Public Finance 10th Edition By Hyman – Test Bank

True/False Questions

1. A lump-sum tax results in both income and substitution effects. (F)
2. A consumer currently pays $500 a year retail sales taxes. She would be better off if she paid the same amount annually as a lump-sum tax. (T)
3. Clothing is sold in perfectly competitive markets where no externalities prevail. An excise tax on clothing will result in a market price for clothing that equals the marginal social benefit and mar­ginal social cost of service. (F)
4. Assuming that the income effects are negligible and that beer is sold in a competitive market, a 10‑cent per can tax on beer that causes a 10,000 can per month decline in sales will result in an excess burden of $1,000 per month. (F)
5. A tax on land results in an income effect on landlords but no substitution effect. Then it follows that the excess burden of a tax on land will be zero. (T)
6. The excess burden of a tax on interest income is $5 billion per year. Total interest income per year is $50 billion. The tax currently collects $15 billion in revenue per year. The efficiency-loss ratio of the tax is therefore 0.33. (T)
7. A payroll tax results in a difference between the gross wages paid by employers and the net wages received by workers. (T)
8. If the market supply of labor services is perfectly inelastic, a tax on labor income will reduce the net wages received by workers by the full amount of the tax per labor hour. (T)
9. If a $10 per unit tax is levied on the output of a monopolist, more of that tax will be shifted to con­sumers than would be the case if the same good were produced by a competitive industry. (F)
10. A study indicates that taxes in the United States reduce the Gini coefficient for the nation by 10 percent. This implies that taxes make the income distribution more equal. (T)
11. A lump-sum tax only results in income effects. (T)
12. An income tax is an example of a price-distorting tax. (T)
13. The more price-elastic the demand of a taxed item, the lower the excess burden of a tax on the sale of that item. (F)
14. If the tax on the sale of gasoline is doubled from 20 cents per gallon to 40 cents per gallon, the excess burden of the tax will quadruple. (T)
15. If the compensated elasticity of supply of labor is zero, then a tax on labor earnings will have zero excess burden. (T)
16. Lump-sum taxes do not prevent prices from equaling the marginal social cost and benefit of any goods and services. (T)
17. Lump-sum taxes can vary in amount based on income level. (F)
18. A lump-sum tax can distort prices and affect consumption behavior. (F)