Tax Structures

Question 1

Define tax

Answer 1

a payment required by a government that is unrelated to any specific benefit or service received from the government

Question 2

What is the general purpose of a tax?

Answer 2

to fund the operations of the government

to raise revenue

Question 3

What is the simplest tax formula?

Answer 3

tax base x tax rate = tax

Question 4

Define tax base

Answer 4

what is actually taxed and is usually expressed in monetary terms

Question 5

Define tax rate

Answer 5

the level of taxes imposed on the tax base and is usually expressed as a percentage

Question 6

Define flat tax

Answer 6

a single tax rate applied to an entire base

Question 7

Define graduated tax

Answer 7

the tax base is dived into a series of monetary amounts (brackets) and each successive bracket is taxed at a different rate (gradually higher or gradually lower)

Question 8

Define marginal tax rate

Answer 8

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

Question 9

Define average tax rate

Answer 9

a taxpayer’s average level of taxation on each dollar of taxable income

Question 10

Define effective tax rate

Answer 10

the taxpayer’s average rate of taxation on each dollar of total income, including taxable and nontaxable

Question 11

What are the three basic tax rate structures used to determine a tax?

Answer 11

proportional
progressive
regressive

Question 12

What is proportional tax rate structure?

Answer 12

aka flat tax
imposes a constant tax rate throughout the tax base
as the tax base increases the taxes increase proportionally

Question 13

What is the effect on the marginal tax rate with a proportional tax rate structure?

Answer 13

remains constant and equals the average tax rate

Question 14

What is progressive tax rate structure?

Answer 14

imposes an increasing marginal tax rate as the tax base increases
as the tax base increases, both the marginal tax rate and the taxes paid increase

Question 15

What tax rate structure is used for the corporate tax rate?

Answer 15

proportional

Question 16

What tax rate structure is used for the federal and most state income taxes?

Answer 16

progressive

Question 17

What is regressive tax rate structure?

Answer 17

imposes a decreasing marginal tax rate as the tax base increases
as the tax base increases, the taxes paid increase, but the marginal tax rate decreases
uncommon

Question 18

What tax rate structure is used for the Social Security tax?

Answer 18

regressive

Question 19

What tax rate structure is used for the federal and state unemployment tax?

Answer 19

regressive

Question 20

Which tax is the most significant tax assessed by the U.S. Government

Answer 20

income tax

Question 21

What percent of tax revenues collected by the U.S. does the income tax account for?

Answer 21

~47.3%

Question 22

When and why was the first income tax enacted by Congress?

Answer 22

1861

to help fund the Civil War

Question 23

What was the maximum tax rate when income tax was first enacted?

Answer 23

5%

Question 24

When did the first enacted income tax expire?

Answer 24

1872

Question 25

When did Congress resurrect the income tax?

Answer 25

1892

Question 26

When was and what resulted from and why the Pollock v Farmer’s Loan and Trust Company challenge on income tax?

Answer 26

1895
US Supreme ruled unconstitutional
direct taxes prohibited by the Constitution unless the taxes were apportioned across states based on their populations

Question 27

Explain the 16th Amendment to the Constitution

Answer 27

ratified February 1913

to remove any doubt as to whether income taxes were allowed by the Constitution

Question 28

What is included in employment taxes?

Answer 28

Old Age, Survivors, and Disability Insurance (OASDI)-aka Social Security tax; and Medical Health Insurance (MHI)-aka Medicare tax

Question 29

What does Social Security tax do?

Answer 29

pays for monthly retirement, survivor and disability benefits for qualifying individuals

Question 30

What does Medicare tax do?

Answer 30

pays for medical insurance for individuals who are elderly or disabled

Question 31

What does unemployment tax do?

Answer 31

fund temporary unemployment benefits for individuals terminated from their jobs without cause

Question 32

Which taxes are employers required to pay based on employee wages?

Answer 32

Medicare, Social Security, and unemployment

Question 33

What is the difference between taxes and fines & penalties?

Answer 33

taxes are not intended to punish or prevent illegal behavior

Question 34

Define sin tax

Answer 34

taxes imposed on the purchase of goods that are considered socially less desirable - e.g. alcohol, tobacco products

Question 35

Define earmarked tax

Answer 35

a tax assessed for a specific purpose

Question 36

What is the difference between a fee and earmarked tax?

Answer 36

the taxpayer’s tax payment does not directly relate to the specific benefit received whereas a fee directly corresponds with a specific benefit received by the payor (i.e. entrance to national parks)

Question 37

Define excise tax

Answer 37

taxes levied on the retail sale of particular 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 amount

Question 38

Define transfer tax

Answer 38

taxes on the transfer of wealth from one taxpayer to another

the estate and gift taxes are two examples of transfer taxes

Question 39

Define estate tax

Answer 39

aka death tax
the tax paid for an estate based on the fair market value of wealth transfer made upon death
type of transfer tax

Question 40

Define gift tax

Answer 40

the tax paid on a gift based on the fair market value of wealth transfer made by gift
type of transfer tax

Question 41

What is the annual gift exclusion

Answer 41

allows a taxpayer to transfer $15,000 of gifts per donee each year without gift taxation

Question 42

What is the gift and estate unified tax credit?

Answer 42

exempts from taxation $11,200,000 in bequests and gifts

Question 43

Name 5 criteria to evaluate alternative tax systems

Answer 43

sufficiency, equity, certainty, convenience, and economy

Question 44

What is sufficiency?

Answer 44

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

Question 45

Define static forecasting

Answer 45

the process of forecasting tax revenues based on the existing state of transactions while ignoring how taxpayers may alter their activities in response to a tax law change

Question 46

Define dynamic forecasting

Answer 46

the process of forecasting tax revenues that incorporates into the forecast how taxpayers may alter their activities in response to a tax law change

Question 47

What is the income effect?

Answer 47

one of the two basic responses that a taxpayer may have when taxes increase

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

Question 48

What is the substitution effect?

Answer 48

one of the two basic responses that a taxpayer may have when taxes increase

predicts that when taxpayers are taxed more, rather than working more they will substitute nontaxable activities like leisure pursuits for taxable ones because the marginal value of taxable activities has decreased

Question 49

What is equity?

Answer 49

one of the criteria used to evaluate a tax system

a system is considered fair or equitable if the tax is based on the taxpayer’s ability to pay

taxpayers with a greater ability to pay, pay more taxes

Question 50

What is horizontal equity?

Answer 50

one of the dimensions of equity - achieved if taxpayers in similar situations pay the same tax

Question 51

What is vertical equity

Answer 51

one of the dimensions of equity - achieved when taxpayers with greater ability to pay tax, pay more tax relative to taxpayers with a lesser ability to pay tax

Question 52

What is certainty?

Answer 52

one of the criteria used to evaluate tax systems

certainly means taxpayers should be able to determine when, where, and how much tax to pay

Question 53

What is convenience?

Answer 53

on of the criteria used to evaluate tax systems

a tax system should be designed to facilitate the collection of tax revenues without undue hardship on the taxpayer or the government

Question 54

What is economy?

Answer 54

on of the criteria used to evaluate tax systems

a tax system should minimize its compliance and administration costs