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
