Exam 2

What is an excise tax?

"Predatory" tax on specific items. Consumption unit tax. Distorts goods and services from being bought, creates inefficiency. Can be taxed twice, i.e. tobacco and gasoline. Can be designed to create revenue or to push people away from things like alcohol and tobacco

What is a flat rate income tax?

A percentage rate that is taxed to all people regardless of income level.

What is accelerated depreciation and straight line depreciation?

Accelerated depreciation allows a firm to deduct more than the actual economic depreciation from its income each year. Straight-line depreciation is deduction of the same fraction of the cost of an asset each year over its useful economic life.

What are the three components of wealth?

All real property owned by households. All tangible personal property owned by households. All intangible personal property owned by households.

How do businesses measure income?

Annual business income measured by subtracting business costs from business receipts over a one-year period.

Define Assessment

Assessment is the valuation of taxable wealth by government authorities

How is a wealth tax equivalent to a tax on savings?

Both can equally decrease personal annual wealth growth.

Know how to figure out a taxpayer's tax liability

By applying rate to total sales invoices and deducting VAT paid on previous intermediate purchases.

What is a retail sales tax?

Collected from businesses that gain on retail sales, added to the retail price of goods. State and local tax NOT federal

How does a comprehensive consumption tax or expenditure tax work?

Comprehensive consumption tax works like an income tax that allows exclusion of retirement savings from the tax base. All savings, without limit, would be excluded from income. No tax penalty for withdrawing funds from savings. Tax paid only when funds are converted to cash and spent.

Understand what the Alternative Minimum Tax is

Conceived as a way to ensure that a few wealthy taxpayers paid a reasonable amount of tax on their gross income. Has increased tax liability of many middle and upper-middle income taxpayers in recent years.

Difference between equity and debt finance?

Debt finance- you're required to repay the money plus interest over a set period of time, typically in monthly installments. Equity finance- carries no repayment obligation, so more money can be channeled into growing your business.

How is taxing corporate profits through a corporate income tax like double taxation?

Double taxation often occurs because corporations are considered separate legal entities from their shareholders. As such, corporations pay taxes on their annual earnings, just like individuals.

What is a comprehensive tax on wealth and what would be included in a comprehensive wealth tax base?

Effective tax on annual return to accumulated savings associated with wealth. Levied on all forms of capital and land at a flat tax. Included in the tax base would be all wealth in the economy.

What are estate and gift taxes?

Estate taxes referred to as death duties. Excise taxes on rights to transfer property at death. Federal government levies taxes on property transfers before death in the form of gift taxation. Without gift taxation, all estate taxes could be avoided by transferring property before death. Gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return.

What effect does a tax on economic profits have on a profit maximizing corporations output in the short run?

Expected to reduce net return to investment in corporate business in the short run unless corporations can make adjustments to shift the tax

How would a flat tax affect incentives to work and income distribution if we shifted from our current progressive tax system?

Flat-rate tax would tax all income at the same rate. Progressive taxation implies increase in taxation rates as income increases. Change from progressive to flat-rate tax would change the distribution of tax burden: Low-income groups harmed by having both average and marginal rates of taxation increased. Middle-income groups see the average rate of taxation increase but marginal tax rates decrease. Upper-income groups have both average and marginal rates of taxation reduced.

Is the retail sales tax a general tax on consumption?

Form of taxation consumption in the U.S. is retail sales tax. About 1/3 of aggregate state government revenues.

What is a fractional assessment?

Fractional assessment of property exists when real property is assessed at a fraction of market value. May result from infrequent assessment of property in periods of rising property values. Some are the result of state law.

What is a general tax on consumption and how does it work?

General tax on consumption is equivalent to an income tax that allows savings to be excluded from the tax bases.

Understand the work leisure choices of income taxes

I=w(24-L)... Taxes reduce the slope of a workers wagerline, and essentially act as a reduction in leisure time

How would taxing corporate income as personal income under a comprehensive income tax work?

If corporate income tax went to a personal income tax, no double-taxation. Corporate profits would be distributed to shareholders on a pro rata basis according to their share of ownership.

Know the difference between a lump sum tax and a comprehensive income tax

Lump sum is same across all income disparities (flat rate)=regressive

What is a cash-flow tax?

Modified form of a general consumption tax.

What are selective property taxes?

Most property taxes selective in that they are levied on only certain forms of wealth

Know what net worth and capital gains are.

Net worth = Assets - Liabilities Capital gains are gains on an asset that are taxed as profit from the original price of the asset

What are property tax differentials?

Property tax differentials are differences above or below the national average rate of property taxation.

What are retained earnings and dividends and how are they taxed currently in the US?

Retained earnings can be kept in a separate account and are tax-exempt until they are distributed as salary, dividends, or bonuses. Salary and bonuses can be deducted from corporate income tax, but are taxed at the individual level. Dividends are not tax-deductible.

What is tangible property and intangible property (for both corporations and individuals?)

Tangible assets are typically physical assets or property owned by a company, such as equipment, buildings, and inventory. Intangible assets are non-physical assets that have a monetary value since they represent potential revenue. Intangible assets include patents, copyrights, bonds, and stocks.

Know the difference between tax deductions and tax credits

Tax Credits are based on a certain percentage of expenses incurred. Percentage is fixed for all taxpayers regardless of income and MTRs. Deduction varies with the taxpayer's marginal tax bracket in terms of reduction in taxes received from the deduction.

Know the income tax terms: taxable income, adjusted gross income, personal exemptions, itemized deductions, standard deductions, marginal tax rate and tax credits.

Taxable income is the portion of income received by individuals that is subject to personal income tax. Adjusted gross income (AGI) is gross income minus any allowable adjustments. Personal exemption is a sum of money a taxpayer is allowed to deduct from AGI. Varies with number of dependents claimed. Standard deduction is a fixed dollar amount that is adjusted for inflation each year and varies with filing status of the taxpayer. Itemized deductions are legally deductible expenses deducted as an alternative to the standard deduction.

What is the invoice method?

Taxes all transactions at a fixed rate so firms only maintain invoices on sales and purchases for each payment period

Why is there a possible bias to debt financing and leveraged buyouts?

There is concern that corporate finance is biased toward debt because interest is tax deductible but dividends are not.

Know how to compute the tax liability of a consumption type VAT. (Sales- purchases= tax base)

Value Added = Total Transactions - Intermediate Transactions

What is wealth and how do we measure it?

Wealth is the market value of accumulated assets in a nation. Acquired through saving, gifts or inheritances.

Know and understand the Haig Simons Definition of income

Would require both realized and unrealized capital gains to be included in the income

VAT essay question

a consumption tax on goods and services that is levied at each stage of the supply chain where value is added, from initial production to the point of sale. Product type, income type, and consumption type are three VAT's

Personal tax essay question

a tax levied on the wages, salaries, dividends, interest, and other income a person earns throughout the year. Come from the state.

Know what income-in kind is

income in kind is the form of goods and services rather than cash payments.

Corporate tax essay question

is a direct tax imposed on the income or capital of corporations. Double taxation from stock dividends from corporate level and personal level

What is comprehensive consumption?

is annual comprehensive income minus annual savings.