Chapter 1 - An Intro to Tax Flashcards
what are the 3 elements of a tax?
- levied by a legislative authority
- required payment (not voluntary)
- payer of the tax gets no special benefit
is this a tax? why?
fee for a driver’s license
NO
you get a special benefit if you pay (the driver’s license)
it is voluntary - you don’t have to get a driver’s license
basic formula for calculating tax
tax = tax base * tax rate
tax base
what is actually being taxed (usually expressed in monetary terms)
- income tax
- sales tax
- property tax
tax rate
percentage of taxes imposed on tax base
exception to the “tax rate is a percentage of cost”
gasoline - tax is measured per unit (gallon) no matter the cost per gallon
two ways to increase tax revenue
raise the tax rate
raise the tax base
flat tax
a single tax rate applied to the entire tax base
- example: sales tax rate is the same regardless of the cost of the item
graduated tax
when the tax base is divided into a series of brackets and each bracket is taxed at a different rate
marginal tax rate
the rate that will be applied to the next unit of the tax base
average tax rate
the taxpayer’s average level of taxation on each dollar of taxable income
formula for average tax rate
total tax / taxable income
formula for effective tax rate
total tax / total income
effective tax rate
the taxpayer’s average rate of taxation on each dollar of total income (both taxable and nontaxable)
marginal tax rate will always be __________ average tax rate
greater than or equal to
average tax rate will always be ___________ effective tax rate
greater than or equal to
with no nontaxable income, the average tax rate will _______ the effective tax rate
equal
progressive tax rate structure
as tax base increases, the tax rate (and marginal tax rate) also increases in increments
what type of tax rate does the laffer curve describe?
marginal rates
about where is the highest peak on the laffer curve?
70%
proportional tax rate structure
has a constant tax rate regardless of the tax base
- flat tax
- ex: sales tax, corporate tax rate
regressive tax rate structure
as the tax bases increases, the tax rate (and therefore marginal rate) decreases
- average tax rate higher than marginal tax rate (equal when in first bracket)
2 examples of regressive tax rate structure
social security and federal employment tax
tariff
tax on imported goods, paid by the person who buys the goods
when was the first income tax established?
1863 (Civil War)
the IRS used to be called:
the Office of Commissioner of Internal Revenue
when did congress pass & ratify the 16th amendment?
1909, 1913
16th amendment states that:
Congress can set and collect income taxes from whatever source derived (they do not have to split it proportionally between the states anymore)
two types of taxes (on a broad level)
explicit and implicit
explicit taxes
taxes directly imposed by a government and easily quantified
implicit taxes
indirect taxes that are not paid directly to the government, but instead result from a tax advantage the government gives to certain transactions
what are the 4 types of federal taxes?
income
employment & unemployment
estate and gift
excise
what are the 4 types of income tax?
individual
corporation
estates
trusts
FUTA is paid by the:
employer
how much is the FUTA tax?
6% of first $7,000 wages
employers get a ______ rebate of FUTA taxes
5.4%
2 elements of FICA
- Old Age Survivor’s and Disability Insurance (social security)
- Medical Health Insurance (Medicare)
what is the total FICA tax structure?
7.65% of first $160,200 in wages + 1.45% on anything exceeding
what is the Social Security tax rate?
6.2% of first $160,200 in wages, then nothing
what is the Medicare tax rate?
1.45% of all wages
true/false
employers match employee FICA contributions
true
estate and gift taxes are paid by:
the giver
the Unified Tax Credit is part of:
estate and gift taxes
what is the federal UTC limit?
$12,920,000 over the giver’s lifetime
the UTC has an annual gift exclusion of:
$17,000 per recipient per year
excise taxes are also called
sin taxes
what’s unique about excise taxes?
they are levied on the quantity purchased rather than the value
5 types of SALT taxes
- state income
- sales
- use
- property
- excise
sales tax is paid by:
the ultimate consumer of a product
a use tax is generally levied on:
items purchased out of state not subject to sales tax
real property taxes:
paid on real property (real estate: land + anything attached to the land)
personal property taxes:
paid on not real property (boats, whiteboards, etc.)
difference between real and personal property taxes
property tax is generally levied on stuff you can move around
“ad valorem”
on value
“ad valorem” tax
based on the assessed value of the property
Adam Smith’s 4 maxim’s of a good tax policy
- certainty
- equity
- convenience
- economy
(CECE)
fifth maxim of a good tax policy (not from Adam Smith)
sufficiency
equity
how the burden of taxes is spread across taxpayers
horizontal equity
two taxpayers in a similar situation pay the same amount of tax
vertical equity
taxpayers with a greater ability to pay taxes pays more taxes
certainty
taxpayers should be able to determine when, where, and how they are going to be taxed
convenience
ease of collection from taxpayers
economy
minimize compliance and administrative costs associated with taxes
sufficiency
taxes need to generate necessary tax revenues
tax reform boils down to:
simpleness vs. fairness
