ECO 450 Week 10 Quiz – Strayer

ECO/450 Week 10 Quiz – Strayer

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CHAPTER 15
Taxation of Corporate Income
TRUE/FALSE QUESTIONS
1. The corporate income tax in the United States is levied only on economic profits.
2. Imputed interest from retained earnings are not deducted when computing taxable corporate income.
3. In general, the shorter the depreciation period allowed for tax purposes, the higher the tax burden on corporations.
4. Accelerated depreciation allows a firm to deduct more than the actual economic depreciation from its income each year.
5. Inflation causes an understatement of true depreciation cost.
6. If a corporation maximizes profits, an ad valorem tax on its profits will result in a reduction in output in the short run.
7. Assuming that the corporate income tax is not shifted to consumers in the short run, the long-run effect will be a reduction in the return to investment in both the corporate and noncorporate sector.
8. The excess burden of the corporate income tax stems from a misallocation of investment between the corporate and noncorporate sectors when the supply of savings is perfectly inelastic.
9. When the supply of savings is not perfectly inelastic, the corporate income tax can be shifted to workers.
10. In the long run the corporate income tax has no effect on the price of products produced by corporations.
11. The corporate income tax in the United States is levied on the sum of economic and normal profits.
12. The corporate income tax is levied only on retained earnings with dividends paid out exempt from taxation.
13. Because the corporate income tax base includes dividends, those dividends are taxed twice if they are also included in the personal income tax base.
14. Because the opportunity cost of a corporate equity is not tax deductible, the corporate income tax encourages borrowing, which allows interest cost to be deducted from corporate income.
15. If the corporate income tax is not shifted in the short run, then in the long run it will reduce the return to capital in the corporate sector only.
16. Depreciation is based on historic cost.
17. During periods of inflation historic cost overstates replacement cost.
18. Corporate dividends are paid from post-tax income.
MULTIPLE CHOICE QUESTIONS
1. 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.
2. Accelerated depreciation allows corporations to:
a. earn more interest on their capital costs.
b. reduce capital costs to zero.
c. reduce labor costs.
d. increase the time period over which assets are depreciated.
3. If corporations maximize profits, the short-run incidence of a tax on its profits will be borne by:
a. consumers.
b. all investors.
c. corporate shareholders.
d. workers.
4. 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:
a. reduce the incomes of corporate shareholders only.
b. reduce the incomes of workers only.
c. reduce the incomes of all investors.
d. increase the price of both corporate and noncorporate goods.
5. Assuming that the supply of savings is perfectly inelastic, the corporate income tax prevents the attainment of efficiency by:
a. reducing annual savings.
b. reducing annual investment.
c. reducing wages.
d. causing a misallocation of investment between the corporate and noncorporate sectors
6. Assuming that corporations maximize profits and investors maximize the return from their invest¬ment, a corporate income tax is likely to:
a. increase the price of corporate goods.
b. decrease the price of noncorporate goods.
c. both (a) and (b)
d. have no effect on output prices.
7. Inflation affects corporate income by:
a. understating depreciation and inventory costs.
b. overstating capital gains.
c. both (a) and (b)
d. always increasing taxes.
8. Assuming that corporations maximize profits, that investors maximize the return to their invest¬ments, and that the supply of savings is not perfectly inelastic, in the long run a corporate income tax will:
a. not prevent investment markets from achieving efficiency.
b. reduce investment.
c. reduce wages.
d. both (b) and (c)
9. Which of the following is true about the economic effects of the corporate income tax?
a. Its incidence is likely to be borne entirely by workers.
b. Its incidence is likely to be borne only by shareholders of corporations.
c. Its incidence is likely to be borne only by consumers of corporate products.
d. Its incidence is likely to be shared by owners of capital, workers, and consumers of corporate products.
10. According to the Harberger model of the incidence of the corporate income tax, the tax:
a. reduces the return to capital in the corporate sector of the economy only.
b. reduces the return to capital in all uses.
c. has no effect on the return to capital.
d. increases the return to capital.
11. If corporations maximize profit, a corporate income tax:
a. has no affect on the profit-maximizing output in the short run.
b. reduces the profit, maximizing output in the short run.
c. increase the profit, maximizing output in the short run.
d. increases the supply of corporate output in the short run.

12. Under the corporation income tax in the United States,
a. interest on borrowed money cannot be deducted from the tax base.
b. only economic profits are taxed.
c. only normal profit is taxed.
d. the opportunity cost of equity cannot be deducted from the tax base.
13. 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.
14. In the long run a corporate income tax that initially reduces the return to investment in the corpo¬rate sector will also:
a. reduce the return to capital in noncorporate sectors.
b. increase the output of corporate goods.
c. decrease the output of noncorporate goods.
d. both (b) and (c)
15. 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.
d. both (b) and (c)
16. The double taxation of dividends under U.S. tax code means:
a. dividends are taxed while not being adjusted for inflation.
b. dividends are paid from after-tax corporate income and then taxed again as personal income
c. dividends are deducted as an expense at the corporate level, but as a gain at the personal level
d. both (a) and (b)
17. 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?
a. $85,000.00
b. $105,100.00
c. $90,100.00
d. $100,000.00
18. If interest on corporate debt is tax deductible, a firm’s return on equity increases because:
a. after-tax income increases with the presence of debt.
b. generally, the presence of debt reduces the amount of equity to a greater effect than the reduction in after-tax.
c. debt reduces equity and increases after-tax income.
d. the presence of debt to lead to increases in dividends.

19. Assuming no change in the payout structure, what measure would reduce corporate financing costs?
a. allowing dividends to be deducted from income prior to assessing tax.
b. a reduction in the tax rate.
c. limiting the amount of interest that can be deducted from income prior to assessing tax.
d. both (a) and (b)
20. The effective tax rate is:
a. the same as the statutory tax rate.
b. based on real economic profits.
c. based on the nominal profits.
d. not inflation adjusted.

CHAPTER 16
Taxes on Consumption and Sales
TRUE/FALSE QUESTIONS
1. Comprehensive consumption is measured by excluding increments in net worth from comprehen¬sive income.
2. If two persons have equal labor earnings over their lifetimes and never receive any gifts or inheri¬tances, then the discounted present value of income taxes that they pay will be the same despite any differences in their rates of saving.
3. A tax on comprehensive consumption will not prevent the attainment of efficiency in investment markets.
4. Under a comprehensive consumption tax, liability for payment of taxes on the amount of income saved in any year is deferred rather than eliminated.
5. Under a consumption tax, borrowing money will increase taxes that are due in the year the funds are borrowed.
6. If a flat-rate tax on comprehensive consumption yields the same revenue as a flat-rate tax on com¬prehensive income, the tax rate for the two taxes must be equal.
7. Substituting a comprehensive consumption tax for an equal-yield comprehensive income tax will reduce excess burden in the labor market.
8. Sales taxes in the United States generally tax all personal services.
9. The value-added tax as used in Western Europe generally exempts investment goods from taxation.
10. The value-added tax, collected through the invoice method, exempts intermediate purchases from taxation.
11. A comprehensive income tax is more favorable to the incentive to save than a comprehensive con¬sumption tax.
12. A comprehensive consumption tax is equivalent to a comprehensive tax on labor income.
13. A comprehensive consumption tax will not prevent labor markets from attaining efficiency.
14. The retail sales tax is a major source of revenue for the federal government in the United States.
15. As used in Europe, the value-added tax typically excludes services from the tax base.
16. A consumption tax is the same as an income tax.
17. Annual comprehensive consumption is equal to annual comprehensive income if there is no annual savings.
18. A sales tax encourages saving and discourages consumption.
MULTIPLE CHOICE QUESTIONS
1. A flat-rate tax on comprehensive consumption:
a. will reduce the market rate of interest.
b. will reduce net interest received by savers in any given year.
c. will not result in any difference between the gross interest rate paid by borrowers and the net interest rate received by savers.
d. causes no loss of efficiency in labor markets.
2. Assuming that a person never receives any cash gifts or bequests, a tax on comprehensive con¬sumption is equivalent to a(n):
a. tax on capital income.
b. tax on labor income.
c. income tax.
d. wealth tax.
3. A tax on comprehensive consumption:
a. will not influence a taxpayer’s work-leisure choice.
b. will not affect the incentive to save in ways that cause losses in efficiency.
c. is likely to reduce saving.
d. will exempt consumption of personal services from taxation.
4. Substitution of an equal-yield general consumption tax for an income tax will:
a. improve efficiency in investment markets.
b. impair efficiency in the labor market.
c. increase taxes paid by those earning interest on income.
d. both (a) and (b)
e. both (b) and (c)
5. The differential incidence of substituting a tax on comprehensive consumption for a tax on compre¬hensive income is likely to be:
a. regressive.
b. progressive.
c. proportional.
d. uncertain.
6. 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,
a. the discounted present value of taxes paid will be the same for both.
b. the discounted present value of taxes paid will be greater for the saver.
c. the discounted present value of taxes paid will be greater for the nonsaver.
d. the saver will pay no tax on his interest income.
7. In most states, the retail sales tax can be regarded as equivalent to a:
a. comprehensive tax on consumption.
b. comprehensive tax on income.
c. set of selective excise taxes.
d. tax on the profits of retailers.
8. A consumption-type, value-added tax:
a. will not cause losses in efficiency in labor markets.
b. will not cause losses in efficiency in investment markets.
c. both (a) and (b)
d. taxes interest income.
9. The invoice method of collecting the value-added tax:
a. requires firms to compute value added.
b. taxes a firm’s sales at a fixed rate but allows a credit for taxes paid on purchases of interme¬diate goods.
c. requires firms to pay a fixed rate of taxation on both sales and purchases.
d. taxes only intermediate purchases at a fixed rate.
10. Which of the following statements about taxes on consumption are true?
a. Taxes on consumption do not distort choices between current and future consumption in ways that impair efficiency.
b. Taxes on consumption have the same economic effects as taxes on income.
c. Taxes on consumption are likely to reduce saving.
d. Taxes on consumption have no effect on real wages.
11. Comprehensive consumption is:
a. equal to comprehensive income.
b. is comprehensive income plus savings.
c. is comprehensive income minus savings.
d. excludes services.
12. A direct tax on comprehensive consumption:
a. requires taxpayers to report their annual income.
b. requires taxpayers to report their annual savings.
c. taxes savings.
d. both (a) and (b)
13. Which of the following taxes is likely to be most favorable for capital accumulation?
a. a comprehensive income tax
b. a comprehensive tax on wealth
c. a comprehensive tax on consumption
d. an excise tax on gasoline
14. As administered in most states in the United States, the retail sales tax:
a. has zero excess burden.
b. distorts the choice between taxed goods and untaxed services, resulting in some efficiency loss.
c. taxes all services.
d. discourages saving.
15. The value-added tax used in the European Union:
a. generally exempts services from taxation.
b. requires all taxpayers to report value added.
c. exempts investment purchases from taxation.
d. taxes all transactions at the same low rate.
16. Nicholas Kaldor argued:
a. consumption is a better index of the ability to pay than income.
b. savings entails sacrifice and results in no increase in well-being.
c. consumption provides little personal satisfaction and should be taxed for that reason.
d. both (a) and (b)
17. An adult’s life cycle is considered to begin:
a. 18 years old.
b. 21 years old.
c. upon earning fulltime employment.
d. none of the above
18. Consumption-in-kind:
a. is exemplified by services provided and consumed in the household.
b. is the same as income-in-kind
c. is easily determined.
d. both (a) and (b)
19. What below is taxable under a consumption tax system?
a. savings
b. contributions to social security
c. contributions to retirement funds
d. a bequest at death
20. A cash-flow tax is:
a. a modified version of a consumption tax.
b. a modified version of an income tax.
c. a tax that allows some savings to be excluded from tax.
d. both (a) and (c)