Tax Structures Flashcards
Define tax
a payment required by a government that is unrelated to any specific benefit or service received from the government
What is the general purpose of a tax?
to fund the operations of the government
to raise revenue
What is the simplest tax formula?
tax base x tax rate = tax
Define tax base
what is actually taxed and is usually expressed in monetary terms
Define tax rate
the level of taxes imposed on the tax base and is usually expressed as a percentage
Define flat tax
a single tax rate applied to an entire base
Define graduated tax
the tax base is dived into a series of monetary amounts (brackets) and each successive bracket is taxed at a different rate (gradually higher or gradually lower)
Define marginal tax rate
the tax rate that applies to the next additional increment of a taxpayer’s taxable income (or deductions)
Define average tax rate
a taxpayer’s average level of taxation on each dollar of taxable income
Define effective tax rate
the taxpayer’s average rate of taxation on each dollar of total income, including taxable and nontaxable
What are the three basic tax rate structures used to determine a tax?
proportional
progressive
regressive
What is proportional tax rate structure?
aka flat tax
imposes a constant tax rate throughout the tax base
as the tax base increases the taxes increase proportionally
What is the effect on the marginal tax rate with a proportional tax rate structure?
remains constant and equals the average tax rate
What is progressive tax rate structure?
imposes an increasing marginal tax rate as the tax base increases
as the tax base increases, both the marginal tax rate and the taxes paid increase
What tax rate structure is used for the corporate tax rate?
proportional
What tax rate structure is used for the federal and most state income taxes?
progressive
What is regressive tax rate structure?
imposes a decreasing marginal tax rate as the tax base increases
as the tax base increases, the taxes paid increase, but the marginal tax rate decreases
uncommon
What tax rate structure is used for the Social Security tax?
regressive
What tax rate structure is used for the federal and state unemployment tax?
regressive
Which tax is the most significant tax assessed by the U.S. Government
income tax
What percent of tax revenues collected by the U.S. does the income tax account for?
~47.3%
When and why was the first income tax enacted by Congress?
1861
to help fund the Civil War
What was the maximum tax rate when income tax was first enacted?
5%
When did the first enacted income tax expire?
1872
When did Congress resurrect the income tax?
1892
When was and what resulted from and why the Pollock v Farmer’s Loan and Trust Company challenge on income tax?
1895
US Supreme ruled unconstitutional
direct taxes prohibited by the Constitution unless the taxes were apportioned across states based on their populations
Explain the 16th Amendment to the Constitution
ratified February 1913
to remove any doubt as to whether income taxes were allowed by the Constitution
What is included in employment taxes?
Old Age, Survivors, and Disability Insurance (OASDI)-aka Social Security tax; and Medical Health Insurance (MHI)-aka Medicare tax
What does Social Security tax do?
pays for monthly retirement, survivor and disability benefits for qualifying individuals
What does Medicare tax do?
pays for medical insurance for individuals who are elderly or disabled
What does unemployment tax do?
fund temporary unemployment benefits for individuals terminated from their jobs without cause
Which taxes are employers required to pay based on employee wages?
Medicare, Social Security, and unemployment
What is the difference between taxes and fines & penalties?
taxes are not intended to punish or prevent illegal behavior
Define sin tax
taxes imposed on the purchase of goods that are considered socially less desirable - e.g. alcohol, tobacco products
Define earmarked tax
a tax assessed for a specific purpose
What is the difference between a fee and earmarked tax?
the taxpayer’s tax payment does not directly relate to the specific benefit received whereas a fee directly corresponds with a specific benefit received by the payor (i.e. entrance to national parks)
Define excise tax
taxes levied on the retail sale of particular products
they differ from other taxes in that the tax base for an excise tax typically depends on the quantity purchased rather than a monetary amount
Define transfer tax
taxes on the transfer of wealth from one taxpayer to another
the estate and gift taxes are two examples of transfer taxes
Define estate tax
aka death tax
the tax paid for an estate based on the fair market value of wealth transfer made upon death
type of transfer tax
Define gift tax
the tax paid on a gift based on the fair market value of wealth transfer made by gift
type of transfer tax
What is the annual gift exclusion
allows a taxpayer to transfer $15,000 of gifts per donee each year without gift taxation
What is the gift and estate unified tax credit?
exempts from taxation $11,200,000 in bequests and gifts
Name 5 criteria to evaluate alternative tax systems
sufficiency, equity, certainty, convenience, and economy
What is sufficiency?
assessing the amount of the tax revenues it must generate and ensuring that it provides them
Define static forecasting
the process of forecasting tax revenues based on the existing state of transactions while ignoring how taxpayers may alter their activities in response to a tax law change
Define dynamic forecasting
the process of forecasting tax revenues that incorporates into the forecast how taxpayers may alter their activities in response to a tax law change
What is the income effect?
one of the two basic responses that a taxpayer may have when taxes increase
predicts that when taxpayers are taxed more they will work harder to generate the same after-tax dollars
What is the substitution effect?
one of the two basic responses that a taxpayer may have when taxes increase
predicts that when taxpayers are taxed more, rather than working more they will substitute nontaxable activities like leisure pursuits for taxable ones because the marginal value of taxable activities has decreased
What is equity?
one of the criteria used to evaluate a tax system
a system is considered fair or equitable if the tax is based on the taxpayer’s ability to pay
taxpayers with a greater ability to pay, pay more taxes
What is horizontal equity?
one of the dimensions of equity - achieved if taxpayers in similar situations pay the same tax
What is vertical equity
one of the dimensions of equity - achieved when taxpayers with greater ability to pay tax, pay more tax relative to taxpayers with a lesser ability to pay tax
What is certainty?
one of the criteria used to evaluate tax systems
certainly means taxpayers should be able to determine when, where, and how much tax to pay
What is convenience?
on of the criteria used to evaluate tax systems
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?
on of the criteria used to evaluate tax systems
a tax system should minimize its compliance and administration costs
