Answers
what decisions to businesses consider in regards to taxes - ANSWERSorganizational
form, location, acquisition structures, employee compensation, capital structure, rent or
ownership of property and equipment, distribution of profits
why do politicians care about taxes - ANSWERSdistinguishing feature, voters must
have basic knowledge
why do individuals care about taxes - ANSWERStax deductions for home owning,
retirement planning
what is a tax - ANSWERSa payment required by a government that is unrelated to any
specific benefit or service received from the government
key components of a tax - ANSWERSpayment required, payment imposed by
government agency, payment not tied directly to benefit received by the taxpayer
is a payment for a drivers license a tax - ANSWERSno
is a payment for required (by government) house appraisal a tax - ANSWERSno
is a payment for hotel use of 1% of bill to pay for city projects a tax - ANSWERSyes
is a payment for rental car use of 3% of bill to pay for the roads a tax - ANSWERSyes
tax rate - ANSWERSlevel of taxes imposed on the tax base and is usually expressed as
a percentage
tax base - ANSWERSdefines what is actually taxed and is usually expressed in
monetary terms
tax calculation equation - ANSWERStax = tax base x tax rate
marginal tax rate - ANSWERSthe tax rate that applies to the next additional increment
of a taxpayer's taxable income
average tax rate - ANSWERSthe taxpayer's average level of taxation on each dollar of
taxable income
,effective tax rate - ANSWERSthe taxpayer's average rate of taxation on each dollar of
total income (both taxable and nontaxable)
proportional tax rate (flat tax) - ANSWERSimposes a constant tax rate throughout the
tax base
progressive tax rate - ANSWERSimposes an increasing marginal tax rate as the tax
base increases
regressive tax rate - ANSWERSimposes a decreasing marginal tax rate as the tax base
increases
types of taxes - ANSWERSfederal, state and local, implicit
federal taxes - ANSWERSincome, employment and unemployment, excise, transfer
state and local taxes - ANSWERSsales and use, property, income, excise
income taxes (federal) - ANSWERSrepresent approximately 56.5% of all tax revenues
collected in the US; levied on individuals, corporations, estates, and trusts
employment and unemployment taxes - ANSWERSsecond largest group of taxes
imposed by the US government
employment taxes - ANSWERSinclude the OASDI (social security tax) and the MHI tax
(Medicare tax)
unemployment taxes - ANSWERSfund temporary unemployment benefits for individuals
terminated from their jobs without cause
excise taxes (federal) - ANSWERSthird largest group of taxes imposed by the US
government; levied on the quantity of products sold
estate and gift taxes - ANSWERSlevied on the fair market values of wealth transfers
upon death or by gift
sales and use taxes - ANSWERStax base for sales tax is the retail sales of goods and
some services; tax base for the use tax is the retail price of goods owned, possessed,
or consumed within a state that were not purchased within the state
property taxes - ANSWERSad valorem taxes; real property taxes consists of taxes on
land and structures permanently attached to land; personal property taxes includes
taxes on all other types of property, both tangible and intangibe
ad valorem tax - ANSWERStax base is the fair market value of the property
, income taxes (state) - ANSWERScalculations largely conform to the federal taxable
income calculations
excise taxes (state) - ANSWERSimposed on items subject to federal excise tax
implicit taxes - ANSWERSindirect taxes that result from a tax advantage the
government grants to certain transactions; the reduced before-tax return that a tax-
favored asset produces because of its tax advantaged status; difficult to quantify but
important to understand in evaluating the relative tax burdens of tax-advantaged
investments
how to evaluate different tax systems - ANSWERSsufficiency, equity, certainty,
convenience, economy
sufficiency - ANSWERSassessing the aggregate size of the tax revenues that must be
generated and making sure that the tax system provides these revenue
equity - ANSWERShow the tax burden should be distributed across taxpayers
certainty - ANSWERStaxpayers should be able to determine when to pay the tax, where
to pay the tax, and how to determine the tax
convenience - ANSWERStax system should be designed to be collected without undue
hardship to the taxpayer
economy - ANSWERSshould minimize the compliance and administration costs
associated with the tax system
types of revenue casting - ANSWERSstatic and dynamic
static revenue forecasting - ANSWERSignores how taxpayers might alter their activities
in response to a tax law change and to base projected tax revenues on the existing
state of transactions
dynamic revenue forecasting - ANSWERStries to predict possible responses by
taxpayers to new tax laws
income effect - ANSWERSas tax rates go up, people will work harder to maintain same
after-tax income
substitution effect - ANSWERSas tax rates go up, people will substitute non-taxable
activities because the marginal value of taxable ones has decreased
how is a tax system considered equitable - ANSWERSbased on the taxpayer's ability to
pay