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# mid108.ans - ECONOMICS 150 Midterm Exam 1(ten points Define...

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ECONOMICS 150 Midterm Exam January 29, 2008 1. (ten points) Define the "excess burden" of a tax. The excess burden of a tax measures the degree to which the resulting losses in consumer and producer surplus exceed the revenue gain to the government. 2. (ten points) What is the difference between "tax avoidance" and "tax evasion"? Both concepts refer to individual behavior aimed at reducing tax payments. Tax evasion describes behavior that is illegal, while tax avoidance describes behavior that is within the letter but not the intent of the law. 3. (fifteen points) Under the Earned Income Tax Credit, a family receives forty cents from the government for each \$1 of labor income earned up to \$10,000 of earnings. For simplicity, assume that for each dollar of earnings beyond \$10,000, twenty cents of the transfers are withheld until none are left. Just based on this program, what is the marginal tax rate faced by a family earnings \$20,000? What is this family's average tax rate? For a family earning \$20,000, for each dollar extra they earn they lose \$.20 in transfers, so face a marginal tax rate of 20%. Their total transfer equals .4*10,000 - .2*(20,000- 10,000) = 2,000, implying an average "tax" rate of -2,000/20,000 = -.1. 4. (fifteen points) The government is considering two alternative policies: a) impose a lump sum tax of \$100 on everyone and b) raise the tax rate by .02 in a tax bracket that

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