Chapter 27 Quiz

Twelve multiple-choice questions and four short-answer questions. Answers and explanations follow.

Multiple choice

1. The federal income-tax rate structure is progressive marginal. This means:

a) Total tax owed is calculated by applying the highest applicable rate to all income. b) Each additional dollar of income is taxed at the rate applicable to its bracket; lower brackets continue to be taxed at lower rates. c) Tax rates rise as the economy grows. d) Capital gains are taxed at the same rate as ordinary income.

2. The 2017 Tax Cuts and Jobs Act made several changes to individual income tax. Which of the following is TRUE?

a) It eliminated the standard deduction. b) It permanently lowered all individual marginal rates. c) It capped the State and Local Tax (SALT) deduction at $10,000 and is scheduled to sunset most individual provisions at the end of 2025. d) It raised the corporate tax rate to 35%.

3. Under U.S. federal estate tax law as of 2024, what share of decedents owe any estate tax?

a) About 10%. b) About 5%. c) About 1%. d) About 0.3%.

4. Which of the following is the largest single tax expenditure in the federal budget?

a) The mortgage interest deduction. b) The exclusion of employer-paid health insurance from taxable income. c) The charitable contribution deduction. d) The State and Local Tax (SALT) deduction.

5. As of FY 2024, mandatory spending was approximately what share of total federal outlays?

a) About 25%. b) About 40%. c) About 64%. d) About 90%.

6. "Industrial policy" — government intervention to promote specific sectors of the economy — has experienced a notable shift in recent U.S. policy. Which best describes the shift?

a) Both parties have abandoned industrial policy in favor of pure free markets. b) After roughly three decades of bipartisan consensus against industrial policy, both parties have moved toward more active sectoral intervention since about 2018. c) The Democratic Party has embraced industrial policy while the Republican Party has consistently opposed it. d) The Republican Party has embraced industrial policy while the Democratic Party has consistently opposed it.

7. The Chicago School approach to antitrust, identified with Robert Bork's The Antitrust Paradox, focuses on:

a) The political-economic harms of concentrated economic power. b) Whether large firms suppress workers' wages. c) Whether conduct produces measurable harm to consumers, typically through higher prices. d) Whether firms have more than 50% of any market.

8. Which of the following best characterizes the contemporary empirical literature on minimum-wage effects?

a) Minimum-wage increases of any size have no employment effects. b) Minimum-wage increases of any size cause large employment losses. c) Moderate minimum-wage increases have small employment effects in most labor markets; very large increases have larger and more uncertain effects, with magnitudes depending on local conditions. d) The literature provides no usable evidence either way.

9. The Federal Reserve's independence in U.S. monetary policy refers primarily to:

a) Complete autonomy from any branch of government. b) Operational independence — the Board of Governors is appointed by the President with Senate confirmation, but operational decisions on rates and balance sheet are not subject to executive override. c) Independence from the global financial system. d) Independence from federal banking law.

10. The U.S. Gini coefficient for household income, by Census Bureau data, was approximately 0.40 in 1980 and approximately what in 2020?

a) 0.30 b) 0.40 c) 0.49 d) 0.65

11. The Auten and Splinter (2024) paper on income inequality:

a) Confirmed the Piketty-Saez estimates exactly. b) Argued that top-1% income share rose by less than the Piketty-Saez series suggests, after adjusting for tax-unit definitions, transfer income, and unreported income. c) Argued that top-1% income share rose by more than Piketty-Saez found. d) Concluded that there is no inequality in the United States.

12. The 2018 Trump administration tariffs on Chinese imports (Section 301) and the 2022 Biden administration trade actions:

a) Were entirely opposed in their direction; Biden reversed Trump's tariffs. b) Were continuous in important respects; the Biden administration retained most Trump-era China tariffs and added some additional ones. c) Affected only Chinese goods produced after 2020. d) Were declared unconstitutional by the Supreme Court.

Short answer

Each short-answer question expects a 100–200-word response.

13. Explain the difference between the statutory corporate tax rate and the effective corporate tax rate. Why might a 21% statutory rate produce an effective rate substantially below 21%?

14. Steel-man the conservative case for taxing capital gains at lower rates than ordinary wage income. Then steel-man the progressive case for taxing them at the same rate. State the strongest version of each.

15. The neo-Brandeisian challenge to Chicago School antitrust argues that the consumer-welfare standard is too narrow. What broader harms do neo-Brandeisians identify, and what is the conservative response?

16. Federal Reserve independence has both a theoretical case for it and a democratic-accountability case against unlimited independence. Sketch each side fairly in 100 words or so.

Answer key

1. b. Marginal rates apply only to dollars within each bracket. A common misconception (a) drives some opposition to "moving up a tax bracket" that is empirically unfounded.

2. c. The TCJA capped SALT at $10,000 and made individual provisions temporary (sunsetting end of 2025), in contrast to its permanent corporate rate cut. The standard deduction was approximately doubled, not eliminated (a is wrong); rates were lowered but on a sunset schedule (b is wrong); the corporate rate was cut to 21%, not raised (d is wrong).

3. d. About 99.7% of decedents owe no federal estate tax due to the exemption (~$13.6M individual in 2024).

4. b. The exclusion of employer-paid health insurance is approximately $300B/year, the largest single tax expenditure. Capital-gains and dividend preferences are next. The mortgage interest deduction is much smaller (about $30B post-TCJA cap).

5. c. Mandatory spending was about 64% of FY 2024 outlays; discretionary about 26%; net interest about 13%.

6. b. The 1980s–2010s consensus against industrial policy has eroded; both parties have engaged in sectoral intervention since 2018 (Trump 1 tariffs, CHIPS Act, IRA).

7. c. The Chicago School consumer-welfare standard focuses on measurable consumer harm, narrowly defined. (a) describes neo-Brandeisian concerns. (b) describes the labor-market-concentration literature. (d) is a structural test the Chicago School rejected.

8. c. Modern empirical literature (Card-Krueger and successors; Cengiz et al.; CBO 2021) supports this nuanced finding. The 1980s "always causes unemployment" view is too strong; the "no effect at any level" view is also too strong.

9. b. Operational independence within government — the Fed answers to its statutory mandate but its rate decisions are not subject to executive veto.

10. c. Census P-60 data; the Gini for household money income rose from about 0.40 in 1980 to about 0.49 in 2020.

11. b. Auten-Splinter argued the Piketty-Saez series overstated the rise; their adjusted series shows top-1% income share rising from about 9% to about 12%, rather than to 19%.

12. b. The Biden administration retained most Trump-era China tariffs and added new ones (EVs, batteries, solar, semiconductors). The Trump 2.0 administration has expanded further.

Short answer 13. Statutory rate is the rate prescribed by law (21% since 2017). Effective rate is what corporations actually pay after credits, deductions, accelerated depreciation, and international structuring. JCT estimates put the effective rate for large profitable corporations in roughly the 13–17% range. The gap reflects both intentional policy (R&D credits, accelerated depreciation as investment incentive) and unintentional gaps (international profit-shifting that base-erosion provisions only partially address).

Short answer 14. Conservative: Lower capital-gains rates avoid double taxation of corporate profits already taxed at the corporate level; reward patient long-term investment over short-term churning; address the inflation portion of nominal gains; encourage capital formation that benefits workers via higher productivity and wages. Progressive: A rate gap between wages and capital gains systematically favors households whose income is from owning assets over households whose income is from working; the corporate-double-taxation argument assumes corporations actually pay statutory rates, which they often don't; inflation indexing can be done directly without lowering rates; the rate gap is among the largest sources of tax-driven inequality.

Short answer 15. Neo-Brandeisian harms: reduced innovation; suppressed wages from labor-market concentration; political-economic concentration that distorts democracy; conflicts of interest in vertically integrated platforms; harms to suppliers and small competitors. Conservative response: these harms are real concerns but not amenable to legal enforcement under existing antitrust statutes; expansion would require congressional action; aggressive enforcement creates regulatory uncertainty that may chill procompetitive M&A; recent FTC cases have lost on the legal merits, suggesting theory has outpaced doctrine.

Short answer 16. For independence: monetary policy operates on a 12–24-month lag that does not match the political cycle; politicians have systematic biases toward easier money than economic conditions justify; cross-country empirical work (Alesina-Summers, subsequent literature) found more independent central banks produce lower inflation without sacrificing growth. Against unlimited independence: monetary policy has substantial distributional consequences (interest rates affect borrowers and savers differently; QE inflates asset prices held disproportionately by the wealthy); decisions of this magnitude warrant democratic accountability; the Fed's mandate has effectively expanded over time without congressional re-authorization.