Course
Public Finance
Test
Quiz 8
Instructions This quiz consist of 30 multiple choice questions. The first 15 questions cover the
material in Chapter 15. The second 15 questions cover the material in Chapter 16. Be
sure you are in the correct Chapter when you take the quiz.
false
Question 1
According to the Harberger model of the incidence of the corporate income tax, the tax:
Answer
Correct Answer:
reduces the return to capital in all uses.
Question 2
Under the corporation income tax in the United States,
Answer
Correct Answer:
the opportunity cost of equity cannot be deducted from the tax base.
Question 3
Accelerated depreciation allows corporations to:
Answer
Selected Answer:
Correct Answer:
earn more interest on their capital costs.
Question 4
If corporations maximize profits, the short-run incidence of a tax on its profits will be borne
by:
Answer
Correct Answer:
corporate shareholders.
Question 5
The tax base for the corporate income tax in the United States is:
Answer
Correct Answer:
the sum of normal and economic profits of corporations.
Question 6
The double taxation of dividends under U.S. tax code means:
Answer
Correct
Answer:
dividends are paid from after-tax corporate income and then taxed again
as personal income
Question 7
If an all-equity firm has after-tax income of $100,000 based on a 34% income tax, what is
the after-tax income of an equivalent firm that pays $15,000 in interest that is tax
deductible?
Answer
Correct Answer:
$90,100.00
Question 8
If interest on corporate debt is tax deductible, a firm’s return on equity increases because:
Answer
Correct
Answer:
generally, the presence of debt reduces the amount of equity to a greater effect
than the reduction in after-tax.
Question 9
Assuming that the supply of savings is perfectly inelastic, the corporate income tax prevents the
attainment of efficiency by:
Answer
Correct
Answer:
causing a misallocation of investment between the corporate and
noncorporate sectors
Question 10
If the supply of savings is not perfectly elastic, the corporate income tax is likely to:
Answer
Correct Answer:
decrease investment.
Question 11
In the long run a corporate income tax that initially reduces the return to investment in the
corporate sector will also:
Answer
Correct Answer:
reduce the return to capital in noncorporate sectors.
Question 12
If corporations maximize profit, a corporate income tax:
Answer
Correct Answer:
has no affect on the profit-maximizing output in the short run.
Question 13
Assuming that corporations maximize profits and investors seek to maximize the return to their
investments, the long-run impact of a corporate income tax is to:
Answer
Correct Answer:
reduce the incomes of all investors.
Question 14
The effective tax rate is:
Answer
Correct Answer:
based on real economic profits.
Question 15
Which of the following is true about the economic effects of the corporate income tax?
Answer
Correct
Answer:
Its incidence is likely to be shared by owners of capital, workers, and
consumers of corporate products.
Question 16
In most states, the retail sales tax can be regarded as equivalent to a:
Answer
Correct Answer:
set of selective excise taxes.
Question 17
The differential incidence of substituting a tax on comprehensive consumption for a tax on
comprehensive income is likely to be:
Answer
Correct Answer:
regressive.
Question 18
Suppose two individuals earn the same salary each year over their lifetimes. One individual saves
25 percent of his income each year, while the other saves nothing. Over their lifetimes under a
comprehensive income tax,
Answer
.
Correct Answer:
the discounted present value of taxes paid will be greater for the saver.
Question 19
The value-added tax used in the European Union:
Answer
Correct Answer:
exempts investment purchases from taxation.
Question 20
Consumption-in-kind:
Answer
Correct Answer:
is exemplified by services provided and consumed in the household.
Question 21
As administered in most states in the United States, the retail sales tax:
Answer
Correct
Answer:
distorts the choice between taxed goods and untaxed services, resulting in
some efficiency loss.
Question 22
Comprehensive consumption is:
Answer
Correct Answer:
is comprehensive income minus savings.
Question 23
A flat-rate tax on comprehensive consumption:
Answer
Selected
Answer:
Correct
Answer:
will not result in any difference between the gross interest rate paid by
borrowers and the net interest rate received by savers.
will not result in any difference between the gross interest rate paid by
borrowers and the net interest rate received by savers.
Question 24
Which of the following taxes is likely to be most favorable for capital accumulation?
Answer
Correct Answer:
a comprehensive tax on consumption
Question 25
The invoice method of collecting the value-added tax:
Answer
Correct
Answer:
taxes a firm’s sales at a fixed rate but allows a credit for taxes paid on purchases
of intermediate goods.
Question 26
Which of the following statements about taxes on consumption are true?
Answer
Correct
Answer:
Taxes on consumption do not distort choices between current and future
consumption in ways that impair efficiency.
Question 27
A consumption-type, value-added tax:
Answer
Correct Answer:
will not cause losses in efficiency in investment markets.
Question 28
An adult’s life cycle is considered to begin:
Answer
Selected Answer:
18 years old.
Correct Answer:
18 years old.
Question 29
Assuming that a person never receives any cash gifts or bequests, a tax on comprehensive consumption is equivalent to a(n):
Answer
Selected Answer:
tax on labor income.
Correct Answer:
tax on labor income.
Question 30
A tax on comprehensive consumption:
Answer
Correct Answer:
will not affect the incentive to save in ways that cause losses in efficiency.