Chapter 1 & 3

Question 1

What is the proportional tax system

what is another word for this tax

Answer 1

• constant tax rate throughout the tax base, as base increases so does taxes paid
• also known as flat rate

Question 2

what are examples of proportional tax rates

Answer 2

corporate tax rate, and sales tax

Question 3

for a proportional tax system, the marginal rate equals the …

Answer 3

average rate

Question 4

the proportional tax system satisfies..

Answer 4

vertical equity by $ but not rate

Question 5

What is the progressive tax system

Answer 5

imposes an increasing marginal tax rate as the tax base increases

Question 6

what are examples of progressive taxes

Answer 6

federal and state income taxes

Question 7

for the progressive system how does the marginal tax rate compare to the average tax rate

Answer 7

the marginal tax rate will always be more or equal to the average rate

Question 8

progressive tax system satisfies…

Answer 8

vertical equity by rate and dollar

Question 9

What is the regressive tax system

Answer 9

the marginal tax rate decreases as the tax base increases

Question 10

what are examples of regressive taxes

Answer 10

social security tax and state unemployment taxes (because they are capped at a certain amount)

Question 11

What tax system is sales tax viewed to follow?

Answer 11

if we look at it as a marginal/average tax it follows the proportional tax system

if we look at the effective tax it is regressive because the more base you have the less of it is going towards the flat tax

Question 12

What are the 4 characteristics of a good tax

Answer 12

1. Equity
2. Economy
3. Certainty
4. Convienence

Question 13

what does a sufficiency mean in terms of a good tax

Answer 13

it means assessing the amount of tax revenues a system must generate and ensuring that it provides them

Question 14

what is the income effect

Answer 14

it predicts that when taxpayers are taxed more they will work harder to generate the same after-tax dollar

therefore they work more to increase their pre-tax income

Question 15

what is the substitution effect

Answer 15

predicts that when taxpayers are taxed more, rather than working more, they will substitute nontaxable activities like leisure for taxable ones

Question 16

what are the income effect and substitution effect relevant to?

Answer 16

determining how tax payers may respond to tax changes in order to forecast sufficient revenue

Question 17

What does it mean that a tax needs to be equitable to be good

Answer 17

it means that the tax is based on the taxpayers ability to pay, in other words more able to pay more taxes paid

-tax payer has to be able to pay it

Question 18

what is horizontal equity

Answer 18

two taxpayers with the same tax situation pay the same amount

Question 19

vertical equity

Answer 19

means that the taxpayer with the greater ability to pay pay more tax relative to taxpayers with a lesser ability to pay tax

Question 20

What does it mean that a tax must be certain

Answer 20

tax payers should be able to determine when to pay the tax, where to pay the tax, and how to determine the tax

Question 21

What does it mean that a tax must be convenient

Answer 21

it means that a tax system should be designed to facilitate the collection of tax revenues without being too difficult for the taxpayer or the government

Question 22

what does economy mean in relation to a good tax system

Answer 22

the system should minimize the compliance and administration costs associated with the tax system

Question 23

What is the marginal tax rate

Answer 23

the tax rate that applies to the next additional increment of a taxpayer’s taxable income (or to deductions).

how much your next dollar will be taxed at

Question 24

what is the marginal tax rate equation

Answer 24

tax/taxable income

also (old - new tax)/(old - new income)

Question 25

what is the marginal tax rate good for in terms of tax planning?

Answer 25

tax planning

Question 26

What is average tax

Answer 26

the tax rate that applies to the next additional increment of a taxpayer’s taxable income (or to deductions). historical

Question 27

What is the equation for the average tax

Answer 27

total tax/taxable income

Question 28

what is the average tax good for in terms of tax planning

Answer 28

It is good for budgeting tax expenses as a portion of income

Question 29

What is the effective tax rate

Answer 29

represents the average rate of taxation on each dollar of income

Question 30

What is the effective tax rate equation

Answer 30

total tax/ (taxable income)=

Question 31

What is the effective tax rate good for in terms of tax planning

Answer 31

gives us the best look at what the taxpayer's tax burden is in relation to all income (taxable and nontaxable)

Question 32

what taxes are external users most interested in when evaluating if a company is good at tax planning

Answer 32

effective tax

Question 33

What are explicit taxes

Answer 33

taxes that are directly imposed by the government

Question 34

what are implicit taxes

Answer 34

indirect taxes that are not directly paid to the government, that result from the government granting tax-favorable options *reduced before tax return

Question 35

what does tax-favored mean

Answer 35

that the income is either excluded from tax base (deductable) or the tax rate is lower

Question 36

why is there an implicit tax

Answer 36

due to demand for tax favorable options it leads to lower pre-tax return

Question 37

what are the ways to find the implicit tax

Answer 37

1. Difference between tax-favored before-tax rate of return and taxed before-tax rate of return 2. (Pre-tax rate of return of taxable - pre tax-favored) / pretax return of taxable

Question 38

what is the tax rate for dividend income

Answer 38

15%

Question 39

what is the tax rate for long-term capital gains

Answer 39

20%

Question 40

what is the medicare surtax

Answer 40

2.9 split 50/50 among employer/employee

Question 41

What is the tax treatment for C Corps

Answer 41

double taxed at an entity and shareholder level pay a flat 21%

Question 42

how are sole proprietorships taxed?

Answer 42

business deductions and income reported at the owner's tax rate - losses a business faces can offset personal income

Question 43

How are partnerships taxed?

Answer 43

flow through entity losses offset partners income and tax free withdrawals

Question 44

how are S corporations taxed

Answer 44

flow-through entity losses offset shareholders' income tax-free withdrawals

Question 45

LLC and LLP

Answer 45

flow-through entity

Question 46

what does flow through entity mean

Answer 46

that business doesn't pay tax but flows through to owners who then pay the tax

Question 47

What are different tax planning strategies

Answer 47

1. shift income & deductions across time 2. Shift income and deductions across jurisdictions 3. Shift income across entities 4. Shift among character

Question 48

What does it mean to shift income across time

Answer 48

means you want to delay revenue recognition and accelerate expenses

Question 49

how does shifting the time you pay taxes benefit a tax payer

Answer 49

In PV terms, tax costs decrease and cash flows increase when a tax liability is deferred until a later year

Question 50

when do after cash flows increase in terms of Time

Answer 50

after-tax cash flows increase if income is recognized in the low-tax year and deductions taken in the high-tax year

Question 51

What does tax planning in terms of jurisdiction mean?

Answer 51

the state in which the income is taxed or the country in which it is taxed

Question 52

what jurisdiction do you want to have taxes in

Answer 52

one with a lower tax rate

Question 53

What does it mean to shift tax to a different entity in terms of planning

Answer 53

shifting income to a different entity, such as a family member or different business entity owned by the taxpayer

Question 54

What does shifting tax among character mean in terms of tax planning

Answer 54

shifting the character of your income can affect how it is taxed -different things are taxed different

Question 55

when considering cash inflows and outflows do you want higher or lower PV

Answer 55

outflows: low PV cash inflows: high pv

Question 56

what is ordinary income and how is it taxed

Answer 56

income generated by routine operations and investments and are taxed at regular rates

Question 57

what is capital income and how is it taxed

Answer 57

generated by sale of capital assets and is subject to a lower tax rate

Question 58

What is the business purpose doctrine

Answer 58

The IRS can disallow business expenses for transactions with no underlying business motivation

Question 59

what is the step transaction doctrine

Answer 59

a company might break apart or lump transactions for tax purposes but the IRS can disallow if the think it's necessary

Question 60

what is the substance over form doctrine

Answer 60

IRS can tax on substance vs how company made something look

Question 61

what is the economic substance doctrine

Answer 61

has to have meaning and be an economical transaction