Use the marginal income tax rates shown here to calculate the average tax rate o

Question

Use the marginal income tax rates shown here to calculate the average tax rate on an income of $100,000.

Taxable Income

Tax rate

10%

15%

25%

28%

33%

35%

Average tax rate on $100,000 of income is ____________.

21.46%

24.27%

28.00%

10.5 points   

QUESTION 2

Use the marginal income tax rates shown here to calculate the average tax rate on an income of $200,000.

Taxable Income

Tax rate

10%

15%

25%

28%

33%

35%

Average tax rate on $200,000 of income is ___________.

25.26%

30.50%

33.00%

10.5 points   

QUESTION 3

Based on the data below, which of the four nations was in the worst fiscal shape in 2010? (All data comes from the OECD and is in billions of current U.S. dollars.)

Spain, because it had the highest annual budget deficit between 2000 and 2010.

Ireland, because it had the lowest GDP in 2010.

Spain, because it had the highest debt in 2010.

Greece, because it had the highest debt-to-GDP ratio in 2010.

10.5 points   

QUESTION 4

Suppose that over the past 50 years, the nominal and real deficit of a country grew from $100 billion to $200 billion. Suppose that, over the same time, real GDP grew from $100 billion to $300 billion. Using __________, we can give an accurate picture of what happened in the country and conclude that the country is __________.

nominal deficits; worse off

real deficits; worse off

real deficits; better off

deficit-to-GDP ratio; worse off

deficit-to-GDP ratio; better off

10.5 points   

QUESTION 5

Using the data shown in the table below, the debt-to-GDP ratio for Greece in 2001 was _______ and the debt-to-GDP ratio for Greece in 2011 was _________.

2001

2011

Debt

GDP

Debt

GDP

$134.6 billion

$129.8 billion

$493.19 billion

$289.6 billion

170.3%; 103.7%

103.7%; 170.3%

96.4%; 58.7%

58.7%; 96.4%

1.037%; 1.703%

10.5 points   

QUESTION 6

You have been hired as an economic advisor for a politician running for national office. The politician, at a recent campaign event, said that corporations are paying too much in taxes and are funding most of the federal government’s operations. When you speak to the politician after the event, what would you say?

“I can’t believe you said that! Everyone knows that taxes on cigarettes and alcohol (excise taxes) represent the largest source of tax revenue for the federal government.”

“Good job! You will win this election based on your sound economic knowledge.”

“We have a great deal of work to do. On the news tonight I predict there will be an expert correcting you and questioning why anyone would vote for you. Individuals, through income tax and social insurance taxes, provide the bulk of government revenue.”

“So close! Maybe no one will catch your error. Corporate and estate taxes are about equal and are tied for the largest sources of tax revenue.”

“Everyone knows that taxes on inheritances are the largest source of tax revenue. Perhaps we should rethink our election strategy.”

10.5 points   

QUESTION 7

Which of the following statements are true about deficits versus debt?

The current year deficit can be subtracted from, the current year debt to find the previous year’s deficit.

The sum of all debts equal the deficit.

The sum of all deficits equal the debt.

If in year 1 the debt is $1 million and the deficit in year 2 in $200,000, the debt in year 2 is $800,000.

If in year 4 the deficit is $2 million and in year 3 the debt is $50 million, the debt in year 4 is $52 million.

10.5 points   

QUESTION 8

Which of the following statements about Medicare and Social Security are false?

Spending on Medicare and Social Security has increased dramatically as the population has gotten older.

Medicare and Social Security represent a mandatory outlay.

Medicare and Social Security represent about 10% of total government spending.

Medicare is a program that provides health care to the poor and to the elderly.

Social Security and Medicare are social insurance programs.

10.5 points   

QUESTION 9

Which of the following represents a mandatory government outlay?

an interest payment made to holders of government debt

a payment made to a construction worker who was hired to pave a road

the payment of health care expenses for those participating in the Medicare program (health care for the poor)

rental assistance payments made to those who are poor

the purchase of a new tank to replace a tank destroyed during a war

10.5 points   

QUESTION 10

Which of the following would be considered a transfer payment by the government?

The government spends money to replace all computers in government offices.

The government gives every citizen $1,000 with the hope that the individual will buy a new computer.

The government helps senior citizens cover their monthly expenses with a cash payment.

The government directly pays the health care expenses of senior citizens.

The government hires a construction crew to rebuild a bridge across a river.

Taxable Income

Tax rate

$0–$8,700

10%

$8,700–$35,350

15%

$35,350–$85,650

25%

$85,650–$178,650

28%

$178,650–$388,350

33%

Over $388,350

35%

Explanation / Answer

(1) When Income = 100,000,

Tax payable = 10% x 8,700 + 15% x (35,350 - 8,701) + 25% x (85,650 - 35,351) + 28% x (100,000 - 85,651)

= 870 + 3,997.5 + 12,575 + 4,018

= 21,460.5

Average tax rate = Total tax / income = 21,460.5 / 100,000 = 21.46%

(2) When income = 200,000,

Tax payable =

10% x 8,700 + 15% x (35,350 - 8,701) + 25% x (85,650 - 35,351) + 28% x (178,650 - 85,651) + 33% x(200,000 - 178,651)

= 870 + 3,997.5 + 12,575 + 26,039.7 + 7,045.17

= 50,527.37

Average tax rate = 50,527.37 / 200,000 = 25.26%

(3) Greece is in the worst fiscal situation with huge debt/GDP ratio, which will lead to a debt spiral upward.

(4) Using Deficit/GDP ratio, we conclude that country is better-off.

[Deficit/GDP ratio has decreased from 1 (=100 / 100) to 0.67 (= 200 / 300)]

(5) Debt/GDP (2001) = 134.6 / 129.8 = 103.7%

Debt/GDP (2011) = 493.19 / 289.6 = 170.3%

(6) (c)

Individual taxes comprise majority of tax revenue.

(7) (d)

Year 4 deficit = Year 3 debt + Year 4 deficit

= $50 mill + $2 mill = $52 mill

(8) Option (c) is wrong. Spending on medicare & social security is much higher than 10%.

(9) (a).

Interest payment to debt-holders is a mandatory expense and obligation to be fulfilled.

(10) (c)

Payment to senior citizens is a unilateral transfer payment from government fund to individuals.

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