Chapter 1: Introduction To Tax

Question 0

What is aggregate demand?

Answer 0

The total amount of goods and services demanded in the economy at a given overall price level and in a given time period

Question 1

What is Keynesian economics?

Answer 1

An economic theory of total spending in the economy and its effects on output and inflation

Question 2

What qualifies as a tax?

Answer 2

The general purpose of taxes is to fund government agencies

Taxes are not meant to punish or prevent illegal behavior

Question 3

What are the three criteria necessary to be tax payment?

Answer 3

The payment is required
The payment is imposed by a government
The payment is not directly tied to the benefit of the taxpayer

Question 4

What is a sin tax?

Answer 4

Taxes imposed on products or service to discourage use of the products such as tobaccos product or alcohol

Question 5

What is a earmarked tax?

Answer 5

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

Question 6

What is a tax base?

Answer 6

Defines what is actually taxed and is usually expressed in monetary terms

Question 7

What is a tax rate?

Answer 7

Determines the level of taxes imposed on the tax base and is usually expressed as a percentage

Question 8

What is a flat tax?

Answer 8

A single tax applied to an entire base

Question 9

What are graduated taxes?

Answer 9

The tax base is divided into a series of monetary amounts or brackets

Question 10

What is the marginal tax rate?

Answer 10

The tax rate that applies to the next additional increment of a taxpayers taxable income

Question 11

How do you find the marginal tax rate?

Answer 11

(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

Question 12

When is the marginal tax rate used?

Answer 12

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

Question 13

What is the average tax rate?

Answer 13

Represents a taxpayers average level of taxation on each dollar of taxable income

Question 14

How do you find the average tax rate?

Answer 14

Average tax rate = total tax / taxable income

Question 15

When is the average tax rate used?

Answer 15

Often used in budgeting tax expense as apportion of income

Question 16

What is the effective tax rate?

Answer 16

Represents the taxpayers average rate of taxation on each dollar of total income including taxable and no taxable income

Question 17

How do you find the effective tax rate?

Answer 17

Effective tax rate = total tax / total income

Question 18

Why does the effective tax rate provide a better depiction of a taxpayers tax burden?

Answer 18

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

Question 19

what is the proportional tax rate structure?

Answer 19

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

Question 20

what is the progressive tax rate structure?

Answer 20

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

Question 21

in a progressive tax rate structure is the average tax rate less than or equal to the marginal tax rate or both?

Answer 21

the average tax rate in a progressive tax rate structure will always be less than or equal to the marginal tax rate

Question 22

what is the regressive tax rate structure?

Answer 22

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

Question 23

What is a value-added tax?

Answer 23

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

Question 24

When was the income tax ratified?

Answer 24

Income tax became law in 1913 with the ratification of the 16th amendment

Question 25

What is the most significant tax assessed by the US government?

Answer 25

Income tax which represented 47.4 percent of all tax revenues in the year 2011

Question 26

What is the tax base for Social Security tax and what is the rate?

Answer 26

The tax base is salary or wages and the rate is 12.4%

Question 27

What is the tax base for Medicare tax and what is the rate?

Answer 27

Wages or salary is the tax base and the rate is 2.9%

Question 28

What is the tax base and tax rate for unemployment taxes?

Answer 28

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%

Question 29

What is an excise tax?

Answer 29

taxes that are levied on the retail sale of particular products

Question 30

What is the tax base for excise taxes?

Answer 30

the tax base is based on the quantity of a product purchased rather than a monetary amount

Question 31

What is the purpose of the use tax?

Answer 31

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

Question 32

What are explicit taxes?

Answer 32

taxes that are directly imposed by a government and are easily quantified

Question 33

What are implicit taxes?

Answer 33

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

Question 34

What does it mean to be tax-favored?

Answer 34

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

Question 35

Why do tax-advantaged assets bean an implicit tax or a reduced before-tax return as a result of the tax advantage?

Answer 35

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

Question 36

What does sufficiency mean?

Answer 36

assessing the size of the tax revenues that the tax system must generate and ensuring that it provides them

Question 37

What is static forecasting?

Answer 37

the forecasting of revenue that will be produced by changes in tax law without considering how taxpayer activities could be altered.

Question 38

What is dynamic forecasting?

Answer 38

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

Question 39

What are tax preferences and why are they utilized?

Answer 39

governments provide incentives in the form of tax breaks or additional deductions to encourage investment or further social objectives

Question 40

What is vertical equity?

Answer 40

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

Question 41

What is certainty?

Answer 41

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

Question 42

What is convenience?

Answer 42

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

Question 43

What is economy?

Answer 43

this criteria for evaluating a tax system requires that a good system should minimize the compliance and administration costs associated with the tax system

Question 44

What is an Ad valorem tax?

Answer 44

a tax based on the value of property