midterm Flashcards
Haig simons definition of income
income is the money value of the net increase in an individuals power to consume during a period.
this equals the amount actually consumed during the period plus net additions to wealth.
Wealth = Savings, this must be included in income b/c it represents an increase in potential consumption.
Juliets cigar store has gross revenues of 100,000. business expenses are 95,000.
according to H-S definition of income her potential consumption increased by?
5,000
*a decrease in an individuals potential to consume should be subtracted in determining income
H-S definition of income includes wages and salaries, business profits, rents, royalties, dividends, interest AND unconventional items such as:
employer pension contributions and insurance purchases,
transfer payments –> social security retirement benefits, unemployment compensation and welfare
capital gains
income in-kind: ex. subsidized lunches, barter agreements, imputed net rent from your own home
H-S believes it doesn’t matter whether benefits are in money form or not. they are all income.
Interest earned on bonds issued by state and localities are or are not subject to tax?
are NOT
*unconstitutional for one level of gov’t to levy taxes on a different level of govt.
The exclusion of state and local interest from taxation is a powerful tool for the state to do what?
raise Revenue
If investors do not have to pay federal tax on interest from state and local bonds, they should be willing to accept a lower before-tax rate of return than they receive on taxable bonds.
dividend income is taxed at a max rate of ____
and WHY
- 8%, lower than the rate of ordinary income (goes as high as 39.6%)
why: Corporations would be taxed on dividends twice, at individual level and corporate level. So they taxing dividends at a lower rate is too lessen the shittyness of double taxation
Max capital gains rate ____ as long as…
capital losses can decrease what?
capital losses up to 3000 can be subtracted from what?
23.8% as long as the asset is held for more than one year.
Capital gains held less than one year are taxed at ordinary income.
Capital losses can decrease capital gains
capital losses in excess of capital gains can be subtracted from taxable income
taxes deferred are taxes ____
saved!
lock in effect
the disincentive to change portfolios that arises because investors incur a tax on realized gains
are capital gains taxed at death?
NO, angel of death loop hole
Capital gains rules
taxes realized gains preferentially, and unrealized capital gains accrue without taxation.
if asset held until death of owner, its escapes taxation completely
employer contributions to employee retirement funds are or are not subject to tax?
employer contributions to medical insurance plans are not included in what?
are NOT
- gov’t also does not tax the interest accrued on pension contributions over time
- only when pensions are paid out at retirement are the principle and interest subject to taxation
- INCOME
Individual Retirement Account IRA
not provided by an employer, an individual can deposit up to 5,500 per year in a qualified account (savings account, money market funds). This money is tax deductible. interest accrued is untaxed, tax is due only when money is paid out at retirement. Penalties imposed if money is drawn out early, except for education expenses.
Roth IRA
tax-preffered savings vehicle.
Money is not tax deductible, but interest accrues tax free. No tax when money is withdrawn.
401k plan
an employee can earmark a portion of his/her salary each year, no income tax liability incurred on that portion.
