Question 1 Taxable income at the federal level includes A interest on state and local government bonds. B unrealized capital gains. rents and profits. employer contributions for health insurance. Question 2 Deductibility of an expenditure from AG to determine taxable income A generates a substitution effect away from the good whose expenditure is deductible. B encourages spending on that good or service. improves the efficiency of the tax system. cannot be criticized as being unfair