CH 3: Introduction to Tax Flashcards
who care about taxes
-businessess
-politicians
-individuals
why do businesses care abt taxes
business activities such as deciding location, etc, can affect a businesses taxes
why do politicians care abt taxes
-they distinguish themselves from their opponents based on their tax rhetoric
-get in the way of an efficient tax system
-business hire lobbyists for/against various tax reasons
what is a tax
a payment required by a govt that is unrelated to any specific benefit or service received from the govt
3 key components of a tax
payment required
Payment imposed by local gvt agency (local, state, federal)
Payment not tied directly to a benefit received by the taxpayer
main purpose of a tax
fund government operations
other purpose of taxes
-encourage behavior
-discourage behavior (sin taxes)
-special purpose (musems)
what qualifies as a tax
anything u are required by the govt to pay for that does not benefit you in any way
ex: tax for road fixing
How to calculate tax
Tax= Tax Base × Tax Rate
Tax base
defines what is actually taxed and is expressed in monetary terms
Tax rate
level of taxes imposed on the tax base, usually expressed a percentage
3 types of tax rates
-average
-effective
-marginal
average tax rate definition +formula
taxpayers avg level of taxation on each dollar of taxable income
total tax/ taxable income
effective tax rate definition + formula
taxpayers abg rate of taxation on each dollar of total income (both tax and non taxable)
total tax/ total income
key difference btw average and effective tax rate
denominator
marginal tax rate definition + forumula
tax rate that applies to the next additional increment of a taxpayers taxable income
new tax-old tax/new taxable income-old taxable income
accoutning income
based on gaap
total/economic income
takes opportunity costs into consideration
taxable income (skip)
based on tax codes and regulations
difference btw 1 taxable inc and acct in and taxable inc and total inc (skip)
1-a compny cant reduce its taxable income by including fines but fines are considering for accounting income
2-taxable income doesnt include opportunity costs
3 tax rate structures
-proportional
-progressive
-regressive
proportional tax rate
imposes a constant tax rate throughout the tax base
-state sales tax, corporate tax rate
progressive tax rate
imposes increasing marginal tax rate as tax base increases
-individual tax
regressive tax
imposes a decreasing marginal tax as the tax base increases
social security taxes, employment taxes
federal taxes (List)
Individual income tax
excise taxes
unemployment tax
social security & medicare tax
estate tax,
customs & duties tax corporate income tax
state and local taxes
-income taxes
-sales and use taxes
-property taxes
-excise taxes
income taxes (federal)
Levied on individuals, corporates, estates and trusts
-largest one
employment/unemploymet taxes (federal)
Second largest group
Include social security and medicare tax
Unemployment taxes fund temporary unemployment benefits for individuals terminated from their jobs without cause
Excise taxes (federal)
3rd largest
Levied on the quantity of products sold
Estate taxes (federal)
Levied on the fair market values of wealth transfers upon death or gift
sales and use taxes (state)
Tax base for sales tax is the retail sale of goods and some services
Tax base for use tax is the retail price of which goods are owned,possesed, or consumed within a state that were not purchased within the state
Property taxes (state)
Ad valorem taxes meaning that the tax base for each is the fair market value of the property
Real property taxes consist of taxes on land and structures permanently attached to land
Personal property taxes include assets on other types of property both tangible and intangible
income taxes (state)
Most state taxable income calculations largely conform to the federal taxable
Excise taxes (state)
States typically impose excise taxes on items subject to federal excise tax.
Implicit taxes
Indirect taxes that result from a tax advantage the govt grants to certain transactions
Defined as the reduced before tax return bc of its tax advantageous status
Difficult to quantify but important to understand in evaluating the relative tax burdens of tax-advantaged investments
alt tax systems
sufficiency
equity
certainty
convenience
economy
sufficency
Involves assessing the aggregate size of the tax revenues that must be generated and making sure that the tax system provides these revenues
static revenue forcasting
-part of sufficeny
forecasting that ignores how taxpayers may alter their activities based to a tax law changes
dynamic revenue forcasting
-part of sufficeny
-forecasting that tries to predict possible responses by taxpayers to new tax laws
Income effect& Substitution effect
equity
How the tax burden should be distributed across taxpayers
A tax system is considered fair or equitable if the tax is based on the taxpayers ability to pau
horizontal and vertical equity
horizontal equity
2 taxpayers in similar situations pay the same tax
vertical equity
taxpayers w greater ability to pay tax pay more tax relative to ppl w lesser ability to pay
Certainty
Taxpayers should be able to determine when and where to pay the tax and how to determine tax
Convenience
Tax system should be designed to be collected without hardship to the taxpayer
Economy
Should minimize the compliance and administration costs associated with the tax system
The first personal income tax was enacted in 1861 to fund the
civil war
The estate tax may also be referred to as the
death tax
excise tax examples
-gasoline
-coal
-alc
-tabocco
-phones & airline tickets
what is excluded from the estate giftdeath tax
payments on ones behalf for education
tax base of a sales tax
retaile sales of goods and some services
tax base for use tax
retail price of goods owned, possessed, or consumed within a state that were not purchased within the state
whats an ad valorem tax
tax base is the fair market value
example of economy tax system
state
enforcement of use taxes on
individuals or “under-the-table” household help
example of convience tax system
Employer withholds and
remits taxes on your behalf
use tax explain self asses
if u buy a good online, or out of state, and u are not charged sales tax, u are supposed to self assess and input it urself into ur taxes (most ppl don’t do this)
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
substitute nontaxable activities because the marginal
value of taxable ones has decreased
what revenue for-casting does our government use
dynamic forecasting
