Chapter 1 - An Intro to Tax

Question 1

what are the 3 elements of a tax?

Answer 1

1. levied by a legislative authority
2. required payment (not voluntary)
3. payer of the tax gets no special benefit

Question 2

is this a tax? why?
fee for a driver’s license

Answer 2

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

Question 3

basic formula for calculating tax

Answer 3

tax = tax base * tax rate

Question 4

tax base

Answer 4

what is actually being taxed (usually expressed in monetary terms)
- income tax
- sales tax
- property tax

Question 5

tax rate

Answer 5

percentage of taxes imposed on tax base

Question 6

exception to the “tax rate is a percentage of cost”

Answer 6

gasoline - tax is measured per unit (gallon) no matter the cost per gallon

Question 7

two ways to increase tax revenue

Answer 7

raise the tax rate
raise the tax base

Question 8

flat tax

Answer 8

a single tax rate applied to the entire tax base
- example: sales tax rate is the same regardless of the cost of the item

Question 9

graduated tax

Answer 9

when the tax base is divided into a series of brackets and each bracket is taxed at a different rate

Question 10

marginal tax rate

Answer 10

the rate that will be applied to the next unit of the tax base

Question 11

average tax rate

Answer 11

the taxpayer’s average level of taxation on each dollar of taxable income

Question 12

formula for average tax rate

Answer 12

total tax / taxable income

Question 13

formula for effective tax rate

Answer 13

total tax / total income

Question 14

effective tax rate

Answer 14

the taxpayer’s average rate of taxation on each dollar of total income (both taxable and nontaxable)

Question 15

marginal tax rate will always be __________ average tax rate

Answer 15

greater than or equal to

Question 16

average tax rate will always be ___________ effective tax rate

Answer 16

greater than or equal to

Question 17

with no nontaxable income, the average tax rate will _______ the effective tax rate

Answer 17

equal

Question 18

progressive tax rate structure

Answer 18

as tax base increases, the tax rate (and marginal tax rate) also increases in increments

Question 19

what type of tax rate does the laffer curve describe?

Answer 19

marginal rates

Question 20

about where is the highest peak on the laffer curve?

Answer 20

70%

Question 21

proportional tax rate structure

Answer 21

has a constant tax rate regardless of the tax base
- flat tax
- ex: sales tax, corporate tax rate

Question 22

regressive tax rate structure

Answer 22

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)

Question 23

2 examples of regressive tax rate structure

Answer 23

social security and federal employment tax

Question 24

tariff

Answer 24

tax on imported goods, paid by the person who buys the goods

Question 25

when was the first income tax established?

Answer 25

1863 (Civil War)

Question 26

the IRS used to be called:

Answer 26

the Office of Commissioner of Internal Revenue

Question 27

when did congress pass & ratify the 16th amendment?

Answer 27

1909, 1913

Question 28

16th amendment states that:

Answer 28

Congress can set and collect income taxes from whatever source derived (they do not have to split it proportionally between the states anymore)

Question 29

two types of taxes (on a broad level)

Answer 29

explicit and implicit

Question 30

explicit taxes

Answer 30

taxes directly imposed by a government and easily quantified

Question 31

implicit taxes

Answer 31

indirect taxes that are not paid directly to the government, but instead result from a tax advantage the government gives to certain transactions

Question 32

what are the 4 types of federal taxes?

Answer 32

income employment & unemployment estate and gift excise

Question 33

what are the 4 types of income tax?

Answer 33

individual corporation estates trusts

Question 34

FUTA is paid by the:

Answer 34

employer

Question 35

how much is the FUTA tax?

Answer 35

6% of first $7,000 wages

Question 36

employers get a ______ rebate of FUTA taxes

Answer 36

5.4%

Question 37

2 elements of FICA

Answer 37

- Old Age Survivor's and Disability Insurance (social security) - Medical Health Insurance (Medicare)

Question 38

what is the total FICA tax structure?

Answer 38

7.65% of first $160,200 in wages + 1.45% on anything exceeding

Question 39

what is the Social Security tax rate?

Answer 39

6.2% of first $160,200 in wages, then nothing

Question 40

what is the Medicare tax rate?

Answer 40

1.45% of all wages

Question 41

true/false employers match employee FICA contributions

Answer 41

true

Question 42

estate and gift taxes are paid by:

Answer 42

the giver

Question 43

the Unified Tax Credit is part of:

Answer 43

estate and gift taxes

Question 44

what is the federal UTC limit?

Answer 44

$12,920,000 over the giver's lifetime

Question 45

the UTC has an annual gift exclusion of:

Answer 45

$17,000 per recipient per year

Question 46

excise taxes are also called

Answer 46

sin taxes

Question 47

what's unique about excise taxes?

Answer 47

they are levied on the quantity purchased rather than the value

Question 48

5 types of SALT taxes

Answer 48

1. state income 2. sales 3. use 4. property 5. excise

Question 49

sales tax is paid by:

Answer 49

the ultimate consumer of a product

Question 50

a use tax is generally levied on:

Answer 50

items purchased out of state not subject to sales tax

Question 51

real property taxes:

Answer 51

paid on real property (real estate: land + anything attached to the land)

Question 52

personal property taxes:

Answer 52

paid on not real property (boats, whiteboards, etc.)

Question 53

difference between real and personal property taxes

Answer 53

property tax is generally levied on stuff you can move around

Question 54

"ad valorem"

Answer 54

on value

Question 55

"ad valorem" tax

Answer 55

based on the assessed value of the property

Question 56

Adam Smith's 4 maxim's of a good tax policy

Answer 56

- certainty - equity - convenience - economy (CECE)

Question 57

fifth maxim of a good tax policy (not from Adam Smith)

Answer 57

sufficiency

Question 58

equity

Answer 58

how the burden of taxes is spread across taxpayers

Question 59

horizontal equity

Answer 59

two taxpayers in a similar situation pay the same amount of tax

Question 60

vertical equity

Answer 60

taxpayers with a greater ability to pay taxes pays more taxes

Question 61

certainty

Answer 61

taxpayers should be able to determine when, where, and how they are going to be taxed

Question 62

convenience

Answer 62

ease of collection from taxpayers

Question 63

economy

Answer 63

minimize compliance and administrative costs associated with taxes

Question 64

sufficiency

Answer 64

taxes need to generate necessary tax revenues

Question 65

tax reform boils down to:

Answer 65

simpleness vs. fairness