Tax: Chapter 1

71. Employers often withhold federal income taxes directly from worker's paychecks. This is an example of which principle in practice? A. Convenience B. Certainty C. Economy D. Equity E. None of these

A.

82. Eliminating the current system of withholding income taxes directly from employee paychecks would: A. Violate the convenience criterion of federal taxation B. Increase the rate of compliance C. Make collection of federal income taxes easier D. All of these E. None of these

A.

50. Marc, a single taxpayer, earns $60,000 in taxable income and $5,000 in interest from an investment in city of Birmingham Bonds. Using the U.S. tax rate schedule for year 2014, what is his average tax rate (rounded)? A. 18.09% B. 20.00% C. 15.69% D. 25.00% E. None of these

A. 18.09% = 10,856.25/60,000.

Jackson has the choice to invest in city of Mitchell bonds or Sundial, Inc. corporate bonds that pay 10% interest. Jackson is a single taxpayer who earns $50,000 annually. Assume that the city of Mitchell bonds and the Sundial, Inc. bonds have similar risk. 87. What interest rate would the city of Mitchell have to pay in order to make Jackson indifferent between investing in the city of Mitchell and the Sundial, Inc. bonds for year 2014? A. 7.50% B. 10.00% C. 8.00% D. 7.20% E. None of these

A. Jackson's marginal tax rate is 25%, so his after-tax rate of return on the Sundial, Inc. bonds would be 7.5%. Therefore, the city of Mitchell must pay 7.5% to make Jackson indifferent between the two bonds.

81. If Susie earns $750,000 in taxable income and files as head of household for year 2014, what is Susie's average tax rate (rounded)? A. 33.24% B. 33.87% C. 35.00% D. 39.60% E. None of these

A. [123,424 + .396(750,000 - 432,200)]/750,000 = 33.24%.

66. Geronimo files his tax return as a head of household for year 2014. If his taxable income is $72,000, what is his average tax rate (rounded)? A. 17.24% B. 18.24% C. 19.24% D. 25.00% E. None of these

A. [6,762.5 + ((72,000 - 49,400) × .25)]/72,000 = 17.24%.

52. Marc, a single taxpayer, earns $60,000 in taxable income and $5,000 in interest from an investment in city of Birmingham Bonds. Using the U.S. tax rate schedule for year 2014, what is his current marginal tax rate? A. 15.00% B. 25.00% C. 28.00% D. 33.00% E. None of these

B

43. Earmarked taxes are: A. Taxes assessed only on certain taxpayers B. Taxes assessed to fund a specific purpose C. Taxes assessed for only a specific time period D. Taxes assessed to discourage less desirable behavior E. None of these

B.

46. Which of the following is not an example of a graduated tax rate structure? A. Progressive tax rate structure B. Proportional tax rate structure C. U.S. Federal Income Tax D. Regressive tax rate structure E. None of these

B.

48. Which of the following is not one of the basic tax rate structures? A. Proportional B. Equitable C. Regressive D. Progressive E. All of these are different kinds of the basic tax rate structures

B.

55. Which of the following is false? A. A proportional tax rate structure imposes a constant tax rate while a progressive tax rate structure imposes an increasing marginal rate related to the tax base B. The average tax rate changes under a proportional tax rate structure, but it is static for a progressive tax rate system C. An example of a proportional tax is the tax on gasoline D. An example of a progressive tax is the federal tax on gifts E. None of these

B.

57. The ultimate economic burden of a tax is best captured by: A. The marginal tax rate B. The effective tax rate C. The average tax rate D. The proportional tax rate E. None of these is correct

B.

60. Which of the following is true regarding use taxes? A. A use tax is relatively easy to enforce compared to a sales tax. B. Use taxes attempt to eliminate any tax advantage of purchasing goods out of state. C. Use taxes encourage taxpayers to buy goods out of state to avoid paying sales tax in their home state. D. A use tax is generally a progressive tax. E. None of these is true.

B.

62. Which of the following statements is true? A. Municipal bond interest is subject to explicit federal tax B. Municipal bond interest is subject to implicit tax C. Municipal bonds typically pay a higher interest rate than corporate bonds with similar risk D. All of these are true E. None of these is true

B.

70. Congress recently approved a new, bigger budget for the IRS. What taxation concept evaluates the cost of administering our tax law? A. Convenience B. Economy C. Certainty D. Equity E. None of these

B.

51. Marc, a single taxpayer, earns $60,000 in taxable income and $5,000 in interest from an investment in city of Birmingham Bonds. Using the U.S. tax rate schedule for year 2014, what is his effective tax rate (rounded)? A. 23.08% B. 16.70% C. 14.48% D. 25.00% E. None of these

B. 16.70% = 10,856.25/(60,000 + 5,000).

Curtis invests $250,000 in a city of Athens bond that pays 7% interest. Alternatively, Curtis could have invested the $250,000 in a bond recently issued by Initech, Inc. that pays 9% interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 28%. 86. How much explicit tax would Curtis incur on interest earned on the Initech, Inc. bond? A. $16,200 B. $6,300 C. $4,900 D. $12,600 E. None of these

B. (250,000 × .09) × 0.28 = $6,300.

79. How much money would Leonardo and Theresa save if they filed jointly instead of separately for year 2014? A. Nothing B. $167.50 C. $309.75 D. $5,907.00 E. None of these

B. 24,212.50 both separate - 24,380 jointly = 167.50.

40. Margaret was issued a $150 speeding ticket. This is: A. A tax because payment is required by law B. A tax because the payment is not related to any specific benefit received from the government agency collecting the ticket C. Not a tax because it is considered a fine intended to punish illegal behavior D. A tax because it is imposed by a government agency E. Not a tax because Margaret could have avoided payment if she did not speed

C.

44. Sin taxes are: A. Taxes assessed by religious organizations B. Taxes assessed on certain illegal acts C. Taxes assessed to discourage less desirable behavior D. Taxes assessed to fund a specific purpose E. None of these

C.

47. The difficulty in calculating a tax is typically in the determination of: A. The correct tax rate B. Where to file the tax return C. The tax base D. The due date for the return E. None of these

C.

53. The city of Granby, Colorado recently enacted a 1.5% surcharge on vacation cabin rentals that will help pay for the city's new elementary school. This surcharge is an example of ________. A. A sin tax to discourage undesirable behavior B. A government fine C. An earmarked tax D. Both a sin tax to discourage undesirable behavior and an earmarked tax E. None of these

C.

58. Which of the following taxes represents the largest portion of U.S. Federal Tax revenues? A. Employment taxes B. Corporate income taxes C. Individual income taxes D. Estate and gift taxes E. None of these

C.

67. Al believes that SUVs have negative social and environmental effects because of their increased carbon monoxide emissions. He proposes eliminating sales taxes on smaller automobiles in favor of higher sales taxes levied on SUVs. Al performs some calculations and comes to the conclusion that based on the current number of SUVs owned in the U.S. exactly the same amount of total sales tax will be collected under his reformed system. Which of the following concepts explains why Al's idea may not work? A. The ability to pay principle B. Horizontal equity C. Substitution effect D. Vertical equity E. None of these

C.

68. Which of the following would not be a failure of the horizontal equity concept? A. Two taxpayers with identical income pay different amounts of tax because one taxpayer's income includes tax exempt interest. B. Two taxpayers pay different amounts of property tax amounts on similar plots of land (i.e., same value) because one plot of land is used to raise crops. C. Two taxpayers pay different amounts of estate tax because one taxpayer's estate is worth significantly more. D. All of these. E. None of these.

C.

69. Which of the following is true regarding tax-advantaged assets? A. They are typically subject to excise taxes to account for their low explicit taxes B. A corporate bond is typically considered a tax-advantaged asset C. They are often subject to implicit taxes D. A corporate bond is typically considered a tax-advantaged asset and they are often subject to implicit taxes are correct but not they are typically subject to excise taxes to account for their low explicit taxes E. None of these

C.

Curtis invests $250,000 in a city of Athens bond that pays 7% interest. Alternatively, Curtis could have invested the $250,000 in a bond recently issued by Initech, Inc. that pays 9% interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 28%. 83. What is Curtis's after-tax rate of return on the city of Athens bond? A. 1.96% B. 2.52% C. 7.00% D. 9.00% E. None of these

C.

49. Marc, a single taxpayer, earns $60,000 in taxable income and $5,000 in interest from an investment in city of Birmingham Bonds. Using the U.S. tax rate schedule for year 2014, how much federal tax will he owe? A. $15,000.00 B. $12,375.00 C. $10,856.25 D. $9,412.50 E. None of these

C. $10,856.25 = 5,081.25 + .25(60,000 - 36,900).

Leonardo, who is married but files separately, earns $80,000 of taxable income. He also has $15,000 in city of Tulsa bonds. His wife, Theresa, earns $50,000 of taxable income. 76. If Leonardo instead had $30,000 of additional tax deductions for year 2014, his marginal tax rate (rounded) on the deductions would be: A. 28.00% B. 25.00% C. 25.57% D. 17.07% E. None of these Leonardo earns $80,000 of taxable income. He also has $15,000 in city of Tulsa bonds. His wife, Theresa, earns $50,000 of taxable income.

C. (8,356.5 - 16,023.5)/(50,000 - 80,000) = 25.57%.

Leonardo earns $80,000 of taxable income. He also has $15,000 in city of Tulsa bonds. His wife, Theresa, earns $50,000 of taxable income. 77. If Leonardo and his wife file married filing jointly in 2014, what would be their average tax rate (rounded)? A. 15.00% B. 25.00% C. 18.63% D. 23.73% E. None of these

C. 24,212.50/130,000 = 18.63%.

Curtis invests $250,000 in a city of Athens bond that pays 7% interest. Alternatively, Curtis could have invested the $250,000 in a bond recently issued by Initech, Inc. that pays 9% interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 28%. 85. If Curtis invested in the Initech, Inc. bonds, what would be his after-tax rate of return from this investment? A. 5.04% B. 7.00% C. 6.48% D. 2.52% E. None of these

C. [(1 - 0.28) × (250,000 × .09)]/250,000 = .0648.

74. If Manny earns an additional $35,000 in taxable income in year 2014, what is his marginal tax rate (rounded) on this income? A. 22.49% B. 28.00% C. 25.91% D. 25.00% E. None of these

C. (21,175.75 - 12,106.25)/(100,000 - 65,000) = 25.91%.

80. If Susie earns $750,000 in taxable income, how much tax will she pay as a single taxpayer for year 2014? A. $243.752.90 B. $252,500.00 C. $254,045.75 D. $270,376.45 E. None of these

C. 118,118.75 + .396(750,000 - 406,750) = 254,045.75.

65. Which of the following federal government actions would make sense if a tax system fails to provide sufficient tax revenue? A. Issue treasury bonds B. Cut funding to various federal projects C. Increase federal spending D. Issue treasury bonds and cut funding to various federal projects but not increase federal spending E. None of these

D.

42. Which of the following is considered a tax? A. Tolls B. Parking meter fees C. Annual licensing fees D. A local surcharge paid on retail sales to fund public schools E. Entrance fees paid at national parks

D.

54. The state of Georgia recently increased its tax on a carton of cigarettes by $2.00. What type of tax is this? A. A sin tax B. An excise tax C. It is not a tax; it is a fine D. Both a sin tax and an excise tax are correct E. None of these is correct

D.

56. Which of the following is true? A. A regressive tax rate structure imposes an increasing marginal tax rate as the tax base increases B. Regressive tax structures are the most common tax rate structure C. An example of a regressive tax is an excise tax D. In terms of effective tax rates, a sales tax can be viewed as a regressive tax E. None of these

D.

59. Which of the following represents the largest percentage of state tax revenue? A. Sales tax B. Individual income tax C. Other D. Property tax E. None of these

D.

61. Which of the following is true regarding real property taxes and personal property taxes? A. Personal property taxes are assessed on permanent structures and land B. Real property taxes are assessed on cars and boats C. All U.S. states currently impose personal property taxes D. Real property taxes are generally easier to administer than personal property taxes E. None of these is true

D.

63. The concept of tax sufficiency: A. Suggests the need for tax forecasting B. Suggests that a government should estimate how taxpayers will respond to changes in the current tax structure C. Suggests that a government should consider the income and substitution effects when changing tax rates D. All of these E. None of these

D.

72. Which of the following principles encourages a vertically equitable tax system? A. Pay as you go B. Economy C. Income effects D. Ability to pay principle E. None of these

D.

Curtis invests $250,000 in a city of Athens bond that pays 7% interest. Alternatively, Curtis could have invested the $250,000 in a bond recently issued by Initech, Inc. that pays 9% interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 28%. 84. How much implicit tax would Curtis pay on the city of Athens bond? A. $17,500 B. $1,400 C. $1,300 D. $5,000 E. None of these

D. The implicit tax equals the difference in pre-tax income earned from a similar (same risk) bond. In this case: (250,000 × .09) - (250,000 × .07) = $5,000.

Leonardo, who is married but files separately, earns $80,000 of taxable income. He also has $15,000 in city of Tulsa bonds. His wife, Theresa, earns $50,000 of taxable income. 75. If Leonardo earned an additional $30,000 of taxable income this year, what would be the marginal tax rate (rounded) on the extra income for year 2014? A. 27.75% B. 17.50% C. 25.00% D. 28.00% E. None of these

D. (24,423.50 - 16,023.50)/(110,000 - 80,000) = 28%.

Jackson has the choice to invest in city of Mitchell bonds or Sundial, Inc. corporate bonds that pay 10% interest. Jackson is a single taxpayer who earns $50,000 annually. Assume that the city of Mitchell bonds and the Sundial, Inc. bonds have similar risk. 88. Assume the original facts as given except that Jackson is a head of household taxpayer and the city of Mitchell pays interest of 7.8%. How would you advise Jackson to invest his money? A. Invest in Sundial, Inc. bonds because their explicit tax is greater than the implicit tax on city of Mitchell bonds. B. Invest in city of Mitchell bonds because their implicit tax is greater than the explicit tax on Sundial, Inc. bonds. C. Invest in Sundial, Inc. bonds because their explicit tax is less than the implicit tax on city of Mitchell bonds. D. Invest in city of Mitchell bonds because their implicit tax is less than the explicit tax on Sundial, Inc. bonds. E. None of these.

D. Implicit tax on City of Mitchell bonds: 10% - 7.8% = 2.2%, Explicit tax on Sundial, Inc. bonds: 10% × .25 = 2.5%.

39. Taxes influence which of the following decisions? A. business decisions B. personal decisions C. political decisions D. investment decisions E. All of these

E.

41. Which of the following is a tax? I. A 1% special sales tax for funding local road construction. II. A fee paid to the state for a license to practice as an attorney. III. An income tax imposed by Philadelphia on persons working within the city limits. IV. A special property assessment for installing a new water system in the taxpayer's neighborhood. A. Only I is correct. B. Only IV is correct. C. Only III is correct. D. III and IV are correct. E. I and III are correct.

E.

45. To calculate a tax, you need to know: I. the tax base II. the taxing agency III. the tax rate IV. the purpose of the tax A. Only I is correct B. Only IV is correct C. Only III is correct D. Items I through IV are correct E. I and III are correct

E.

64. The substitution effect: A. Predicts that taxpayers will work harder to pay for consumer products when tax rates increase B. Is one of the effects considered in static forecasting C. Results in the government collecting more aggregate tax revenue than under the income effect D. Is typically more descriptive for taxpayers with lower disposable income E. None of these

E.

Leonardo earns $80,000 of taxable income. He also has $15,000 in city of Tulsa bonds. His wife, Theresa, earns $50,000 of taxable income. 78. What is Leonardo and Theresa's effective tax rate for year 2014 (rounded)? A. 15.00% B. 18.63% C. 21.28% D. 28.00% E. None of these

E.

Manny, a single taxpayer, earns $65,000 per year in taxable income and an additional $12,000 per year in city of Boston bonds. 73. What is Manny's current marginal tax rate for year 2014? A. 18.63% B. 28.00% C. 15.72% D. 22.86% E. None of these

E.