Tax Ch.1

Which of the following definitions describes a tax?

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

Andy is considering investing $5,000 into one of three investments. He can invest in corporate stock that will pay dividends of 5% per year. He can purchase corporate bonds that pay 6%. Or, he can invest in tax-exempt securities that will pay 4% per year. Andy is in the 33% marginal tax bracket and the dividends will be taxed at 15%. Based on his after-tax return, which investment should he choose?

Corporate stock

Which of the following criteria are often used to evaluate a good tax system?

1) Equity 2) Sufficiency 3) Convenience 4) Certainty 5) Economy

Which of the following taxes are known as transfer taxes?

1) Estate Tax 2) Gift Tax

Which of the following types of taxes are paid by employers based upon their employees' wages?

1) Social security tax 2) Medicare tax 3) unemployment tax

Which of the following statements are correct regarding the history of the U.S. personal income tax?

1) The income tax was once ruled unconstitutional. 2) The 16th Amendment to the U.S. Constitution gives Congress the power to assess income tax on individuals.

Which business decisions would likely be affected by tax laws?

1) Where should a business locate? 2) How should the business compensate employees? 3) What organizational form should a business use?

True or false: A tax can be defined as a fine or penalty.

False

Which of the following taxes uses a proportional tax rate structure?

Federal corporate income tax

Which of the following statements is true regarding sin taxes?

Sin taxes discourage undesirable, yet legal, behaviors such as smoking and drinking.

What is the tax base for the gift tax?

The fair market value of the gift on the date the gift is given

How do taxpayers benefit from taxes paid to a government?

They benefit from govt provided programs and services, such as national defense and public schools.

True or false: Gasoline sales often have a state excise tax built in to the price that is based on the quantity of fuel purchased rather than the price of the fuel purchased.

True

The federal income tax is designed on a progressive rate structure so that those taxpayers earning more income are taxed at higher rates than those taxpayers earning less. This structure is based on what premise?

Vertical equity

Which of the following decisions would most likely NOT be influenced by our tax system?

choosing a vacation destination

The first personal income tax was enacted in 1861 to fund the ._______ ________

civil war

Retailers collect sales taxes when consumers purchase taxable goods. By facilitating the collection of the tax, the system is meeting the ______ criteria implemented by a good tax system.

convenience

When evaluating a tax system, suggests that the system should be designed to facilitate the collection of tax revenues without undue hardship on the taxpayer or the government.

convenience

Regardless of the level of income, all ____ must file a tax return annually.

corporations

A tax that is assessed for a specific purpose is a(n)_____ tax.

earmarked

In order to raise revenue in the city of Hamlet, the city considered assessing a local tax on food served in restaurants. When forecasting the amount of revenue that would be generated by the new tax, the budget officials suggested that about 10% of current customers would likely quit eating out in Hamlet and drive to the nearest town. This is an example of:

Dynamic Forecasting

Which of the following taxes is based on the quantity of a product sold, rather than the selling price of the product sold?

Excise

Which of the following statements is INCORRECT regarding sales tax?

Products purchased on the internet are never subject to sales tax.

Blade pays tax of $5,000 on taxable income of $50,000 while Caden pays tax of $12,000 on taxable income of $100,000. What type of tax rate structure appears to be in force?

Progressive

The federal individual income tax system in the United States uses a(n) _____ tax structure.

Progressive

Which of the following statements is correct regarding state income tax?

Many states also impose an income tax on corporations.

Roger purchased a new suit for $350. The sales tax rate was 6%. What is the total cost of the suit to Roger?

$371 {$350 + (350 x.06)}

Andy has two nephews and three nieces. He wants to give each of them the maximum gift he can disburse without having to file a gift tax return. What is the total aggregate amount that Andy can give his two nephews and three nieces in 2019?

$75,000 He can distribute $15,000 to each of his nieces and nephews ($15,000 x 5 = $75,000).

Which of the following statements are correct regarding a graduated tax?

1) With a graduated tax, different portions of a tax base may be taxed at different rates. 2) With a graduated tax, higher income brackets may be assessed a higher tax rate than lower income brackets.

Randall is single and has total income from all sources (taxable and nontaxable) of $83,000. His taxable income is $62,000. Randall's tax liability is $11,239. What is Randall's effective tax rate?

13.54% ($11,239/$83,000)

Steven and Sally have income from all sources (taxable and nontaxable) totaling $140,286. Their taxable income is $114,966. Their tax liability is $20,219. Their average tax rate rounded to the nearest whole number is %.

18% ($20,219/$114,966)

The city of Tinderville imposed a 1% tourism tax on all restaurant sales. The proceeds from the tax will be used to promote tourism in the city. What is this type of tax called?

An earmarked tax

Which of the following transactions would NOT likely be subject to an excise tax?

Car repair services

Judging the equity of a tax system is best described by which of the following?

Considering how the tax burden should be distributed across taxpayers

Judging the certainty of a tax system is best described by which of the following?

Considering that taxpayers should be able to determine when, where, and how to calculate and pay the tax

Judging the sufficiency of a tax system is best described by which of the following?

Considering whether tax revenues generated are adequate to meet the financial needs of the government

Economy is listed as one criteria of a good tax system. What is meant by economy in this context?

Economy requires that the system should minimize compliance and administration costs.

True or false: The general purpose of a tax is to provide incentives that will stimulate and improve the economy.

False

A single tax rate applied to an entire base is known as a(n) ______ tax. When the base is divided into a series of monetary amounts, or brackets, and each bracket is taxed at a different rate, this system is known as a(n)________ tax.

Flat;Graduated

Which of the following federal taxes comprises the highest percentage (almost half) of all tax revenues collected by the U.S. government?

Income Tax

Which of the following is true regarding taxes?

Political candidates often distinguish themselves from their opponents based on their tax policies.

The state of Indiana charges a 6% sales tax on most consumer goods. Grant purchased a generator for $400 and paid an additional $24 in sales tax. In this example, what is the "tax rate?"

The percentage of tax being charged (6%)

Jose has been offered a new job. The new job will pay more than his current job. Jose is hesitant to take the new job because it will cause his income to exceed the maximum amount in his current tax bracket. He is concerned that the increase in taxes will exceed his increased income from the new job.

This is not possible. Only the portion of income that exceeds Jose's current bracket will be taxed at the higher rate, not his total taxable income.

True or false: While taxpayers benefit from government-provided programs and services, such as national defense and law enforcement, taxes paid are NOT directly related to any specific benefit received by the taxpayer.

True

Jack has $1,000 to invest. He has a choice between municipal bonds with an interest rate of 4% or corporate bonds with an interest rate of 6%. Jack has a marginal tax rate of 25%. Given this information, Jack should invest in the _____ bonds. The after-tax rate of return on the municipal bonds is ______ and the after tax rate of return on the corporate bonds is _______. The difference in the rates of return is known as ______ taxes.

corporate;4;4.5;implicit

The _______ ________system assigns a score to each tax return representing the probability the tax liabilities on the return have been underreported.

discriminant function

The ________ tax rate is the best measure of the tax burden because it is the average level of tax on all income from taxable and nontaxable sources. The ________ tax rate measures the average level of tax on only taxable income. The ________ tax rate indicates the rate of tax on the next additional increment of income.

effective; average; marginal

There is no statute of limitations for ______ returns or failure to file.

fraud

The term ______ equity means that two taxpayers in similar situations pay the same tax, while ______ equity means that taxpayers with the greater ability to pay tax, pay more tax that taxpayers with less ability to pay.

horizontal;vertical

A(n) _____ tax is defined as the reduced before-tax return that a tax-favored asset produces because of its tax-advantaged status.

implicit

Since municipal bonds are tax-exempt, they typically earn a lower rate of return than taxable bonds. The lower rate of return relative to taxable bonds is often referred to as a(n)____ tax.

implicit

An example of a tax assessed by a state or local government is _____ tax.

income

Most states and the District of Columbia impose _____ ______ on individuals and corporations who earn income within the state.

income taxes

The ____ effect predicts that when taxpayers are taxed more, they will work harder to generate the same after-tax dollars, while the _____ effect predicts they will engage in other pursuits since the marginal value of taxable activities has decreased.

income;subsitution

Taxpayers pay the same ______ tax rates on qualified dividends and long term capital gains, but the amount of the dividends and long term capital are not _____together.

preferential; net

A sales tax is an example of a tax that uses a(n) ________ tax rate structure when compared to its tax base

proportional

Property taxes are commonly assessed on ______ property (such as buildings and land) and _______property (such as cars and boats).

real: personal

A tax imposed on a legal product or service that may be addictive in nature is known as a(n):

sin tax

Which of the following taxes uses a regressive tax rate structure?

social security tax

The ______ ______tax pays the monthly retirement, survivor, and disability benefits for qualifying individuals, whereas the ______ tax pays for medical insurance for individuals who are elderly or disabled.

social security; medicare

Assessing the_____ of a tax system means determining the amount of tax revenue needed to fund the government and ensuring that the funds are provided by the system.

sufficiency

What is the general purpose of a tax?

to fund the operations of the government

Federal estate taxes are also known as ____ taxes

transfer

Which type of tax is based on the retail price of goods owned, possessed, or consumed within a state that were NOT purchased within the state?

use tax