Chapter 18 Notes
1) A) Suppose you earn an annual income of $22,500 and you paid a total of $3,600 in taxes. Your average tax rate is 16%.
B) Suppose you earn an annual income of $22,500 and each dollar earned is taxed at the same rate. Your marginal tax rate is
the same as your average tax rate.
C) Suppose the marginal tax rate on the firs $25,000 of income is 20%, and on any income above that, the rate rises to 30%. If
your annual income is $42,000, you’ll pay a total income tax of $10,000.
D) Lower-income groups typically spend a higher portion of their income than do high-income groups. For this reason, excise
and sales taxes are considered to be somewhat regressive.
E) The most important source of revenue for municipalities is the property tax. Rather than being a tax on income or
expenditure, it is a tax on wealth.
2) A) Evaluation of a tax system requires consideration of the following two aspects of taxation: equity and efficiency.
B) Taxation usually causes allocative inefficiency because it distorts the equality between marginal cost and marginal profit of
a given activity.
C) Economists refer to the revenue collected as the result of a tax as the direct burden of taxation. Economists refer to other
costs imposed on society because of the tax as the excess burden of taxation.
D) An efficient tax system is one that collects a given amount of revenue while minimizing the amount of inefficiency.
E) The Laffer curve suggests that above some tax rate, further increases in the tax rate will decrease tax revenue.