Fiscal policy: taxes, spending, deficits and the national debt
Grade 12 Social Studies Worksheet - Building Confidence
Circle the best answer.
Read this first
Dorn's income tax (made up)
Income band Tax rate (percent) First $20,000 10 $20,000 to $60,000 20 Above $60,000 30 Note: The taxes and the three earners are made up. Card A: A marginal tax rate is the rate on the next dollar earned; an average tax rate is total tax divided by income. Card B: Aldo earns $50,000 and spends $40,000 a year. Bree earns $80,000 and spends $50,000. Cai earns $15,000 and spends $15,000. Card C: A progressive tax takes a larger share of income as income rises; a regressive tax takes a smaller share; a proportional tax takes the same share. A direct tax is paid to the government by the person it is meant to burden; an indirect tax is collected by a seller and passed on in prices. Card D: Dorn also charges a sales tax of 6 percent on everything bought. Card E (in our words): Expansionary fiscal policy raises government spending or cuts taxes to lift output; contractionary fiscal policy does the reverse. A deficit is spending above revenue in one year; the debt is the total borrowed and not yet repaid.
Aldo gets a $1,000 raise. Pia asks how much of it Aldo keeps, using the chart and card B. Which answer and reason fit?
- $800: the raise is taxed at Aldo's marginal rate, 20 percent, not at his 16 percent average
- $840: the raise is taxed at Aldo's average rate, 16 percent, so he keeps the other 84 percent
- $700: the raise is taxed at the top rate of 30 percent because Aldo's income is near that band
- $900: the raise is taxed in the first band at 10 percent, since an earner's tax begins there
Bree earns $80,000. Bo works out Bree's tax from the chart. Which statement is correct?
- Bree pays $8,000, the same as Aldo does, because both of them reach the 20 percent band
- Bree pays $24,000, 30 percent of her pay, because her top rate applies to her whole income
- Bree pays $16,000, an average rate of 20 percent, while her next dollar is taxed at 30 percent
- Bree pays $16,000, so her average rate and her marginal rate are both 20 percent
Esme classifies Dorn's income tax using card C and the three earners' average rates. Which classification is right?
- Progressive: the average rate rises with income, 10 percent for Cai, 16 for Aldo, 20 for Bree
- Progressive for Bree alone, since just Bree's income reaches the top band of 30 percent
- Proportional: the three earners pay in the same set of bands, so they are treated the same
- Regressive: Bree pays the most dollars in tax, so the tax weighs most heavily on her
The 6 percent sales tax in card D applies to each person's spending. Jun asks who bears the heaviest burden relative to income. Which answer fits?
- Bree: she pays the most dollars, $3,000, so the burden on her is the heaviest
- Aldo: his $2,400 of tax is the middle amount, so the middle earner is the one most squeezed by it
- No one: the rate is 6 percent, so the tax is proportional and the burden is the same
- Cai: the tax takes 6 percent of Cai's income, against 4.8 for Aldo and 3.75 for Bree
Aldo pays both Dorn's income tax and the 6 percent sales tax. Kira totals the two. Which statement about Aldo's burden is right?
- Together the taxes take $10,400, about 21 percent of Aldo's $50,000 income
- Together the taxes take $8,000, because the sales tax is already inside the income tax
- Together the taxes take about 22 percent, Aldo's 16 percent average rate plus the 6 percent sales tax
- Together the taxes take about 26 percent, the 20 percent marginal rate plus the 6 percent sales tax
Luz classifies the two taxes on Aldo using card C. Which pairing is right?
- Both are indirect, because both taxes are measured as a share of money earned or spent
- Both are direct, because Aldo's own money pays for both of the taxes in the end, one way or another
- The sales tax is direct, because Aldo ends up bearing it in his budget, and the income tax is indirect
- Income tax is direct, paid by Aldo; the sales tax is indirect, collected by sellers
Output is falling and workers are losing jobs. Milo asks which fiscal move fits card E. Which one?
- Lower the IORB, which makes banks lend more: this is the same as fiscal policy
- Raise taxes and cut purchases, which lowers spending: this is contractionary policy
- Run a surplus, which lifts output by cutting the debt that holds back growth
- Cut taxes or raise government purchases, which raises spending: expansionary policy
A city (made up) collected $90 million, spent $100 million and already owed $400 million. Noah applies card E. Which statement is right?
- The deficit is $190 million, and the debt rises to $590 million
- The deficit is $400 million, the amount owed, and the debt is $10 million
- The deficit is $10 million for the year, and the debt rises to $410 million
- The city has a $10 million surplus, since it spends $10 million more than it owed
A tax cut lets people spend more but lowers government revenue. Ren asks what that does if government spending stays the same. Which statement fits?
- It lowers the debt right away, because a deficit and the debt are the same thing
- It can lift spending now but widens the deficit, since revenue falls while outlays stay put
- It shrinks the deficit, since people spend more and the government gets that money back
- It cannot lift spending, because taxpayers save the money they get back
A student says the 30 percent rate means Bree loses 30 percent of her pay. Tala tests the claim. What is the best reply?
- No: Bree pays 10 percent of $80,000, since the first band sets the rate for each earner
- Yes: the top rate applies to the whole $80,000 once a person reaches that band
- Yes: 30 percent is Bree's average rate on the $80,000, since the marginal rate is the one that counts
- No: 30 percent applies to income above $60,000; Bree's average rate is 20 percent