Chapter 1 Flashcards
Courtney recently received a speeding ticket on her way to the university. Her fine was $200. Is this considered a tax? Why or
why not?
No. Instead, it is considered a fine or penalty. Taxes differ from fines and penalties because taxes are not intended to punish or prevent illegal behavior.
Marlon and Latoya recently started building a house. They had to pay $300 to the county government for a building permit. Is the $300 payment a tax? Why or why not?
No. The building permit is not considered a tax because $300 payment is directly linked to a benefit that they received (i.e., the ability to build a house).
To help pay for the city’s new stadium, the city of Birmingham recently enacted a 1 percent surcharge on hotel rooms. Is this a tax? Why or why not?
The 1 percent surcharge is a tax. The 1 percent surcharge is an earmarked tax –i.e., collected for a specific purpose. The surcharge is considered a tax because the tax payments made by taxpayers do not directly relate to the specific benefit received by the taxpayers.
The state of Georgia recently increased its tax on a pack of cigarettes by $2.00. What type of tax is this? Why might Georgia choose this type of tax?
The cigarette tax is both considered an excise tax (i.e., a tax based on quantity purchased) and a “sin” tax (i.e., a tax on goods that are deemed to be socially undesirable). Georgia may choose this type of tax to discourage smoking and because sin taxes are often viewed as acceptable ways of increasing tax revenues.
Alex recently bought a truck in Alabama for his business in Georgia. What different types of federal and state taxes may affect this transaction? Assuming the vehicle will be registered in Georgia
- pay state sales tax in Alabama for the truck purchased.
- pay use tax on the purchase at a rate representing any difference in the Alabama sales tax rate and the Georgia use tax rate.
- pay personal property tax annually on the truck.
- able to depreciate the truck for federal income tax purposes.
Consider the following tax rate structure. Is it horizontally equitable? Why or why not? Is it vertically equitable? Why or why not?
Taxpayer: Salary: Total Tax:
Rajiv 10,000 600
LaMarcus 20,000 600
Dory 10,000 600
horizontally equitable
taxpayers in the same situation (Rajiv and Dory) pay the same tax ($600).
The tax is not vertically equitable because the taxpayer with a greater ability to pay (LaMarcus) does not pay more tax, nor does he pay a higher tax rate.
Consider the following tax rate structure. Is it horizontally equitable? Why or why not? Is it vertically equitable? Why or why not?
Taxpayer: Salary: Total Tax:
Marilyn 10,000 600
Kobe 20,000 3,000
Alfonso 30,000 6,000
We cannot evaluate whether the tax rate structure is horizontally equitable because we are unable to determine if taxpayers in similar situations pay the same tax (i.e., the problem does not give data for two taxpayers with the same income). The tax rate structure would be considered vertically equitable because taxpayers with higher income pay more tax and at a higher rate. Specifically, Marilyn’s, Kobe’s, and Alfonso’s average tax rates are 6 percent, 15 percent, and 20 percent, respectively.
Chuck, a single taxpayer, earns $75,000 in taxable income and $10,000 in interest from an investment in City of Heflin bonds. Using the U.S. tax rate schedule, how much federal tax will he owe? What is his average tax rate? What is his effective tax rate?
Chuck will owe $11,808 in federal income tax this year computed as follows:
$11,808 = $5,147 + 22% ($75,000 - $44,725)—rounded up to the nearest dollar.
Chuck’s average tax rate is 15.74 percent.
Average Tax Rate = Total Tax/Taxable Income = $11,808/$75,000 = 15.74%
Chuck’s effective tax rate is 13.89 percent.
Effective tax rate = Total Tax/Total Income = $11,808/($75,000 + $10,000) = 13.89%
Using the facts in Problem 34, if Chuck earns an additional $40,000 of taxable income, what is his marginal tax rate on this income?
If Chuck earns an additional $40,000 of taxable income, his marginal tax rate on the income is 22.98 percent.
Marginal Tax Rate
= Change in Tax/Change in Taxable Income =
($21,000 - $11,808)/($115,000 - $75,000) = 22.98%
Where $21,000 for the revised tax is computed as follows:
$21,000 = $16,290 + 24% ($115,000 - $95,375).
