Fiscal policy: taxes, spending, deficits and the national debt

Grade 12 Social Studies Worksheet - Building Confidence

Circle the best answer.

1. 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.

2. 1.

   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?

   • $840: the raise is taxed at Aldo's average rate, 16 percent, so he keeps the other 84 percent
   • $800: the raise is taxed at Aldo's marginal rate, 20 percent, not at his 16 percent average
   • $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
3. 2.

   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, so her average rate and her marginal rate are both 20 percent
   • Bree pays $16,000, an average rate of 20 percent, while her next dollar is taxed at 30 percent
4. 3.

   Esme classifies Dorn's income tax using card C and the three earners' average rates. Which classification is right?

   • 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
   • Progressive for Bree alone, since just Bree's income reaches the top band of 30 percent
   • Progressive: the average rate rises with income, 10 percent for Cai, 16 for Aldo, 20 for Bree
5. 4.

   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?

   • 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
   • Bree: she pays the most dollars, $3,000, so the burden on her is the heaviest
   • Cai: the tax takes 6 percent of Cai's income, against 4.8 for Aldo and 3.75 for Bree
6. 5.

   Output is falling and workers are losing jobs. Milo asks which fiscal move fits card E. Which one?

   • Raise taxes and cut purchases, which lowers spending: this is contractionary policy
   • Cut taxes or raise government purchases, which raises spending: expansionary policy
   • Run a surplus, which lifts output by cutting the debt that holds back growth
   • Lower the IORB, which makes banks lend more: this is the same as fiscal policy
7. 6.

   A city (made up) collected $90 million, spent $100 million and already owed $400 million. Noah applies card E. Which statement is right?

   • The city has a $10 million surplus, since it spends $10 million more than it owed
   • The deficit is $400 million, the amount owed, and the debt is $10 million
   • The deficit is $190 million, and the debt rises to $590 million
   • The deficit is $10 million for the year, and the debt rises to $410 million
8. 7.

   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 cannot lift spending, because taxpayers save the money they get back
   • 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 lowers the debt right away, because a deficit and the debt are the same thing
9. 8.

   A student says the 30 percent rate means Bree loses 30 percent of her pay. Tala tests the claim. What is the best reply?

   • Yes: 30 percent is Bree's average rate on the $80,000, since the marginal rate is the one that counts
   • Yes: the top rate applies to the whole $80,000 once a person reaches that band
   • No: 30 percent applies to income above $60,000; Bree's average rate is 20 percent
   • No: Bree pays 10 percent of $80,000, since the first band sets the rate for each earner
10. 9.

    A columnist says everyone pays the same 6 percent sales tax, so it treats everyone alike. Zee checks card B. Which reply is best?

    • Equal rate on spending, unequal share of income: Cai pays 6 percent and Bree 3.75
    • The claim is false: Bree bears the larger share of income since she pays the most dollars
    • The claim is right: an equal rate means an equal burden for each earner, so the tax treats the earners alike
    • The claim is false: the rate on spending differs, since Bree buys more goods than Cai
11. 10.

    Ari wants two facts that together show the income tax is progressive and the sales tax regressive for these earners. Which pair works?

    • Income tax takes 10, 16 and 20 percent; sales tax takes 6 percent from each person
    • Income tax takes $1,500, $8,000 and $16,000; sales tax takes $900, $2,400 and $3,000
    • Income tax takes 6, 4.8 and 3.75 percent; sales tax takes 10, 16 and 20 percent
    • Income tax takes 10, 16 and 20 percent of income; sales tax takes 6, 4.8 and 3.75