Exam 1: An Introduction to Tax

Raquel recently overheard two journalism students discussing the merits of the federal tax system. One student offered as an example of unfairness the spouse of a well-known politician who paid little income tax as most of the spouse's income was earned in the form of municipal bond interest. What type of taxes is the journalism student considering in his example? What type of taxes is he ignoring? Define each type of tax. What role does each type of tax play in calculating relative tax burdens? What role does each type of tax play in evaluating fairness?

In a regressive tax rate system, the marginal tax rate will often be greater than the average tax rate.

Nick and Jessica are married taxpayers that file married filing separately. Jessica earns $250,000 of taxable income per year. Nick earns $130,000 of taxable income per year. Using the appropriate U.S. tax rate schedule for year 2018, how much tax does each of them pay? What are their marginal and average tax rates? How much tax would they save, if any, if they filed jointly? (Round the tax rates to 2 decimal places, e.g., .12345 as 12.35%) (Use tax rate schedule)

Given the following tax structure, what is the minimum tax that would need to be assessed on Lizzy to make the tax progressive with respect to average tax rates? What is the minimum tax that would need to be assessed on Lizzy to make the tax progressive with respect to effective tax rates?  

If Susie earns $750,000 in taxable income, how much tax will she pay as a single taxpayer for year 2018? (Use tax rate schedule)

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 24%. If Curtis invested in the Initech, Inc. bonds, what would be his after-tax rate of return from this investment?

Evaluate the U.S. federal tax system on the certainty and economy criteria.

The two components of the tax calculation are the tax rate and the taxpayer's status.

Nelson has the choice between investing in a city of Fruithurst bond at 4% or a J.B. Ribs, Inc. bond at 6.5%. Assuming that both bonds have the same non-tax characteristics and that Nelson has a 40% marginal tax rate, in which bond should he invest? What interest rate offered by J.B. Ribs, Inc. would make Nelson indifferent between investing in the two bonds?

Eliminating the current system of withholding income taxes directly from employee paychecks would:

Although the primary purpose of a tax system is to raise revenue, Congress uses the federal tax system for other purposes as well. Describe the other ways in which Congress uses the federal tax system. Be specific.

A taxpayer's average tax rate is the most appropriate tax rate to use in tax planning.

The effective tax rate, in general, provides a better depiction of a taxpayer's tax burden than the average tax rate.

Geronimo files his tax return as a head of household for year 2018. If his taxable income is $72,000, what is his average tax rate (rounded)? (Use tax rate schedule)

Consider the following tax rate structure. Is it horizontally equitable? Why or why not? Is it vertically equitable? Why or why not?

The 9ᵗʰ Amendment to the U.S. Constitution removed all doubt that a federal income tax was allowed under the U.S. Constitution.

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 24%. How much explicit tax would Curtis incur on interest earned on the Initech, Inc. bond?

Taxes influence which of the following decisions?

Mandy, the mayor of Bogart and a strong advocate of a clean downtown, is proposing an increase in the city sales tax from 7% to 50% on all packs of chewing gum purchased in Bogart. Based on the current gum sales, Mandy estimates that this tax will actually reduce the tax revenue on gum sales. What type of forecasting is Mandy using to derive her tax revenue estimates? What "effect" is her estimate based on? Does this necessarily imply that Mandy will be happy given her desire to have a clean downtown?

Which of the following would not be a failure of the horizontal equity concept?