Ch. 1 - Intro to Tax

Question 1

What is tax?

Answer 1

A tax is a payment required by a government that is unrelated to any specific benefit or service received from the government.
Key components of a tax:
* Payment required
* Payment imposed by a government agency (federal, state, local)
* Payment not tied directly to the benefit received by the taxpayer

Question 2

What is the general purpose of a tax?

Answer 2

The general purse of a tax is to fund the operations of the government (to raise revenue). They differ from fines and penalties in that taxes are not intended to punish or prevent illegal activity. However, by allowing deductions from income, our federal tax system encourages certain behaviors like charitable contributions, retirement savings, and research and development.

Question 3

Who cares about taxes?

Answer 3

Businesses:
* What organizational form should a business use?
* Where should the business locate?
* How should business acquisitions be structured?
* How should the business compensate employees?
* What is the appropriate mix of debt and equity for the business?
* Should the business rent or own its equipment and property?
* How should the business distribute profits to its owners?

Politicians:
* Politicians often distinguish themselves from their opponents based on tax rhetoric
* Voters must have basic knowledge of taxes to evaluate the merits of alternative tax proposals

Individuals:
* Owning a home: tax deductions for home mortgage interest and real estate taxes can reduce the after0tax costs of owning a home
* Retirement: Understanding the tax-advantaged methods of saving for retirement can increase the after-tax value of your retirement nest egg.

Question 4

Sin taxes

Answer 4

taxes imposed on the purchase of goods (ex: alcohol, tobacco products, etc) that are considered socially less desirable.

Question 5

earmarked tax

Answer 5

a tax that is assessed for a specific purpose

Question 6

How do you calculate a tax in its most simple form?

Answer 6

the amount of tax equals the tax base multiplied by the tax rate

Tax=tax base x tax rate

Question 7

Tax base

Answer 7

The item that is being taxed (ie purchase price of a good, taxable income, etc). Usually expressed in monetary terms.

Def: Tax rate: The level of taxes imposed on the tax base, usually expressed as a percentage.
Examples of tax bases:
* Taxable income (federal and state income taxes)
* Purchases (sales taxes)
* Real estate values (real estate tax)
* Personal Property values (personal property tax)

Question 8

Flat tax

Answer 8

a single tax applied to an entire base.

Question 9

Graduated tax

Answer 9

Taxes in which the tax base is divided into a series of monetary amounts, or brackets, where each successive bracket is taxed to a different (gradually higher or gradually lower) percentage rate.

Question 10

Brackets

Answer 10

a subset (or portion) of the tax base subject to a specific tax rate. Brackets are common to graduated taxes.

Question 11

What are the three tax rates?

Answer 11

• Marginal
• Average
• Effective

Question 12

Tax is computed on a _________, which is generally ______________. Taxable income is ____________

Answer 12

tax base; taxable income; gross income minus deductions

Question 13

Marginal tax rate:

Answer 13

: the tax rate that applies to the next additional increment of a taxpayers taxable income (or to deductions). Specifically, where “old” refers to the current tax and “new” refers to the revised tax after incorporating the additional income ) or deductions in question.

Question 14

The marginal tax rate is particularly useful in tax planning because ________

Answer 14

it represents the rate of taxation or savings that would apply to additional income (or deductions).

Question 15

Average tax rate

Answer 15

A taxpayers average level of taxation on each dollar of taxable income. Useful in budgeting tax expense.

Average tax = total tax/taxable income

Question 16

Effective tax rate

Answer 16

A taxpayers average rate of taxation on each dollar of total income (taxable and nontaxable income). Useful in comparing the relative tax burdens on taxpayers.

Effective tax rate = total tax/total income

Question 17

What are the three basic tax rate structures?

Answer 17

• Proportional
• Progressive
• Regressive

Question 18

What imposes a constant tax rate throughout the tax base. As the tax base increases, the taxes paid increases proportionally?

Answer 18

A proportional tax rate structure (aka a flat tax)

Proportional tax = tax base x tax rate

Question 19

progressive tax rate structure

Answer 19

imposes an increasing marginal tax rate structure as the tax base increases. Common examples include federal and most state income taxes. The average tax rate in a progressive tax rate structure will always be less or equal to the marginal tax rate.

Aka a progressive tax rate system means that the tax rate increases as the taxable amount increases

Question 20

regressive tax rate structure

Answer 20

imposes a decreasing marginal tax rate as the tax base increases. These are not common. In the US, the Social Security tax and federal and state unemployment taxes employ a regressive tax rate structure.

Question 21

The federal government imposes a variety of taxes to fund federal programs such as ______, __________, _________, ________, & __________.

Answer 21

national defense, Social Security, interstate highway system, educational programs, and Medicare.

Question 22

Major federal taxes include________, ______, _________, & __________.

Answer 22

the individual and corporate income taxes, employment taxes, estate and gift taxes, and excise taxes.

Question 23

What is a tax imposed on the producer of goods (and services) based on the value added to the goods (services) at each stage of production. Common in Europe.?

Answer 23

Value-added tax (VAT)

Question 24

Explain income taxes

Answer 24

• The most significant tax assessed by the US government
• Represents approximately 60% (combined corporate and individual) of all tax revenues collected in the US
• Levied on individuals, corporations, estates, and trusts

Question 25

Employment and unemployment taxes

Answer 25

• Second largest group of taxes imposed by the US government
• Employment taxes consist of old age, survivors, and disability (OASDI) tax, commonly called Social Security tax, and Medical Health Insurance (MHI) tax, also known as the Medicare tax
• Unemployment taxes fund temporary unemployment benefits for individuals terminated from their jobs without cause

Question 26

Excise taxes

Answer 26

• Third largest group of taxes imposed by the US government
• Levied (aka imposed) on the quantity of products sold

taxes levied on the retail sale of 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 unit. Imposed on things like diesel, gas, tobacco, telephone use, air transportation, etc.

Producer of the product pays excise tax.

Question 27

Transfer taxes

Answer 27

• Levied on the fair-market values of wealth transfers upon death or by gift.

Question 28

Income tax

Answer 28

a tax in which the tax base is income. Income taxes are imposed by the federal government and by most states. Represented approximately 50.2% of all tax revenues collected by the US government in 2021. Originally began to help fund the Civil War.

Question 29

Congress enacted the _______, and the income tax has been important ever since.

Answer 29

Revenue Act of 1913; Today, income taxes are levied on individuals (max 37%), corporations (flat rate of 21%), estates (max rate of 37%), and trusts (max rate of 37%).

Question 30

What are two examples of transfer taxes?

Answer 30

The estate and gift taxes

Question 31

What is the difference between the social security tax and the medicare tax?

Answer 31

the Social Security Tax pays the monthly retirement, survivor, and disability benefits for qualifying individuals whereas the Medicare tax pays for medical insurance for individuals who are elderly or disabled. The tax base for both is wages or salary, and the rates are 12.4% and 2.9%, respectively.

Question 32

True or false: is the tax base for social security taxes capped?

Answer 32

True! In 2022, the tax base for the Social Security tax is capped at $147,000 (wages over this cap are not subject to the tax)!! The tax base for the Medicare tax is not capped. Employers and employees split these taxes equally (6.2% each)

Question 33

Self