Ch. 1 - Intro to Tax Flashcards
What is tax?
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
What is the general purpose of a tax?
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.
Who cares about taxes?
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.
Sin taxes
taxes imposed on the purchase of goods (ex: alcohol, tobacco products, etc) that are considered socially less desirable.
earmarked tax
a tax that is assessed for a specific purpose
How do you calculate a tax in its most simple form?
the amount of tax equals the tax base multiplied by the tax rate
Tax=tax base x tax rate
Tax base
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)
Flat tax
a single tax applied to an entire base.
Graduated tax
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.
Brackets
a subset (or portion) of the tax base subject to a specific tax rate. Brackets are common to graduated taxes.
What are the three tax rates?
- Marginal
- Average
- Effective
Tax is computed on a _________, which is generally ______________. Taxable income is ____________
tax base; taxable income; gross income minus deductions
Marginal tax rate:
: 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.
The marginal tax rate is particularly useful in tax planning because ________
it represents the rate of taxation or savings that would apply to additional income (or deductions).
Average tax rate
A taxpayers average level of taxation on each dollar of taxable income. Useful in budgeting tax expense.
Average tax = total tax/taxable income
Effective tax rate
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
What are the three basic tax rate structures?
- Proportional
- Progressive
- Regressive
What imposes a constant tax rate throughout the tax base. As the tax base increases, the taxes paid increases proportionally?
A proportional tax rate structure (aka a flat tax)
Proportional tax = tax base x tax rate
progressive tax rate structure
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
regressive tax rate structure
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.
The federal government imposes a variety of taxes to fund federal programs such as ______, __________, _________, ________, & __________.
national defense, Social Security, interstate highway system, educational programs, and Medicare.
Major federal taxes include________, ______, _________, & __________.
the individual and corporate income taxes, employment taxes, estate and gift taxes, and excise taxes.
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.?
Value-added tax (VAT)
Explain income taxes
- 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
