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Quiz 8 Chapter 15 and 16
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
investment, 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
investments, 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 corporate 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 comprehensive
income.
2. If two persons
have equal labor earnings over their lifetimes and never receive any gifts or
inheritances, 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
comprehensive 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 consumption 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 consumption
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 comprehensive 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 intermediate 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)
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