Ch 1, part 1 introduction to tax

Question 1

What is a tax?

Answer 1

A tax is a payment required by a government that is unrelated to any specific benefit or service
received from the government.

Question 2

What are the key components of a tax?

Answer 2

Payment required (mandatory)
* Payment imposed by government agency (federal, state, local)
* Payment not tied directly to specific benefit received by the taxpayer

Question 3

Which of the following constitute a tax?
1. Payment at the DMV for drivers license?
2. Payment to the county government for a building permit?
3. Payment for hotel use of 1% of bill to pay for city projects.
4. Payment for rental car use of 3% of bill to pay for the roads.
5. Payment to the city for expired parking meter?

Answer 3

1. No
2. No
3. yes, earmark tax (earmark tax is a tax assessed for a specific purpose (e.g., for ­education).
4. Yes
5. No

Question 4

Taxpayer Definition?

Answer 4

any person or organization
that pays tax (e.g., individuals and
corporations)

Question 5

Incidence definition

Answer 5

ultimate economic burden of
a tax

Question 6

Jurisdiction definition

Answer 6

The right of a government to tax

Question 7

How to calculate a tax?

Answer 7

Tax = Rate x Base

Question 8

Rate?

Answer 8

Flat (single rate for whole base)
* Graduated (different rates for portions or
brackets of tax base)

Question 9

Base?

Answer 9

defines what is actually taxed and is
usually expressed in monetary terms

Question 10

Revenue

Answer 10

total tax collected by the
government and available for use

Question 11

Different bases on which tax is levied?

Answer 11

• Transaction (event) based
• Activity based
• Ad valorem (on value) based
  Or linked to specific gov expenditures(Earmarked to finance designated projects)

Question 12

Types of taxes?

Answer 12

Explicit taxes and Implicit Taxes

Question 13

What are explicit taxes?

Answer 13

Money paid to the governement

Question 14

What are implicit taxes?

Answer 14

amount sacrificed for preferred tax treatment (an indirect tax)
* Result of negotiation or market activity – not
an actual payment to a government
* Example: Muni bonds generate tax-free
interest (yay!) but they pay lower interest
rates (boo!)

From textbook: Indirect taxes - not paid directly to the gov - that result from a tax advantage the government grants to certain transactions to satisfy social, economic, or other objectives. Implicit taxes are defined as the reduced before-tax return that a tax-favored asset produces because of its tax-advantage status

Question 15

What are the different types of explicit taxes?

Answer 15

Federal taxes which include income taxes, employment and unemployment taxes, exicse, transfer taxes

State and local taxes include sale and use taxes, property taxes, income taxes, excise taxes

Question 16

Where do federal tax rev come from?

Answer 16

biggest 51% individual income tax
31% employment taxes
9% corporate income tax
2% excise tax
7% other taxes

Question 17

How to evaluate different tax
systems?

Answer 17

1. Sufficiency
2. Equity
3. Certainty
4. Convenience
5. Economy

Question 18

1 Sufficiency

Answer 18

A tax is sufficient if:
* It generates enough funds to pay for the
public goods and services provided by the
government levying the tax
* It allows a government to balance its budget

• How to predict revenue needs??
• Types of revenue forecasting:
• Static: ignores how taxpayers might alter their
  activities in response to a tax law change and
  projects tax revenues on the existing environment
• Dynamic: tries to predict possible responses by
  taxpayers to new tax laws
• Income effect: as tax rates go up, people will work harder to maintain same after-tax income
• Substitution effect: as tax rates go up, people will work less because the marginal value of working has decreased

Question 19

2 Equity

Answer 19

In general terms, a tax system is
considered fair or equitable if the tax is
based on the taxpayer’s ability to pay
* Horizontal Equity: two taxpayers in similar
situations pay the same tax
* Vertical Equity: taxpayers with greater
ability to pay tax, pay more tax relative to
taxpayers with a lesser ability to pay tax

Question 20

Horizontal Equity

Answer 20

two taxpayers in similar
situations pay the same tax

Question 21

Vertical Equity:

Answer 21

taxpayers with greater
ability to pay tax, pay more tax relative to
taxpayers with a lesser ability to pay tax

Question 22

3 Certainty

Answer 22

Taxpayers should be
able to determine
when to pay the tax,
where to pay the tax,
and how to calculate
the tax
* Which taxes offer the
most certainty?

Question 23

4 Convenience

Answer 23

Collect tax without undue hardship to the
taxpayer
* Which taxes are the most convenient to
pay?
* What is a mechanism that makes paying
income taxes more convenient?

Question 24

5 Economy

Answer 24

Minimize the compliance and
administration costs associated with the
tax system (both from the government’s
and taxpayer’s perspective)
* From the taxpayer’s perspective, which
taxes require the most compliance effort?