Chapter 1: Introduction To Tax Flashcards
What is aggregate demand?
The total amount of goods and services demanded in the economy at a given overall price level and in a given time period
What is Keynesian economics?
An economic theory of total spending in the economy and its effects on output and inflation
What qualifies as a tax?
The general purpose of taxes is to fund government agencies
Taxes are not meant to punish or prevent illegal behavior
What are the three criteria necessary to be tax payment?
The payment is required
The payment is imposed by a government
The payment is not directly tied to the benefit of the taxpayer
What is a sin tax?
Taxes imposed on products or service to discourage use of the products such as tobaccos product or alcohol
What is a earmarked tax?
A tax that is assessed for a specific purpose; the payment made by the taxpayer does not directly relate to the specific benefit received by the taxpayer
What is a tax base?
Defines what is actually taxed and is usually expressed in monetary terms
What is a tax rate?
Determines the level of taxes imposed on the tax base and is usually expressed as a percentage
What is a flat tax?
A single tax applied to an entire base
What are graduated taxes?
The tax base is divided into a series of monetary amounts or brackets
What is the marginal tax rate?
The tax rate that applies to the next additional increment of a taxpayers taxable income
How do you find the marginal tax rate?
(New total tax - old total tax) / ( new taxable income - old taxable income)
Old refers to the current tax and new refers to the revised tax after incorporating the additional income or deductions in question
When is the marginal tax rate used?
This tax rate is useful in tax planning because it represents the rate of taxation or savings that would apply to additional taxable income or tax deductions
What is the average tax rate?
Represents a taxpayers average level of taxation on each dollar of taxable income
How do you find the average tax rate?
Average tax rate = total tax / taxable income
When is the average tax rate used?
Often used in budgeting tax expense as apportion of income
What is the effective tax rate?
Represents the taxpayers average rate of taxation on each dollar of total income including taxable and no taxable income
How do you find the effective tax rate?
Effective tax rate = total tax / total income
Why does the effective tax rate provide a better depiction of a taxpayers tax burden?
Because the effective tax rate depicts the taxpayers total tax paid as a ratio of the sum of both taxable and non taxable income earned
what is the proportional tax rate structure?
known as a flat tax, it imposes a constant tax rate throughout the tax base. as the tax base increases, the taxes paid increase proportionally
what is the progressive tax rate structure?
when the marginal tax rate increases as the tax base increases. so as the tax base increases, both the marginal tax rate and the taxes paid increase
ex: federal and state income taxes
in a progressive tax rate structure is the average tax rate less than or equal to the marginal tax rate or both?
the average tax rate in a progressive tax rate structure will always be less than or equal to the marginal tax rate
what is the regressive tax rate structure?
a tax structure that imposes a decreasing marginal tax rate as the tax base increases. as the tax base increases, the taxes paid increases, but the marginal tax rate decreases
What is a value-added tax?
A type of sales tax that is imposed on the producers of goods and services based on the value added to the goods and services at each stage of production
When was the income tax ratified?
Income tax became law in 1913 with the ratification of the 16th amendment
What is the most significant tax assessed by the US government?
Income tax which represented 47.4 percent of all tax revenues in the year 2011
What is the tax base for Social Security tax and what is the rate?
The tax base is salary or wages and the rate is 12.4%
What is the tax base for Medicare tax and what is the rate?
Wages or salary is the tax base and the rate is 2.9%
What is the tax base and tax rate for unemployment taxes?
the tax base is wages or salary and the rate is 6.0%. The wage base is the first $7000 of wages received during the year. The government allows a credit for state unemployment taxes paid up to 5.4%
What is an excise tax?
taxes that are levied on the retail sale of particular products
What is the tax base for excise taxes?
the tax base is based on the quantity of a product purchased rather than a monetary amount
What is the purpose of the use tax?
the purpose of this tax is to discourage taxpayers from buying goods out of state in order to avoid or minimize the sales tax in their home state
What are explicit taxes?
taxes that are directly imposed by a government and are easily quantified
What are implicit taxes?
indirect taxes or taxes that are not paid directly to the government. these taxes result from a tax advantage the govt. grants to certain transactions to satisfy social, economic, or other objectives
What does it mean to be tax-favored?
an asset is said to be tax-favored when the income the asset produces is either excluded from the tax base or subject to a lower (preferential) tax rate, or if the asset generates other tax benefits such as large tax deductions
Why do tax-advantaged assets bean an implicit tax or a reduced before-tax return as a result of the tax advantage?
the tax benefits associated with the tax-favored asset increase the demand for the asset. Increased demand drives up the price of the asset which in turn reduces its before tax return
What does sufficiency mean?
assessing the size of the tax revenues that the tax system must generate and ensuring that it provides them
What is static forecasting?
the forecasting of revenue that will be produced by changes in tax law without considering how taxpayer activities could be altered.
What is dynamic forecasting?
revenue forecasting based on how taxpayer activities will change due to the change in tax law. this forecasting is only as good as its assumptions and is not always accurate
What are tax preferences and why are they utilized?
governments provide incentives in the form of tax breaks or additional deductions to encourage investment or further social objectives
What is vertical equity?
a dimension of equity that is achieved when taxpayers with greater ability to pay tax, pay more tax than taxpayers with less ability to pay
What is certainty?
taxpayers should be able to determine when to pay the tax, where to pay the tax, and how to determine their tax.
Used to evaluate tax systems
What is convenience?
another component to evaluating a tax system. This component suggests that a tax system should be designed to facilitate the collection of tax revenues without undue hardship on the taxpayer or the government
What is economy?
this criteria for evaluating a tax system requires that a good system should minimize the compliance and administration costs associated with the tax system
What is an Ad valorem tax?
a tax based on the value of property
