Podcast
Questions and Answers
A business's decision on its organizational form is not influenced by tax considerations.
A business's decision on its organizational form is not influenced by tax considerations.
False (B)
Politicians' stances on tax policies are generally irrelevant to voters during elections.
Politicians' stances on tax policies are generally irrelevant to voters during elections.
False (B)
Tax-advantaged retirement savings methods have no impact on the after-tax value of a person's retirement savings.
Tax-advantaged retirement savings methods have no impact on the after-tax value of a person's retirement savings.
False (B)
A mandatory payment to the government for a specific service, like garbage collection, is considered a tax.
A mandatory payment to the government for a specific service, like garbage collection, is considered a tax.
The ability to deduct home mortgage interest and real estate taxes has no impact on the after-tax cost of owning a home.
The ability to deduct home mortgage interest and real estate taxes has no impact on the after-tax cost of owning a home.
A payment to the government that is directly tied to a specific benefit received is still classified as a tax.
A payment to the government that is directly tied to a specific benefit received is still classified as a tax.
A payment for a driver's license is typically considered a tax because it is a mandatory payment to the government.
A payment for a driver's license is typically considered a tax because it is a mandatory payment to the government.
A mandatory contribution to a government fund that provides unemployment benefits is considered a tax, even if the payer may potentially receive benefits in the future.
A mandatory contribution to a government fund that provides unemployment benefits is considered a tax, even if the payer may potentially receive benefits in the future.
The tax base is typically a percentage used to determine the level of taxes imposed.
The tax base is typically a percentage used to determine the level of taxes imposed.
The marginal tax rate reflects the average level of taxation on each dollar of taxable income.
The marginal tax rate reflects the average level of taxation on each dollar of taxable income.
A regressive tax rate imposes an increasing tax rate as the tax base increases.
A regressive tax rate imposes an increasing tax rate as the tax base increases.
Excise taxes are levied on the quantity of products sold, representing a primary source of federal tax revenue.
Excise taxes are levied on the quantity of products sold, representing a primary source of federal tax revenue.
Sales tax base involves the retail sales of goods; use tax applies to goods already owned but purchased outside the taxing state.
Sales tax base involves the retail sales of goods; use tax applies to goods already owned but purchased outside the taxing state.
Property taxes are typically based on the historical cost of the property, rather than its fair market value.
Property taxes are typically based on the historical cost of the property, rather than its fair market value.
Implicit taxes directly increase the before-tax return of tax-advantaged assets.
Implicit taxes directly increase the before-tax return of tax-advantaged assets.
Tax certainty focuses on ensuring a tax system is collected without causing hardship to taxpayers.
Tax certainty focuses on ensuring a tax system is collected without causing hardship to taxpayers.
Dynamic revenue forecasting ignores potential changes in taxpayer behavior in response to new tax laws.
Dynamic revenue forecasting ignores potential changes in taxpayer behavior in response to new tax laws.
The income effect suggests individuals may work less when tax rates increase, due to a desire for the same after-tax income.
The income effect suggests individuals may work less when tax rates increase, due to a desire for the same after-tax income.
Horizontal equity is achieved when taxpayers with a greater ability to pay, pay more tax relative to those with less ability to pay.
Horizontal equity is achieved when taxpayers with a greater ability to pay, pay more tax relative to those with less ability to pay.
The average tax rate is computed by dividing total income (taxable and non-taxable) by the total amount of taxes paid.
The average tax rate is computed by dividing total income (taxable and non-taxable) by the total amount of taxes paid.
In a progressive tax system, the marginal tax rate is always lower than the average tax rate.
In a progressive tax system, the marginal tax rate is always lower than the average tax rate.
Unemployment taxes are used to fund employment benefits for those who have been terminated from their jobs for cause.
Unemployment taxes are used to fund employment benefits for those who have been terminated from their jobs for cause.
A sales tax is an example of an ad valorem tax, because it is based on the value of the transaction.
A sales tax is an example of an ad valorem tax, because it is based on the value of the transaction.
Flashcards
Business Tax Decisions
Business Tax Decisions
Taxes influence decisions related to business structure, location, acquisitions, employee compensation, and financing.
Taxes and Politics
Taxes and Politics
Politicians use tax rhetoric to differentiate themselves; voters need tax knowledge to evaluate proposals.
Personal Tax Impact
Personal Tax Impact
Tax deductions (like mortgage interest) and tax-advantaged retirement savings impact personal financial well-being.
What is a Tax?
What is a Tax?
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Tax Key Component 1
Tax Key Component 1
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Tax Key Component 2
Tax Key Component 2
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Driver's License Fee
Driver's License Fee
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Hotel Room Tax
Hotel Room Tax
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How to calculate a tax
How to calculate a tax
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Marginal Tax Rate
Marginal Tax Rate
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Average Tax Rate
Average Tax Rate
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Effective Tax Rate
Effective Tax Rate
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Proportional Tax Rate (Flat Tax)
Proportional Tax Rate (Flat Tax)
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Progressive Tax Rate
Progressive Tax Rate
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Regressive Tax Rate
Regressive Tax Rate
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Income Taxes (Federal)
Income Taxes (Federal)
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Employment Taxes
Employment Taxes
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Excise Taxes (Federal)
Excise Taxes (Federal)
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Estate and Gift Taxes
Estate and Gift Taxes
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Sales and Use Taxes
Sales and Use Taxes
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Property Taxes
Property Taxes
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Implicit Taxes
Implicit Taxes
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Sufficiency (Tax System)
Sufficiency (Tax System)
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Study Notes
- Taxes significantly affect business, investment, personal, and political decisions.
- Understanding taxes is crucial for making informed decisions and evaluating political proposals.
What is a Tax?
- A tax is a mandatory payment to a government entity, unrelated to specific benefits received.
- Key elements include it being a required payment to a government agency (federal, state, or local), and not directly tied to a specific benefit for the payer.
- Payments for things like drivers licenses, or house appraisals are not taxes becuase they are directly benefiting the payer.
- Hotel and rental car fees that are put towards specific city or road projects are taxes because they are not directly benefiting the payer.
Calculating Tax
- Tax calculation requires knowledge of the tax rate and tax base.
- Tax rate = the percentage applied to the tax base.
- Tax base = the amount or value being taxed.
- Taxes are calculated as: Tax = Tax Base × Tax Rate.
Tax Rates
- Marginal Tax Rate: rate on the next dollar of taxable income.
- Average Tax Rate: total taxes paid divided by taxable income.
- Effective Tax Rate: total taxes paid divided by total income (taxable and nontaxable).
Tax Structures
- Proportional Tax Rate (Flat Tax): constant rate across the tax base.
- Progressive Tax Rate: increasing rate as the tax base increases.
- Regressive Tax Rate: decreasing rate as the tax base increases.
Types of Taxes
- Federal Taxes: include income, employment, unemployment, excise, and transfer taxes.
- State and Local Taxes: include income, sales, use, property, and excise taxes.
Federal Taxes
- Income Taxes: the largest source of federal revenue, levied on individuals, corporations, estates, and trusts (56.5%).
- Employment and Unemployment Taxes: second-largest federal tax, including Social Security and Medicare taxes, and unemployment benefits.
- Excise Taxes: levied on the quantity of products sold.
- Estate and Gift Taxes: levied on the value of wealth transfers.
State and Local Taxes
- Sales and Use Taxes: Sales taxes are based on retail sales, while use taxes apply to goods purchased outside the state but used within it.
- Property Taxes: Taxes based on the fair market value of property (ad valorem), including real (land and structures) and personal property.
- Income Taxes: Most states conform to federal taxable income calculations with some modifications.
- Excise Taxes: States often tax items already subject to federal excise tax.
Implicit Taxes
- Implicit Taxes: Indirect taxes from tax advantages granted by the government, resulting in reduced before-tax returns on tax-favored assets.
Evaluating Tax Systems
- Sufficiency: the tax system generates enough revenue.
- Equity: the tax burden is distributed fairly.
- Certainty: taxpayers can easily determine when, where, and how to pay taxes.
- Convenience: the tax system is easy for taxpayers to comply with.
- Economy: the system minimizes administration and compliance costs.
Sufficiency in Detail
- Static revenue forecasting: assumes taxpayers will not alter their behavior due to tax law changes, calculate projected tax revenues based on the existing state of transactions.
- Dynamic revenue forecasting: attempts to predict how taxpayers will change their behavior in response to tax law changes.
- Income Effect: Higher tax rates may cause people to work harder to maintain their after-tax income.
- Substitution Effect: Higher tax rates may cause people to engage in more nontaxable activities.
Equity in Detail
- Horizontal Equity: taxpayers in similar situations should pay the same amount of tax.
- Vertical Equity: taxpayers with a greater ability to pay should pay more tax.
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Description
Taxes are mandatory payments to a government entity, not directly tied to specific benefits. Calculating tax requires knowledge of the tax rate and tax base. The tax rate is the percentage applied to the tax base, and taxes are calculated as Tax = Tax Base × Tax Rate.
