Taxation of Individuals answers1.docx

1、Taxation of Individuals answers1Chapter 1An Introduction to TaxSOLUTIONS MANUALDiscussion Questions:(1)LO1 Jessicas friend Zachary once stated that he couldnt understand why someone would take a tax course. Why is this a rather nave view?Taxes are a part of everyday life and have a financial effect

2、on many of the major personal decisions that individuals face (e.g., investment decisions, evaluating alternative job offers, saving for education expenses, gift or estate planning, etc.). (2)LO1 What are some aspects of business that require knowledge of taxation? What are some aspects of personal

3、finance that require knowledge of taxation?Taxes play an important role in fundamental business decisions such as the following: What organizational form should a business use? Where should the business locate? How should business acquisitions be structured? How should the business compensate employ

4、ees? What is the appropriate mix of debt and equity for the business?Should the business rent or own its equipment and property? How should the business distribute profits to its owners? One must consider all transaction costs (including taxes) to evaluate the merits of a transaction. Common persona

5、l financial decisions that taxes influence include: choosing investments, retirement planning, choosing to rent or buy a home, evaluating alternative job offers, saving for education expenses, and doing gift or estate planning. (3)LO1 Describe some ways in which taxes affect the political process in

6、 the United States.U.S. presidential candidates often distinguish themselves from their opponents based upon their tax rhetoric. Likewise, the major political parties generally have very diverse views of the appropriate way to tax the public. Determining who is taxed, what is taxed, and how much is

7、taxed are difficult questions. Voters must have a basic understanding of taxes to evaluate the merits of alternative tax proposals offered by opposing political candidates and their political parties. (4)LO2 Courtney recently received a speeding ticket on her way to the university. Her fine was $200

8、. Is this considered a tax? Why or why not?The $200 speeding ticket is not considered a tax. Instead, it is considered a fine or penalty. Taxes differ from fines and penalties because taxes are not intended to punish or prevent illegal behavior. (5)LO2 Marlon and Latoya recently started building a h

9、ouse. They had to pay $300 to the county government for a building permit. Is the $300 payment a tax? Why or why not?The building permit is not considered a tax because $300 payment is directly linked to a benefit that they received (i.e., the ability to build a house).(6)LO2 The city of Birmingham

10、recently enacted a 1 percent surcharge on hotel rooms that will help pay for the citys new stadium. Is this a tax? Why or why not?The 1 percent surcharge is a tax. The 1 percent surcharge is an earmarked tax i.e., collected for a specific purpose. The surcharge is considered a tax because the tax pa

11、yments made by taxpayers do not directly relate to the specific benefit received by the taxpayers. (7)LO2 As noted in Example 1-2, tolls, parking meter fees, and annual licensing fees are not considered taxes. Can you identify other fees that are similar? There are several possible answers to this q

12、uestion. Some common examples include entrance fees to national parks, tag fees paid to local/state government for automobiles, boats, etc.(8)LO2 If the general objective of our tax system is to raise revenue, why does the income tax allow deductions for charitable contributions and retirement plan

13、contributions?In addition to the general objective of raising revenue, Congress uses the federal tax system to encourage certain behavior and discourage other behavior. The charitable contribution deduction is intended to encourage taxpayers to support the initiatives of charitable organizations whe

14、reas deductions for retirement contributions are intended to encourage retirement savings. (9)LO2 One common argument for imposing so-called sin taxes is the social goal of reducing demand for such products. Using cigarettes as an example, is there a segment of the population that might be sensitive

15、 to price and for whom high taxes might discourage purchases?The most obvious segment sensitive to price may be teenagers and younger adults, although price sensitivity will vary by taxpayer.(10) LO3 Dontae stated that he didnt want to earn any more money because it would “put him in a higher tax br

16、acket.” What is wrong with Dontaes reasoning?Although earning additional taxable income may increase Dontaes marginal tax rate (i.e., put him in a higher tax bracket), the additional income earned does not affect the taxes that Dontae will pay on his existing income. Moving to a higher tax bracket s

17、imply means that Dontae will pay a higher tax rate on the additional income earned (not income that he already has).(11)LO3 Describe the three different tax rates discussed in the chapter and how taxpayers might use them.The marginal tax rate is the tax rate that applies to the taxpayers additional

18、taxable income or deductions that the taxpayer is evaluating in a decision. Specifically, Marginal Tax Rate = = The marginal tax rate is particularly useful in tax planning because it represents the rate of taxation or savings that would apply to additional taxable income or tax deductions. The aver

19、age tax rate represents the taxpayers average level of taxation on each dollar of taxable income. Specifically, Average Tax Rate = The average tax rate is often used in budgeting tax expense as a portion of income (i.e., what percent of taxable income earned is paid in tax).The effective tax rate re

20、presents the taxpayers average rate of taxation on each dollar of total income (i.e., taxable and nontaxable income). Specifically, Effective Tax Rate = Relative to the average tax rate, the effective tax rate provides a better depiction of a taxpayers tax burden because it depicts the taxpayers tot

21、al tax paid as a ratio of the sum of both taxable and nontaxable income earned. (12)LO3 Which is a more appropriate tax rate to use to compare taxpayers tax burdens the average or the effective tax rate? Why?Relative to the average tax rate, the effective tax rate provides a better depiction of a ta

22、xpayers tax burden because it depicts the taxpayers total tax paid as a ratio of the sum of both taxable and nontaxable income earned. (13)LO3 Describe the differences between a proportional, progressive, and regressive tax rate structure.A proportional (flat) tax rate structure imposes a constant t

23、ax rate throughout the tax base. In other words, as the tax base increases, the taxes paid increases, but the marginal tax rate remains constant. Because the marginal tax rate is constant across all levels of the tax base, the average tax rate remains constant across the tax base and always equals t

24、he marginal tax rate. Common examples of proportional taxes include sales taxes and excise taxes (i.e., taxes based on quantity such as gallons of gas purchased). A progressive tax rate structure imposes an increasing marginal tax rate as the tax base increases. In other words, as the tax base incre

25、ases, both the marginal tax rate and the taxes paid increase. Common examples of progressive tax rate structures include federal and state income taxes and federal estate and gift taxes. A regressive tax rate structure imposes a decreasing marginal tax rate as the tax base increases. In other words,

26、 as the tax base increases, the taxes paid increases, but the marginal tax rate decreases. Regressive tax rate structures are not common. In the United States, the Social Security tax and the federal employment tax employ a regressive tax rate structure. However, there are other regressive taxes whe

27、n the tax is viewed in terms of effective tax rates. For example, a sales tax by definition is a proportional tax i.e., as taxable purchases increase, the sales tax rate (i.e., the marginal tax rate) remains constant. Nonetheless, when you consider that the proportion of ones total income spent on t

28、axable purchases likely decreases as total income increases, the sales tax may be considered a regressive tax.(14)LO3 Arnold and Lilly have recently had a heated discussion about whether a sales tax is a proportional tax or a regressive tax. Lilly argues that a sales tax is regressive. Arnold counte

29、rs that the sales tax is a flat tax. Who is correct?Arnold and Lillyare both correct. A sales tax by definition is a proportional tax i.e., as taxable purchases increase, the sales tax rate (i.e., the marginal tax rate) remains constant. For this reason, Arnold is correct. Nonetheless, when you cons

30、ider that the proportion of ones total income spent on taxable purchases likely decreases as total income increases, the sales tax may be considered a regressive tax. For this reason, Lilly is correct.(15)LO4 Which is the largest tax collected by the U.S. government? What types of taxpayers are subj

31、ect to this tax?The federal income tax is the largest tax collected by the U.S. government. Currently, federal income taxes are levied on individuals, corporations, estates, and trusts.(16)LO4 What is the tax base for the Social Security and Medicare taxes for an employee or employer? What is the ta

32、x base for Social Security and Medicare taxes for a self-employed individual? Is the self-employment tax in addition to or in lieu of federal income tax?Employee wages is the tax base for the Social Security and Medicare taxes. Net earnings from self-employment is the tax base for the self-employment tax. The self-employment tax is in addition to the federal income tax. (17)LO4 What are unemployment taxes?Employers are required to pay federal and state unemployment taxes, which fund tempora