Midterm #1 Flashcards
The Green River, which is heavily polluted by industrial waste, flows through State S. Eighty-five companies operate manufacturing facilities that border the river. State S recently enacted legislation requiring each company to pay $50,000 annually into a special fund to clean up Green River. Does this payment meet the definition of a tax?
This payment has characteristics of a tax, a penalty, and a user fee. The compulsory payment is not specifically punitive but does apply selectively to those companies most likely responsible for the polluted condition of Green River. However, these same companies may be the entities that benefit most from the environmental clean-up.
Mr. Powell owns a residential apartment complex in a suburban area. This year, the local jurisdiction increased the property tax rate on the apartment complex. To offset this additional cost, Mr. Powell decreased the amount he usually spends on maintaining the exterior of the building and the landscaping. Who bears the incidence of the increased property tax?
To the extent that the decline in exterior maintenance reduces the value of Mr. Powell’s apartment
complex, he bears the incidence of the increased property tax. To the extent that the decline reduces the value of adjoining properties or makes the neighborhood less attractive, the owners of the adjoining properties and the neighborhood residents share the incidence of the tax increase.
Mr. and Mrs. Ahern pay 18,000 annual tuition to a private school for their three children. They also pay 2,300 property tax on their personal residence to support the local public school system. Should they be exempt from this property tax?
People who don’t directly use public schools (such as Mr. and Mrs. Ahern or people who don’t have
children) indirectly benefit from a public education system for the general population. Arguably, public
education contributes to a skilled workforce and improves the cultural and social environment in which Mr. and Mrs. Ahern live. Based on this argument, Mr. and Mrs. Ahern should not be exempt from the local
property tax
A local government imposed a new 2% tax on the gross receipts of businesses of operating within its jurisdiction. XYZ company, which manufactures soap and other toiletries, responded to the tax by reducing the size of the bars of soap and purchasing a cheaper grade of ingredients. by making these changes, XYZ maintained its before tax level of profits. Who bears the incidence of the new gross receipts tax?
The consumers who pay the same price for a smaller bar of soap of lesser quality bear the incidence of the
new gross receipts tax
Why is real property a better tax base than personal property?
Real property can’t be hidden or moved, and its ownership (legal title) is a matter of public record. In
contrast, personal property is mobile and may be easily concealed. Moreover, jurisdictions may not have an effective means to discover or trace ownership of personal property.
Many local jurisdictions apply a low property tax rate to land owned by privately operated golf courses. What is the economic justification for such a preferential rate?
Arguably, private golf courses beautify the locality and are environmentally more desirable than other
commercial activities. They also may require more acreage than other businesses and, therefore, would be at a competitive disadvantage without a preferential real property tax rate.
A city government increased its local sales tax from 1% to 2% of the dollar value of consumer goods purchased in the city. However, the city’s sales tax revenues increased by only 30% after the doubling of the tax rate. What factors might account for this result?
The tax increase may have reduced the aggregate demand for consumer goods and, consequently,
municipal residents are buying fewer goods. A second possibility is that municipal residents are traveling
to other jurisdictions with lower tax rates or making more purchases through mail order catalogs or on-line.
Both the federal and many states impose so-called sin taxes: excise taxes levied on the retail sale of liquor and cigarettes. Discuss the reasons why sales of these particular items make a good tax base.
From a political perspective, liquor and cigarettes sales make an excellent tax base because consumption of
the two products is purely discretionary, and any decline in consumption because of the tax is socially
desirable. From an economic perspective, these sales are a good tax base because the demand for liquor and cigarettes is relatively price inelastic. In other words, people who drink and smoke on a regular basis buy these products regardless of a heavy excise tax.
Differentiate between a property tax and a transfer tax.
A property tax is a periodic (usually annual) tax levied on the ownership of property and based on the value
of the property on a particular assessment date. A transfer tax is a transaction-based tax levied on the
transfer of property from one party to another. A transfer tax is based on the value of the property at date of
transfer.
Mr. Josh Kenney, a U.S. citizen and resident of Vermont, owns 100 percent of the stock of JK Services, which is incorporated under Vermont law and conducts business in four counties in the state. JK Services owns 100 percent of the stock of JK Realty, which is incorporated under Massachusetts law and conducts business in Boston.
a. how many taxpayers are identified in the given statement of facts?
b. identify the governments with jurisdiction to tax each of these tax payers?
a. The statement of facts identifies three taxpayers: Mr. Josh Kenney, JK Services, and JK Realty.
b. The government of the locality in which Mr. Kenney resides, the state government of Vermont, and the
U.S. government have jurisdiction to tax Mr. Kenney. The local governments of the four counties in
which JK Services conducts business, the state government of Vermont, and the U.S. government have jurisdiction to tax JK Services. The city of Boston, the state government of Massachusetts, and the U.S.
government have jurisdiction to tax JK Realty.
In each of the following cases, determine if the United States has jurisdiction to tax Mrs. May.
a. Mrs. May is a citizen of Brazil but is a permanent resident of Orlando, Florida.
b. Mrs. May is a citizen and resident of Brazil. She owns Manhattan real estate that generates $100,000 net rental income annually.
c. Mrs. May is a citizen and resident of Brazil. She owns no property and conducts no business in the United States.
d. Mrs. May is a U.S. citizen but is a permanent resident of São Paulo, Brazil.
a. The United States has jurisdiction to tax Mrs. May because she is a permanent resident.
b. The United States has jurisdiction to tax Mrs. May only on the U.S. source rental income generated by
the Manhattan real estate.
c. The United States does not have jurisdiction to tax Mrs. May.
d. The United States has jurisdiction to tax Mrs. May because she is a U.S. citizen
