Econ 463 Exam

Econ 463 Fall 2011

Midterm Exam 2

Answer each of the following questions. There are 59 points on this test. You may use the back of the pages if you need additional space for your answers.

Some of these questions are in a True, false, or uncertain format. In earning points, your explanation counts far more than whether you correctly guess if the statement is true, false, or uncertain.

1) True, false or uncertain. Explain your reasoning. An increase in the tax on wage income will reduce hours worked. (10 points)

2) Suppose two tax payers earn the same wages in each period of their lives. The first taxpayer spends all the money in the period it is earned, the second saves half of it each period. Will either taxpayer prefer a consumption tax to a tax on wages, a wage tax to a consumption tax, or an income tax to either a consumption or a wage tax? Explain your reasoning. (10 points)

3) Explain each of the following terms and the importance or relevance of each for tax policy (3 points each):

A) Expensing

B) Tax neutrality

C) Marriage penalty

4) True, false, or uncertain. Explain your reasoning. Tax deductibility of interest on home

mortgages is a fair and a pareto efficient means of encouraging home ownership. (10 points)

5) Explain how deductibility of interest payments made affects the decision to save or to borrow. (10 points)

6) Explain why Adjusted Gross Income excludes some sources of income. Using specific examples will help clarify your explanation. (10 points)