Chapter 1 Flashcards
Marginal Tax Rate
Rate of tax that will be paid or saved on the next dollar of income.
Used in tax planning.
Average Tax Rate
(total federal income tax / taxable income)
Effective Tax Rate
(total federal income tax / economic income)
Tax Rate Type used in Tax Planning
Marginal Tax Rate
3 Tax Rate Structures
Proportional
Regressive
Progressive
Proportional Tax
Flat tax (average tax rate remains same as tax base increases). Example: sales tax, corporate tax rate at 21%
Regressive Tax
Average tax rate decreases as tax base increases.
Example: Social Security Tax ceiling
Progressive Tax
Average tax rate increases as tax base increases. Consistent with “ability to pay” component of tax.
Example of Proportional Tax
Sales Tax, corporate tax rate at 21%
Example of Regressive Tax
Social Security Tax ceiling
Example of Progressive Rate Structure
federal income tax
Oregon income tax
2 numbers needed to compute a tax
Tax Base x Tax Rate
4 Criteria of a Tax
- Paid to government, required by law
- Pursuant to legislative power
- Used for general public purposes
- No special benefit received
Income
Includes taxable & nontaxable income
Gross Income
Income - items excluded from income
Exclusions
Increases in wealth that Congress has decided not to tax
Gain
Difference between selling price of an asset and its original cost
4 Criteria to Evaluate a Tax
- Equity
- Certainty
- Convenience
- Economy
Horizontal Equity
Similar taxpayers in similar situations pay similar levels of tax
Vertical Equity
Taxpayers in different situations pay different levels of tax, but equitable in ability to pay
Transaction Loss
Asset is sold for less than its cost
Annual Loss
Excess of deductions over income (business)
What is another name for the Tax Base?
Taxable Income
Why does the IRS publish a new tax rate schedule every year?
For cost of living/inflation increases
