CBE Public Finance 2

Question 1

Which concept describes the condition where a tax system collects the same revenue but imposes the least possible excess burden on the economy?

Accepted Answer

Optimal taxation

Answer

Optimal taxation theory seeks to design tax structures that raise required revenue while minimizing deadweight loss and distortions to economic behavior.

Question 2

A state government increases its sales tax from 5% to 7%. If the price elasticity of demand for taxed goods is -0.8, what is the expected effect on tax revenue?

Accepted Answer

Revenue rises because the rate increase outweighs the demand reduction

Answer

With price elasticity of -0.8 (inelastic), a 40% rate increase leads to only an 32% quantity decrease, so total revenue increases.

Question 3

The Tiebout model of local public finance predicts that households will:

Accepted Answer

Sort themselves among jurisdictions based on preferred tax-service bundles

Answer

The Tiebout model suggests households 'vote with their feet,' moving to localities that offer their preferred combination of taxes and public services.

Question 4

What does the concept of 'tax expenditure' refer to in public finance?

Accepted Answer

Revenue losses from preferential tax provisions such as deductions and exemptions

Answer

Tax expenditures are revenue losses attributable to special tax provisions that allow exclusions, deductions, credits, or preferential rates relative to the normal tax structure.

Question 5

Under a progressive income tax with a top marginal rate of 37%, a taxpayer in the top bracket earns an additional $10,000. Their tax liability increases by approximately:

Accepted Answer

$3,700

Answer

The marginal rate applies only to the additional income earned in that bracket, so $10,000 × 37% = $3,700 additional tax.

(CBE) Certified Business Economist Practice Test

(CBE) Certified Business Economist Practice Test

CBE Public Finance 2