Econ for Everyone: Midterm 2

The following statements are true regarding transfer payments from the US federal government.

• These transfer payments (T) are different from government spending (G) in that T are transfer of purchasing power and G are actual spending on goods and services.

• These transfer payments include social security, medicare and medicaid.

• These transfer payments are increasing over time in current dollars.

• These transfer payments are increasing over time as share of GDP

• These transfer payments are decreasing in real value over time.

According to one diagram on the lecture slides, how much does the US government currently raise in direct and indirect taxes, including social contributions?

• Around 15%

• Around 25%

• Around 35%

• Around 45%

In a progressive income tax scheme as in the US federal income taxation, the following is true

• Higher-income individuals pay a lower fraction of their incomes as taxes.

• Higher-income individuals pay a higher fraction of their incomes as taxes.

• The average tax rate is equal to or lower than the marginal tax rate at any given income level.

• The average tax rate is equal to the marginal tax rate at most income levels.

When taxes are levied, people try to avoid them. Examples include:

• A single mother receiving multiple benefits may lose more in benefits than she gains from a wage increase, leading to a strong disincentive to work or take promotions.

•   When state governments provided extra unemployment benefits during Covid, the unemployment rate rose significantly.

• When the toll rises to enter NYC, you will see less drivers in Manhattan.

• Income tax induces people to work less because the after-tax pay rate is lower.

Which of the following statements are true about Laffer Curve?

•  

  Tax revenue is not strictly increasing with respect to tax rate.

• In general, there are two tax rates that achieve a given level of tax revenue.

• Most experts believe that the economy is on the right side of the Laffer Curve.

• Most experts believe that the economy is on the left side of the Laffer Curve.

what challenges did European countries face with wealth taxes?

• Difficulty in accurately valuing diverse types of assets

• Significant capital flight

• Strong political opposition

• Low public support

• High administrative costs

Government in general can raise revenues in the following ways:

• Collect taxes

• Issue debt

• Print money

• Pay interest

• Pay medicaid and medicare

The history of the federal debt has the following features:

• The debt-to-GDP ratio typically spikes during wartime and declines during peacetime until the early 1980s.

• The peak debt-to-GDP ratio during World War II is roughly equivalent to what it is today.

• The U.S. federal government assumed the debts incurred by the states during the Revolutionary War by refinancing them as federal obligations.

• In international comparisons, the U.S. debt-to-GDP ratio is relatively high, except when compared to countries like Italy, Greece, Japan, the UK, and Singapore.

The benefits of government debt include:

• When government expenditures temporarily increase (e.g., due to war), tax rates do not have to be adjusted immediately.

• It provides safe assets for investors and contributes to the development of active capital and money markets.

• By deferring repayment and continuously rolling over the debt, the government can avoid servicing its debt entirely.

• In the late 18th-century U.S., demonstrating the government's capacity to borrow and repay debt helped secure future loans and build investor confidence.

The costs of government debt include:

• Future tax rates might need to be raised, leading to increased economic distortions.

• Increased debt heightens the risk of default, which could have catastrophic economic impacts.

• Competition for a limited pool of loanable funds may increase borrowing costs for businesses and homebuyers.

• It enables the government to stabilize tax revenues over time.