Tax Ch 2 Questionnaires

Q9. The U.S. Congress has occasionally considered enacting a federal tax on the sale of consumer goods and services. This national sales tax would be in addition to any state and local sales tax. Would this new source of federal revenue affect the revenues of state and local governments?

A national sales tax might reduce the aggregate level of consumer demand for taxable goods and services. In this case, the tax base would decrease and state and local sales tax revenues would decline.

Q12. Jurisdiction R and Jurisdiction S both impose a personal income tax on their residents. Under Jurisdiction R's system, employers are required to withhold income tax form their employee's paychecks and remit the tax to the government. Jurisdiction S's system has no such withholding requirement. Instead, residents must compute their income tax and pay the tax directly on a monthly basis. Which tax system is more convenient for the government and for the taxpayers?

Clearly, the system in which employers must withhold and remit income tax from their employees' paychecks is more convenient for the government because the collection process is greatly concentrated. The withholding system is more convenient for individual employees who are not required to compute their monthly tax bills or mail tax payments to the government. Instead, their employers perform these tasks on the individuals' behalf. The withholding system shifts much of the cost of compliance to employers and is, therefore, more inconvenient from the employers' perspective.

Q13. The federal income tax is criticized as being both inequitable across individuals and overly complicated. Discuss why equity and simplicity can be considered conflicting tax policy goals.

For the income tax system to be equitable, the tax base (taxable income) should be defined as precisely as possible to reflect each individual's economic ability to pay. However, the greater the number of personal and financial circumstances taken into account in defining taxable income, the greater the complexity of the law.

Q3. Identify three ways that governments can alter their tax system to increase revenues.

Governments can impose a new tax (by identifying and taxing a new base), increase the rate of an existing tax, or expand the base of an existing tax.

Q4. National governments have the authority to print their own currency. Why might governments be reluctant to finance an operating deficit (excess of spending over revenues) simply by printing more money?

Governments that fail to control the growth of their money supply run the risk of devaluing the currency and triggering a crippling rate of inflation. Therefore, simply printing more money to fund an operating deficit is not a viable, long-term solution to an insufficient tax system

Q2. What evidence suggest that the federal tax system receives a low grade when evaluated on the standard of sufficiency?

Historically, the federal income tax system has not generated enough revenue to fund the government's spending programs. Consequently, the federal government has borrowed money to make up its deficits (excess of spending over revenues) and in doing so has amassed an $11 trillion national debt. The federal government operated at a deficit in every year from 1970 through 1998. In 1999 and 2000, it operated at a small surplus (excess of revenues over spending), but reverted to massive deficit spending in 2001 and subsequent years.

Q15.

Jurisdiction Q could enact: A gross receipts tax. Because Corporation R and Corporation T both have $5 million gross receipts, they would pay the same tax. Corporation T could argue that this result is horizontally inequitable because its gross and net profit are less than Corporation R's gross and net profit, indicating that Corporation T has less ability to pay a tax. A tax based on gross profit. Because Corporation R has more gross profit than Corporation T, Corporation R would pay the greater tax. Corporation R could argue that this result is horizontally inequitable because it has a higher ratio of annual operating expenses to gross profit (55.5 percent) than Corporation T (30.1 percent). Consequently, gross profit doesn't accurately reflect the two corporations' ability to pay tax. A tax based on net profit before charitable contributions. In this case, Corporation R's tax base would be $800,000, and Corporation T's tax base would be $930,000. Corporation T might argue that its generous charitable contributions reduced its economic ability to pay and should be taken into account. Corporation R could refute by arguing that discretionary charitable contributions are irrelevant to the measurement of ability to pay tax on business earnings. A tax based on net profit after charitable contributions. In this case, Corporation R would pay more tax than Corporation T and could argue that allowing Corporation T to deduct charitable contributions violates the concept of horizontal equity.

Q11. Discuss the tax policy implications of the saying "an old tax is a good tax."

Market economies (and the firms operating in those economies) adapt to the various taxes imposed on business transactions. The longer a tax (or a specific tax rule) has been in effect, the better the business community understands it. When governments change the tax system, the business community must spend time and money studying and reacting to the change. Firm managers must reassess, or even modify, their tax strategies. Thus, any change in the tax environment is both costly and unsettling, even if the purpose of the change is to improve the environment.