Ch 1, part 1 introduction to tax Flashcards
What is a tax?
A tax is a payment required by a government that is unrelated to any specific benefit or service
received from the government.
What are the key components of a tax?
Payment required (mandatory)
* Payment imposed by government agency (federal, state, local)
* Payment not tied directly to specific benefit received by the taxpayer
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?
- No
- No
- yes, earmark tax (earmark tax is a tax assessed for a specific purpose (e.g., for education).
- Yes
- No
Taxpayer Definition?
any person or organization
that pays tax (e.g., individuals and
corporations)
Incidence definition
ultimate economic burden of
a tax
Jurisdiction definition
The right of a government to tax
How to calculate a tax?
Tax = Rate x Base
Rate?
Flat (single rate for whole base)
* Graduated (different rates for portions or
brackets of tax base)
Base?
defines what is actually taxed and is
usually expressed in monetary terms
Revenue
total tax collected by the
government and available for use
Different bases on which tax is levied?
- Transaction (event) based
- Activity based
- Ad valorem (on value) based
Or linked to specific gov expenditures(Earmarked to finance designated projects)
Types of taxes?
Explicit taxes and Implicit Taxes
What are explicit taxes?
Money paid to the governement
What are implicit taxes?
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
What are the different types of explicit taxes?
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
Where do federal tax rev come from?
biggest 51% individual income tax
31% employment taxes
9% corporate income tax
2% excise tax
7% other taxes
How to evaluate different tax
systems?
- Sufficiency
- Equity
- Certainty
- Convenience
- Economy
1 Sufficiency
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
2 Equity
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
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
3 Certainty
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?
4 Convenience
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?
5 Economy
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?
