax use? A) Proportionate B) Regressive C) Progressive D) Multi-bracket
41)
Which of the following statements about a progressive tax rate structure is false? A) Progressive rates increase as the tax base increases. B) Progressive rates reflect the theory of the declining marginal utility of income. C) The federal income tax has always used a progressive rate structure. D) Progressive rates result in greater vertical equity than a proportionate rate.
42) Which of the following statements about a proportionate income tax rate structure is false?
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A) A theoretic justification for a proportionate rate is its superior potential for wealth redistribution. B) Under a proportionate rate structure, the marginal rate equals the average rate. C) Under a proportionate rate structure, the taxpayer with the least income pays the same percentage of income to the government as the taxpayer with the most income. D) None of the choices are false.
43)
Which of the following statements concerning income tax rate structures is false?
A) Under a progressive rate structure, the marginal rate and the average rate are equal. B) Under a regressive rate structure, the average rate for low-income individuals is more than the average rate for high-income individuals. C) Under either a regressive, proportionate, or progressive rate structure, high-income taxpayers pay more dollars of tax than low-income individuals. D) In theory, a progressive rate structure results in equal economic sacrifice across taxpayers.
44)
Which of the following statements concerning a regressive tax rate structure is true?
A) A regressive tax rate structure is justified by the tax policy of distributive justice. B) A regressive rate structure is justified by the theory of the declining marginal utility of income. C) Under a regressive rate structure, the average tax rate for high-income taxpayers is less than the marginal tax rate. D) None of the statements are true.
45)
Jurisdiction M imposes an individual income tax based on the following schedule. Rate 5% + 8% + 12%
Income bracket $-0- to $50,000 $50,001 to $200,000 $200,001 and above
Mr. Coen has $78,000 taxable income. Compute the tax on this income. Version 1
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A) $4,740 B) $6,240 C) $8,740 D) None of the choices are correct.
46)
Jurisdiction M imposes an individual income tax based on the following schedule. Rate 5% + 8% + 12%
Income bracket $-0- to $50,000 $50,001 to $200,000 $200,001 and above
Ms. Owen has $314,000 taxable income. Compute the tax on this income. A) $29,680 B) $28,180 C) $37,680 D) None of the choices are correct.
47)
Jurisdiction M imposes an individual income tax based on the following schedule. Rate 5% + 8% + 12%
Income bracket $-0- to $50,000 $50,001 to $200,000 $200,001 and above
Which of the following statements is true? A) If Mrs. Hall's taxable income is $227,000, the average tax rate is 12%. B) If Mr. Poe's taxable income is $41,200, the marginal tax rate is 8%. C) If Ms. Kaye's taxable income is $63,800, the marginal tax rate is 8%. D) None of the choices are correct.
48)
Jurisdiction M imposes an individual income tax based on the following schedule. Rate 5%
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Income bracket $-0- to $50,000 15
+ 8% + 12%
$50,001 to $200,000 $200,001 and above
Which of the following statements is false? A) If Ms. Lui's taxable income is $33,400, the average tax rate is 5%. B) If Mr. Bell's taxable income is $519,900, the marginal tax rate is 12%. C) If Ms. Vern's taxable income is $188,000, the average tax rate is 7.2%. D) None of the choices are false.
49)
Congress originally enacted the federal estate and gift taxes to improve: A) Distributional justice B) Economic efficiency C) Vertical equity D) Horizontal equity
50) Which of the following tax policies would increase the redistribution of wealth across society? A) Repealing the federal estate and gift taxes B) Increasing the highest marginal income tax rate by 10% C) Replacing the progressive income tax rate structure with a flat rate D) Replacing the income tax with a national sales tax
51)
Which of the following statements concerning the standard of fairness is false?
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A) People who believe that a tax is unfair are more likely to evade the tax. B) People believe that the federal income tax is unfair because it contains preferences available only to wealthy individuals. C) The public perception that the federal income tax is unfair has decreased in recent decades. D) None of the choices are false.
52) Assume that Congress plans to amend the federal income tax to provide a deduction for the first $2,400 of residential rent paid by families with incomes below the federal poverty level. Which of the following statements is true? A) The amendment is intended to improve the efficiency of the tax. B) The amendment is intended to improve the equity of the tax. C) The amendment is intended to improve the simplicity of the tax. D) The amendment is intended to improve the convenience of the tax.
53) Assume that Congress plans to amend the federal individual income tax to eliminate the deductions for medical care, charitable contributions, and home mortgage interest. Which of the following statements is true? A) The amendment will reduce the complexity of the tax. B) The amendment will increase the horizontal equity of the tax. C) The amendment will increase the neutrality of the tax. D) Both the amendment will reduce the complexity of the tax and will increase the neutrality of the tax.
54) Assume that Congress plans to amend the federal income tax to provide a deduction for the cost of energy-efficient fluorescent light bulbs. Which of the following statements is true?
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A) The amendment is intended to improve the efficiency of the tax. B) The amendment is intended to improve the equity of the tax. C) The amendment is intended to improve the simplicity of the tax. D) The amendment is intended to improve the convenience of the tax.
55) Congress recently amended the tax law to make it easier for individuals to file their income tax returns electronically (online). Which of the following statements is true? A) The amendment is intended to improve the efficiency of the tax. B) The amendment is intended to improve the equity of the tax. C) The amendment is intended to improve the simplicity of the tax. D) The amendment is intended to improve the convenience of the tax.
56)
A tax meets the standard of sufficiency if it is easy for people to pay the tax. ⊚ true ⊚ false
57)
The federal government is not required to pay interest on the national debt. ⊚ true ⊚ false
58) A static forecast of the revenue effect of a tax rate change assumes that the tax base does not change. ⊚ true ⊚ false
59) A dynamic forecast of the revenue effect of a tax rate change assumes that the tax base does not change. Version 1
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⊚ ⊚
true false
60) The federal Social Security tax burden on employees has not increased since 1990 because the tax rate has not increased since that year. ⊚ true ⊚ false
61) 1%.
If State H increases its sales tax rate by 1%, its sales tax revenue must also increase by ⊚ ⊚
true false
62) The city of Berne recently enacted a 10% tax on the price of a subway ticket. Consequently, Mrs. Lane now walks to work instead of taking the subway. This behavior illustrates the substitution effect of a tax increase. ⊚ true ⊚ false
63) Jurisdiction P recently increased its income tax rate. A taxpayer who reacts to the increase by working harder to earn more income is demonstrating the income effect of the rate increase. ⊚ true ⊚ false
64) According to supply-side economic theory, a decrease in tax rates for high-income individuals could actually cause an increase in tax revenue. ⊚ true ⊚ false
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65) Supply-side economic theory holds that people who benefit from a tax rate reduction will spend their tax windfall on consumption goods. ⊚ true ⊚ false
66)
State use taxes are more convenient for individual consumers than state sales taxes. ⊚ true ⊚ false
67)
The Internal Revenue Service's cost of collecting $100 of tax revenue is about $3. ⊚ true ⊚ false
68) A convenient tax has low compliance costs for taxpayers and low collection and enforcement costs for the government. ⊚ true ⊚ false
69) According to the classical concept of efficiency, an efficient tax should be neutral in its effect on free market allocations of economic resources. ⊚ true ⊚ false
70) According to the Keynesian concept of efficiency, an efficient tax should be neutral in its effect on free market allocations of economic resources. ⊚ true ⊚ false
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71) A tax meets the standard of efficiency if it generates enough revenue to pay for the public goods and services provided by the government. ⊚ true ⊚ false
72) A provision in the tax law designed to encourage a specific economic behavior is a tax preference. ⊚ true ⊚ false
73)
A tax should result in either horizontal or vertical equity across taxpayers. ⊚ true ⊚ false
74) Changes in the tax law intended to make the measurement of taxable income more precise usually make the tax law less complex. ⊚ true ⊚ false
75) Vertical equity focuses on measurement of the tax base, and horizontal equity focuses on the tax rate structure. ⊚ true ⊚ false
76) Tax systems with regressive rate structures result in a proportionally heavier tax burden on persons with smaller tax bases.
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⊚ ⊚
true false
77) A progressive rate structure and a proportionate rate structure both result in vertical equity across taxpayers. ⊚ true ⊚ false
78)
The U.S. individual income tax has always used a progressive rate structure. ⊚ true ⊚ false
79)
The declining marginal utility of income across individuals can be measured empirically. ⊚ true ⊚ false
80)
Tax liability divided by taxable income equals marginal tax rate. ⊚ true ⊚ false
81) If a tax has a proportionate rate structure, a taxpayer's marginal rate and average rate are equal. ⊚ true ⊚ false
82) If a tax has a progressive rate structure, a taxpayer's average rate is greater than her marginal rate.
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⊚ ⊚
83)
true false
The theory of distributional justice is a rationale for a progressive income tax system. ⊚ true ⊚ false
84) Individuals who believe that a tax system is fair are less likely to cheat on their taxes than individuals who believe that the system is unfair. ⊚ true ⊚ false
85)
Many taxpayers believe the income tax system is unfair because it is so complicated. ⊚ true ⊚ false
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Answer Key Test name: Chap 02_2023 5) D 6) A 7) D 8) B 9) C 10) B 11) A 12) D 13) C 14) B 15) D 16) D 17) A 18) A 19) D 20) A 21) C 22) C 23) D 24) B 25) D 26) C 27) D 28) B 29) A 30) D Version 1
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31) C 32) B 33) C 34) D 35) A 36) B 37) D 38) D 39) B 40) C 41) D 42) A 43) A 44) D 45) A 46) B 47) C 48) D 49) A 50) B 51) C 52) B 53) D 54) A 55) D 56) FALSE 57) FALSE 58) TRUE 59) FALSE 60) FALSE Version 1
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61) FALSE 62) TRUE 63) TRUE 64) TRUE 65) FALSE 66) FALSE 67) FALSE 68) TRUE 69) TRUE 70) FALSE 71) FALSE 72) TRUE 73) FALSE 74) FALSE 75) FALSE 76) TRUE 77) TRUE 78) TRUE 79) FALSE 80) FALSE 81) TRUE 82) FALSE 83) TRUE 84) TRUE 85) TRUE
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