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Chapter 01 An Introduction to Tax Answer Key
True / False Questions
1.  Taxes influence many types of business decisions but generally do not influence personal decisions.
FALSE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 0101 Demonstrate how taxes influence basic business, investment, personal, and political decisions. Level of Difficulty: 1 Easy Topic: Who Cares About Taxes and Why? 
2.  Taxes influence business decisions such as where a business should locate or how a business should be structured.
TRUE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 0101 Demonstrate how taxes influence basic business, investment, personal, and political decisions. Level of Difficulty: 1 Easy Topic: Who Cares About Taxes and Why? 
3.  Tax policy rarely plays an important part in presidential campaigns.
FALSE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 0101 Demonstrate how taxes influence basic business, investment, personal, and political decisions. Level of Difficulty: 1 Easy Topic: Who Cares About Taxes and Why? 
4.  Margaret recently received a parking ticket. This is a common example of a local tax.
FALSE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 0102 Discuss what constitutes a tax and the general objectives of taxes. Level of Difficulty: 1 Easy Topic: What Qualifies as a Tax? 
5.  George recently paid $50 to renew his driver’s license. The $50 payment is considered a tax.
FALSE A tax is a payment required by a government that is unrelated to any specific benefit or service received by the government. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 0102 Discuss what constitutes a tax and the general objectives of taxes. Level of Difficulty: 1 Easy Topic: What Qualifies as a Tax? 
6.  A 1% charge imposed by a local government on football tickets sold is not considered a tax if all proceeds are earmarked to fund local schools.
FALSE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0102 Discuss what constitutes a tax and the general objectives of taxes. Level of Difficulty: 2 Medium Topic: What Qualifies as a Tax? 
7.  One key characteristic of a tax is that it is a required payment to a governmental agency.
TRUE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0102 Discuss what constitutes a tax and the general objectives of taxes. Level of Difficulty: 2 Medium Topic: What Qualifies as a Tax? 
8.  Common examples of sin taxes include the taxes imposed on airline tickets and gasoline.
FALSE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0102 Discuss what constitutes a tax and the general objectives of taxes. Level of Difficulty: 2 Medium Topic: What Qualifies as a Tax? 
9.  One benefit of a sin tax (e.g., a tax on cigarettes) is that it should increase the demand for the products being taxed.
FALSE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0102 Discuss what constitutes a tax and the general objectives of taxes. Level of Difficulty: 2 Medium Topic: What Qualifies as a Tax? 
10.  In addition to raising revenues, specific U.S. taxes may have other objectives (e.g., economic or social objectives).
TRUE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0102 Discuss what constitutes a tax and the general objectives of taxes. Level of Difficulty: 2 Medium Topic: What Qualifies as a Tax? 
11.  The two components of the tax calculation are the tax rate and the taxpayer’s status.
FALSE Tax equals the tax base multiplied by the tax rate. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
12.  The tax base for the federal income tax is taxable income.
TRUE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 1 Easy Topic: How to Calculate a Tax 
13.  A flat tax is an example of a graduated tax system.
FALSE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 1 Easy Topic: How to Calculate a Tax 
14.  The main difficulty in calculating an income tax is determining the correct amount of the tax base.
TRUE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
15.  A taxpayer’s average tax rate is the most appropriate tax rate to use in tax planning.
FALSE 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 additional tax deductions. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
16.  The effective tax rate, in general, provides a better depiction of a taxpayer’s tax burden than the average tax rate.
TRUE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
17.  The effective tax rate expresses the taxpayer’s total tax as a percentage of the taxpayer’s taxable and nontaxable income.
TRUE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 1 Easy Topic: How to Calculate a Tax 
18.  In a proportional (flat) tax rate system, the marginal tax rate will always equal the average tax rate.
TRUE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
19.  In a regressive tax rate system, the marginal tax rate will often be greater than the average tax rate.
FALSE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
20.  A sales tax is a common example of a progressive tax rate structure.
FALSE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
21.  In terms of effective tax rates, the sales tax can be viewed as a regressive tax.
TRUE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
22.  While sales taxes are quite common, currently the U.S. federal government does not impose a sales tax.
TRUE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
23.  The largest federal tax, in terms of revenue collected, is the social security tax.
FALSE The most significant tax assessed by the U.S. government is the income tax. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
24.  The 9^{th} Amendment to the U.S. Constitution removed all doubt that a federal income tax was allowed under the U.S. Constitution.
FALSE The 16^{th} amendment was ratified in February 1913. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Blooms: Remember Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
25.  A common example of an employment related tax is the Medicare tax.
TRUE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
26.  Selfemployment taxes are charged on selfemployment income in addition to any federal income tax.
TRUE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
27.  Excise taxes are typically levied on the value of a good purchased.
FALSE Excise taxes are levied on the quantity of products purchased. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
28.  The estate tax is assessed based on the fair market values of transfers made during a taxpayer’s life.
FALSE The estate tax is based on the fair value of wealth transfers upon death. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
29.  A use tax is typically imposed by a state on goods purchased within the state.
FALSE A use tax is levied on goods owned, possessed, or consumed within a state that were not purchased within the state. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
30.  Property taxes may be imposed on both real and personal property.
TRUE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
31.  Relative to explicit taxes, implicit taxes are much easier to estimate.
FALSE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
32.  Implicit taxes are indirect taxes on taxfavored assets.
TRUE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
33.  Dynamic forecasting does not take into consideration taxpayers’ responses to a tax change when estimating tax revenues.
FALSE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 2 Medium Topic: Evaluating Alternative Tax Systems 
34.  The income and substitution effects are two opposing effects that one could consider in static forecasting.
FALSE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 2 Medium Topic: Evaluating Alternative Tax Systems 
35.  Horizontal equity is defined in terms of taxpayers in similar situations whereas vertical equity is defined in terms of taxpayers in different situations.
TRUE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 1 Easy Topic: Evaluating Alternative Tax Systems 
36.  Regressive tax rate structures are typically considered to be vertically equitable.
FALSE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 2 Medium Topic: Evaluating Alternative Tax Systems 
37.  Estimated tax payments are one way the federal income tax system addresses the “certainty” criterion in evaluating tax systems.
FALSE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 2 Medium Topic: Evaluating Alternative Tax Systems 
38.  In considering the “economy” criterion in evaluating tax systems, one must consider this criterion from both the taxpayer and the government’s perspective.
TRUE 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 2 Medium Topic: Evaluating Alternative Tax Systems 
Multiple Choice Questions
39.  Taxes influence which of the following decisions?

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Learning Objective: 0101 Demonstrate how taxes influence basic business, investment, personal, and political decisions. Level of Difficulty: 1 Easy Topic: Who Cares About Taxes and Why? 
40.  Margaret was issued a $150 speeding ticket. This is:

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0102 Discuss what constitutes a tax and the general objectives of taxes. Level of Difficulty: 2 Medium Topic: What Qualifies as a Tax? 
41.  Which of the following is a tax?
I. A 1% special sales tax for funding local road construction.
A tax is a payment required by a government that is unrelated to any specific benefit or service received from the government. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0102 Discuss what constitutes a tax and the general objectives of taxes. Level of Difficulty: 2 Medium Topic: What Qualifies as a Tax? 
42.  Which of the following is considered a tax?

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 0102 Discuss what constitutes a tax and the general objectives of taxes. Level of Difficulty: 1 Easy Topic: What Qualifies as a Tax? 
43.  Earmarked taxes are:

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 0102 Discuss what constitutes a tax and the general objectives of taxes. Level of Difficulty: 1 Easy Topic: What Qualifies as a Tax? 
44.  Sin taxes are:
Surcharges on alcohol and tobacco products are examples of “sin taxes”. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 0102 Discuss what constitutes a tax and the general objectives of taxes. Level of Difficulty: 2 Medium Topic: What Qualifies as a Tax? 
45.  To calculate a tax, you need to know:
I. the tax base

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 1 Easy Topic: How to Calculate a Tax 
46.  Which of the following is not an example of a graduated tax rate structure?
A proportional tax rate structure, also known as a flat tax, imposes a constant tax rate throughout the tax base. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
47.  The difficulty in calculating a tax is typically in the determination of:

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
48.  Which of the following is not one of the basic tax rate structures?

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
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 2015, how much federal tax will he owe?
$10,793.75 = 5,156.25 + .25(60,000 – 37,450) 
AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
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 2015, what is his average tax rate (rounded)?
17.99% = 10,793.75/60,000 
AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
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 2015, what is his effective tax rate (rounded)?
16.61% = 10,793.75/(60,000 + 5,000) 
AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
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 2015, what is his current marginal tax rate?
See 2015 IRS rate schedule for single taxpayers. 
AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 1 Easy Topic: How to Calculate a Tax 
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 ________.

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0102 Discuss what constitutes a tax and the general objectives of taxes. Level of Difficulty: 2 Medium Topic: What Qualifies as a Tax? 
54.  The state of Georgia recently increased its tax on a carton of cigarettes by $2.00. What type of tax is this?

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0102 Discuss what constitutes a tax and the general objectives of taxes. Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes Topic: What Qualifies as a Tax? 
55.  Which of the following is false?

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 3 Hard Topic: How to Calculate a Tax 
56.  Which of the following is true?

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
57.  The ultimate economic burden of a tax is best captured by:

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
58.  Which of the following taxes represents the largest portion of U.S. Federal Tax revenues?
See Exhibit 14 in text book. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
59.  Which of the following represents the largest percentage of state tax revenue?
See Exhibit 15 in text book. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
60.  Which of the following is true regarding use taxes?

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
61.  Which of the following is true regarding real property taxes and personal property taxes?

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
62.  Which of the following statements is true?

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
63.  The concept of tax sufficiency:

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 3 Hard Topic: Evaluating Alternative Tax Systems 
64.  The substitution effect:

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 2 Medium Topic: Evaluating Alternative Tax Systems 
65.  Which of the following federal government actions would make sense if a tax system fails to provide sufficient tax revenue?

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 2 Medium Topic: Evaluating Alternative Tax Systems 
66.  Geronimo files his tax return as a head of household for year 2015. If his taxable income is $72,000, what is his average tax rate (rounded)?
[6,872.50 + ((72,000 – 50,200) × .25)]/72,000 = 17.11% 
AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
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?

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 2 Medium Topic: Evaluating Alternative Tax Systems 
68.  Which of the following would not be a failure of the horizontal equity concept?

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 2 Medium Topic: Evaluating Alternative Tax Systems 
69.  Which of the following is true regarding taxadvantaged assets?

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
70.  Congress recently approved a new, bigger budget for the IRS. What taxation concept evaluates the cost of administering our tax law?

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 2 Medium Topic: Evaluating Alternative Tax Systems 
71.  Employers often withhold federal income taxes directly from worker’s paychecks. This is an example of which principle in practice?

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 2 Medium Topic: Evaluating Alternative Tax Systems 
72.  Which of the following principles encourages a vertically equitable tax system?

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 2 Medium Topic: Evaluating Alternative Tax Systems 
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 2015?
See 2015 IRS tax schedule for single filers; 25%. 
AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 1 Easy Topic: How to Calculate a Tax 
74.  If Manny earns an additional $35,000 in taxable income in year 2015, what is his marginal tax rate (rounded) on this income?
(21,071.25 – 12,043.75)/(100,000 – 65,000) = 25.79% 
AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 3 Hard Topic: How to Calculate a Tax 
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 2015?
(24,325.75 – 15,925.75)/(110,000 – 80,000) = 28% 
AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
76.  If Leonardo instead had $30,000 of additional tax deductions for year 2015, his marginal tax rate (rounded) on the deductions would be:
(8,293.75 – 15,925.75)/(50,000 – 80,000) = 25.44% 
AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 3 Hard Topic: How to Calculate a Tax 
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 2015, what would be their average tax rate (rounded)?
24,087.50/145,000 = 18.53% 
AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
78.  What is Leonardo and Theresa’s effective tax rate for year 2015 (rounded)?
24,087.50/(80,000 + 50,000 + 15,000) = 16.61% 
AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
79.  How much money would Leonardo and Theresa save if they file jointly instead of separately for year 2015?
$24,219.50 both separate – $24,087.50 jointly = $132.00. 
AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 3 Hard Topic: How to Calculate a Tax 
80.  If Susie earns $750,000 in taxable income, how much tax will she pay as a single taxpayer for year 2015?
119,996.25 + .396(750,000 – 413,200) = 253,369.05 
AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
81.  If Susie earns $750,000 in taxable income and files as head of household for year 2015, what is Susie’s average tax rate (rounded)?
[$125,362 + .396($750,000 – $439,000)]/750,000 = 33.14% 
AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 2 Medium Topic: How to Calculate a Tax 
82.  Eliminating the current system of withholding income taxes directly from employee paychecks would:

AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 2 Medium Topic: Evaluating Alternative Tax Systems 
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 aftertax rate of return on the city of Athens bond?
The aftertax rate of return is the same as the pretax rate because the interest from municipal bonds is tax exempt. 
AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 1 Easy Topic: Types of Taxes 
84.  How much implicit tax would Curtis pay on the city of Athens bond?
The implicit tax equals the difference in pretax income earned from a similar (same risk) bond. In this case: (250,000 × .09) – (250,000 × .07) = $5,000 
AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
85.  If Curtis invested in the Initech, Inc. bonds, what would be his aftertax rate of return from this investment?
[(1 – 0.28) × (250,000 × .09)]/250,000 = .0648 
AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
86.  How much explicit tax would Curtis incur on interest earned on the Initech, Inc. bond?
(250,000 × .09) × 0.28 = $6,300 
AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
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 2015?
Jackson’s marginal tax rate is 25%, so his aftertax 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. 
AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 2 Medium Topic: Types of Taxes 
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?
Implicit tax on City of Mitchell bonds: 10% – 7.8% = 2.2%, Explicit tax on Sundial, Inc. bonds: 10% × .25 = 2.5%. 
AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 3 Hard Topic: Types of Taxes 
Essay Questions
89.  Oswald is beginning his first tax course and does not really have a solid understanding of the role that taxes play in various decisions. Please describe for Oswald the various types of decisions that taxes may influence.
Taxes are a part of everyday life and have a financial effect 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.). Taxes play an equally important role in fundamental business decisions such as the following: • What organizational form should a business use? Where should the business locate? Savvy business decisions require consideration of all costs and benefits in order to evaluate the merits of a transaction. Although taxes do not necessarily dominate these decisions, they do represent large transaction costs that should be factored into the financial decisionmaking process. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0101 Demonstrate how taxes influence basic business, investment, personal, and political decisions. Level of Difficulty: 3 Hard Topic: Who Cares About Taxes and Why? 
90.  For each of the following, determine if each is a tax and why or why not.
a. $2.50 toll paid on the Florida Turnpike a. Not a tax because receiving a specific benefit for amount paid. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0102 Discuss what constitutes a tax and the general objectives of taxes. Level of Difficulty: 3 Hard Topic: What Qualifies as a Tax? 
91.  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.
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 (social objective) whereas deductions for retirement contributions are intended to encourage retirement savings (social objective). Taxes are also often used to encourage investment and stimulate the economy. Likewise, taxes are also used to discourage certain less desirable taxpayer behavior. For example, “sin taxes” impose relatively high surcharges on alcohol and tobacco products to discourage their use. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0102 Discuss what constitutes a tax and the general objectives of taxes. Level of Difficulty: 3 Hard Topic: What Qualifies as a Tax? 
92.  There are several different types of tax rates that taxpayers might use in different contexts. Describe each tax rate and how a taxpayer might use it.
The marginal tax rate is the tax rate that applies to the taxpayer’s additional taxable income or deductions that the taxpayer is evaluating in a decision. Specifically,
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 average tax rate represents the taxpayer’s average level of taxation on each dollar of taxable income. Specifically,
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 represents the taxpayer’s average rate of taxation on each dollar of total income (i.e., taxable and nontaxable income). Specifically,
Relative to the average tax rate, the effective tax rate provides a better depiction of a taxpayer’s tax burden because it depicts the taxpayer’s total tax paid as a ratio of the sum of both taxable and nontaxable income earned. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 3 Hard Topic: How to Calculate a Tax 
93.  Ricky and Lucy are debating several types of taxes. Their debate has focused on the different types of tax rate structures and whether they are “fair.” Please define each tax rate structure, provide examples of each structure, and discuss how each structure may be viewed with respect to vertical equity.
A proportional (flat) tax rate structure imposes a constant tax rate throughout the tax base. Common examples of proportional taxes include sales taxes and excise taxes (i.e., taxes based on quantity such as gallons of gas purchased). 
AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 3 Hard Topic: Evaluating Alternative Tax Systems Topic: How to Calculate a Tax 
94.  Bart is contemplating starting his own business. His new business would operate as a sole proprietorship and would require hiring several employees. Describe the employmentrelated taxes that Bart should be aware of as he starts his new business as a selfemployed business owner.
Employment taxes consist of the Old Age, Survivors, and Disability Insurance (OASDI) tax, commonly called Social Security tax, and the Medical Health Insurance (MHI) tax known as the Medicare tax. The Social Security tax pays the monthly retirement, survivor, and disability benefits for qualifying individuals, whereas the Medicare tax pays for medical insurance for individuals who are elderly or disabled. The tax base for the Social Security and Medicare taxes is wages or salary, and the rates are 12.4% (10.4% in 2012) and 2.9%, respectively. Employers and employees split this tax equally. Thus, Bart will have to pay the employer’s portion of these taxes for his employees. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 3 Hard Topic: Types of Taxes 
95.  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 wellknown 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?
The student is considering explicit taxes and ignoring implicit taxes. An explicit tax is a tax that is directly imposed by a government unit and easily quantified. Implicit taxes are the reduced rates of pretax return that a taxfavored asset produces (e.g., the lower pretax rate of return earned by tax exempt municipal bonds). Although implicit taxes are real and equally important in understanding our tax system, they are difficult to quantify. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0104 Identify the various federal, state, and local taxes. Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 3 Hard Topic: Evaluating Alternative Tax Systems Topic: Types of Taxes 
96.  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? Answer: Mandy’s forecast is based on dynamic forecasting (i.e., she is considering how taxpayers may alter their activities in response to the tax law change). Given that Mandy is projecting a decrease in tax revenues, her estimates must be based on the substitution effect – i.e., taxpayers are likely to substitute nontaxable activities (e.g., simply not purchase gum) for taxable purchases. The decreased tax revenue from gum sales does not necessarily imply that Mandy will achieve a cleaner city as taxpayers may simply buy their gum outside the city. This will depend on how close the city is to other towns/neighborhoods that do not impose the high gum tax. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 3 Hard Topic: Evaluating Alternative Tax Systems 
97.  Milton and Rocco are having a heated debate regarding a national sales tax. Milton argues that a national sales tax is a proportional, vertically equitable tax. Rocco argues that a national sales tax would be a regressive, vertically inequitable tax. Explain both sides of the argument.
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, Milton is correct. Nonetheless, when you consider that the proportion of one’s total income spent on taxable purchases likely decreases as total income increases, the sales tax may be considered a regressive tax. For this reason, Rocco is correct. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 3 Hard Topic: Evaluating Alternative Tax Systems Topic: How to Calculate a Tax 
98.  Evaluate the U.S. federal tax system on the certainty and economy criteria.
Certainty means that taxpayers should be able to determine when to pay the tax, where to pay the tax, and how to determine the tax. It is relatively easy to determine when and where to pay the federal income tax. For example, individual federal income tax returns and the remaining balance of taxes owed must be filed with the Internal Revenue Service each year on or before April 15^{th} (or the first business day following April 15^{th}). Thus, from this perspective, the federal income tax scores high. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 3 Hard Topic: Evaluating Alternative Tax Systems 
99.  Jonah, a single taxpayer, earns $150,000 in taxable income and $10,000 in interest from an investment in city of Denver Bonds. Using the U.S. tax rate schedule for year 2015, how much federal tax will he owe? What is his average tax rate? What is his effective tax rate? What is his current marginal tax rate? If Jonah earned an additional $40,000 of taxable income, what is his marginal tax rate on this income? (Round the tax rates to 2 decimal places, e.g., .12345 as 12.35%)
Jonah will owe $35,071.25 in federal income tax this year computed as follows: Jonah’s average tax rate is 23.38%.
Jonah’s effective tax rate is 21.92%.
Jonah is currently in the 28% tax rate bracket. His marginal tax rate on small increases in income and deductions is 28%. If Jonah earns an additional $40,000 of taxable income, his marginal tax rate on the income is 28.09%.

AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 3 Hard Topic: How to Calculate a Tax 
100.  Heather, a single taxpayer who files as a head of household, earns $60,000 in taxable income and $5,000 in interest from an investment in city of Oxford Bonds. Using the U.S. tax rate schedule for year 2015, how much federal tax will she owe? What is her average tax rate? What is her effective tax rate? What is her current marginal tax rate? If Heather has an additional $20,000 of tax deductions, what is her marginal tax rate on these deductions? (Round the tax rates to 2 decimal places, e.g., .12345 as 12.35%)
Heather will owe $9,322.50 in federal income tax this year computed as follows: Heather’s average tax rate is 15.54%.
Heather’s effective tax rate is 14.34%.
Heather is currently in the 25% tax rate bracket. Her marginal tax rate on small increases in income and deductions is 25%. If Heather has an additional $20,000 of tax deductions, her marginal tax rate on the deductions is 19.90%.

AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 3 Hard Topic: How to Calculate a Tax 
101.  Fred and Wilma, married taxpayers, earn $100,000 in taxable income and $20,000 in interest from an investment in city of Bedrock Bonds. Using the U.S. tax rate schedule for married filing jointly for year 2015, how much federal tax will they owe? What is their average tax rate? What is their effective tax rate? What is their current marginal tax rate? If Fred and Wilma earn an additional $40,000 of taxable income, what is their marginal tax rate on this income? (Round the tax rates to 2 decimal places, e.g., .12345 as 12.35%)
Fred and Wilma will owe $16,587.50 in federal income tax this year computed as follows: Fred and Wilma’s average tax rate is 16.59%.
Fred and Wilma’s effective tax rate is 13.82%.
Fred and Wilma are currently in the 25% tax rate bracket. Their marginal tax rate on small increases in income and deductions is 25%. If Fred and Wilma earn an additional $40,000 of taxable income, their marginal tax rate on the income is 25.00%.

AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 3 Hard Topic: How to Calculate a Tax 
102.  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 2015, 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%)
Nick would owe $30,664.50 and Jessica would owe $71,957.95 computed as follows: Nick’s average tax rate is 23.59%.
Jessica’s average tax rate is 28.78%.
Nick is in the 33% tax rate bracket, and Jessica is in the 39.6% tax rate bracket. Thus, their marginal tax rates are 33% and 39.6%, respectively, on small increases in income and deductions. If Nick and Jessica filed jointly, they would owe $100,929 in tax. 
AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 3 Hard Topic: How to Calculate a Tax 
103.  Ariel invests $50,000 in a city of Las Vegas bond that pays 5% interest. Alternatively, Ariel could have invested the $50,000 in a bond recently issued by Jittery Joe’s, Inc. that pays 8% interest with similar nontax characteristics as the city of Las Vegas bond (e.g., similar risk). Assume that Ariel’s marginal tax rate is 25%. What is her aftertax rate of return for the city of Las Vegas bond? For the Jittery Joe’s, Inc. bond? How much explicit tax does Ariel pay on the city of Las Vegas bond? How much implicit tax does she pay on the city of Las Vegas bond? How much explicit tax would she have paid on the Jittery Joe’s, Inc. bond? Which bond should she choose?
Since the city of Las Vegas bond is a tax exempt bond, Ariel’s after tax rate of return on the bond is equal to its pretax rate of return (5%). Ariel pays no explicit tax on the interest earned from the city of Las Vegas bond. The Jittery Joe’s bond would pay $4,000 of interest (i.e., 8% × $50,000). Since Ariel’s marginal tax rate is 25%, she would have paid $1,000 of explicit tax (i.e., 25% × $4,000) on the interest earned from the Jittery Joe’s, Inc. bond and her aftertax rate of return is 6% ($4,000 interest – $1,000 tax)/$50,000 investment. Ariel earns $2,500 of interest on the city of Las Vegas bond (i.e., 5% × $50,000). A similar priced taxable bond (i.e., the Jittery Joe’s, Inc. bond) would pay $4,000 of taxable interest (i.e., 8% × $50,000). Ariel pays $1,500 of implicit tax on the city of Las Vegas bond (i.e., the difference between the pretax interest earned from a similar taxable bond ($4,000) and the pretax interest earned from the city of Las Vegas bond ($2,500)). Ariel should choose the Jittery Joe’s, Inc. bond because it earns a higher aftertax rate of return ((($4,000 interest – $1,000 tax)/$50,000 investment) = 6%) than the city of Las Vegas bond (5%). 
AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 3 Hard Topic: Types of Taxes 
104.  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 nontax 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?
Nelson’s after tax rate of return on the tax exempt city of Fruithurst bond is 4%. The J.B. Ribs, Inc. bond pays taxable interest of 6.5%. Nelson’s after tax rate of return on the J.B. Ribs, Inc. bond is 3.9% (i.e., 6.5% interest income – (6.5% × 40%) tax = 3.9%). Nelson should invest in the city of Fruithurst bond. To be indifferent between investing in the two bonds, the J.B. Ribs, Inc. bond should provide Nelson the same aftertax rate of return as the city of Fruithurst bond (4%). To solve for the required pretax rate of return we can use the following formula: Aftertax return = Pretax return × (1 – Marginal Tax Rate). J.B. Ribs, Inc. needs to offer a 6.67% interest rate to generate a 4% aftertax return and make Nelson indifferent between investing in the two bonds 4% = Pretax return × (1 – 40%); 
AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 3 Hard Topic: Types of Taxes 
105.  Namratha has the choice between investing in a city of Watkinsville bond at 4.5% or a Moe’s, Inc. bond at 7%. Assuming that both bonds have the same nontax characteristics and that Namratha has a 25% marginal tax rate, in which bond should she invest? What interest rate offered by Moe’s, Inc. would make Namratha indifferent between investing in the two bonds?
Namratha’s after tax rate of return on the tax exempt city of Watkinsville bond is 4.5%. The Moe’s, Inc. bond pays taxable interest of 7%. Namratha’s after tax rate of return on the Moe’s, Inc. bond is 5.25% (i.e., 7% interest income – (7% × 25%) tax = 5.25%). Namratha should invest in the Moe’s, Inc. bond. To be indifferent between investing in the two bonds, the Moe’s, Inc. bond should provide Namratha the same aftertax rate of return as the city of Watkinsville bond (4.5%). To solve for the required pretax rate of return we can use the following formula: Aftertax return = Pretax return × (1 – Marginal Tax Rate). Moe’s, Inc. needs to offer a 6% interest rate to generate a 4.5% aftertax return and make Namratha indifferent between investing in the two bonds 4.5% = Pretax return × (1 – 25%); 
AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0104 Identify the various federal, state, and local taxes. Level of Difficulty: 3 Hard Topic: Types of Taxes 
106.  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?
Mort’s average tax rate is 20%.
A 20% average tax rate on Lizzy’s $80,000 taxable income would result in $16,000 of tax (i.e., 20% × $80,000 = $16,000). Thus, Lizzy must pay more than $16,000 tax for the tax structure to be progressive with respect to average tax rates. Mort’s effective tax rate is 16%.
A 16% effective tax rate on Lizzy’s $110,000 total income would result in $17,600 of tax (i.e., 16% × $110,000 = $17,600). Thus, Lizzy must pay more than $17,600 tax for the tax structure to be progressive with respect to effective tax rates. 
AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 3 Hard Topic: How to Calculate a Tax 
107.  Given the following tax structure, what is the minimum tax that would need to be assessed on Dora to make the tax progressive with respect to average tax rates? What is the minimum tax that would need to be assessed on Dora to make the tax progressive with respect to effective tax rates?
Diego’s average tax rate is 5%.
A 5% average tax rate on Dora’s $50,000 taxable income would result in $2,500 of tax (i.e., 5% × $50,000 = $2,500). Thus, Dora must pay more than $2,500 tax for the tax structure to be progressive with respect to average tax rates. Diego’s effective tax rate is 3.75%.
A 3.75% effective tax rate on Dora’s $55,000 total income would result in $2,062.50 of tax (i.e., 3.75% × $55,000 = $2,062.50). Thus, Dora must pay more than $2,062.50 tax for the tax structure to be progressive with respect to effective tax rates. 
AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0103 Describe the different tax rate structures and calculate a tax. Level of Difficulty: 3 Hard Topic: How to Calculate a Tax 
108.  Junior earns $80,000 taxable income as a regional circuit stock car driver and is taxed at an average rate of 25 percent (i.e., $20,000 of tax). If Congress increases the income tax rate such that Junior’s average tax rate increases from 25% to 30%, how much more income tax will he pay assuming that the income effect is larger than the substitution effect? What effect will this tax rate change have on the tax base and tax collected? What will happen to the government’s tax revenues if Junior chooses to spend more time pursuing his other passions besides work (e.g., earns only $60,000 in taxable income) in response to the tax rate change? What is the term that describes this type of reaction to a tax rate increase? (Round your answers to two decimal places.)
Under the current income tax, Junior has $60,000 of income after tax. If the income effect is descriptive and Congress increases tax rates so that Junior’s average tax rate is 30%, Junior will need to earn $85,714.29 to continue to have $60,000 of income after tax. 
AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 3 Hard Topic: Evaluating Alternative Tax Systems 
109.  Given the following tax structure, what amount of tax would need to be assessed on Carrie to make the tax horizontally equitable? What is the minimum tax that Simon should pay to make the tax structure vertically equitable based on Fantasia’s tax rate? This would result in what type of tax rate structure?
Horizontal equity means that two taxpayers in similar situations pay the same tax. Thus, to make the tax structure horizontally equitable, Carrie should pay $1,500 in tax. Fantasia’s average tax rate is 7.5%.
To be vertically equitable with respect to tax rates, Simon should pay a tax rate higher than 7.5%. A 7.5% tax rate on Simon’s $30,000 taxable income would result in $2,250 of tax (i.e., 7.5% × $30,000 = $2,250). Thus, Simon must pay more than $2,250 tax for the tax structure to be vertically equitable (i.e., to generate a tax rate more than 7.5%). This would result in a progressive tax rate structure. 
AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 3 Hard Topic: Evaluating Alternative Tax Systems 
110.  Consider the following tax rate structures. Is it horizontally equitable? Why or why not? Is it vertically equitable? Why or why not?
The tax rate schedule is horizontally equitable because those taxpayers in the same situation (Lucy and Ethel) pay the same tax ($4,500). The tax is not vertically equitable because the taxpayers with a greater ability to pay (Lucy and Ethel) do not pay more tax, nor do they pay a higher tax rate than Ricky. 
AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 3 Hard Topic: Evaluating Alternative Tax Systems 
111.  Consider the following tax rate structure. Is it horizontally equitable? Why or why not? Is it vertically equitable? Why or why not?
We cannot evaluate whether the tax rate structure is horizontally equitable because we are unable to determine if taxpayers in similar situations pay the same tax (i.e., the problem does not give data for two taxpayers with the same income). The tax rate structure would be considered vertically equitable because taxpayers with higher income pay more tax and at a higher rate. Specifically, Moe’s, Larry’s, and Curly’s average tax rates are 7.5%, 20%, and 25%, respectively. 
AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 3 Hard Topic: Evaluating Alternative Tax Systems 
112.  Jed Clampett is expanding his familyrun beer distributorship into Georgia or Tennessee. His parents began the business many years ago and now three generations of Clampetts work in the family business. Jed will relocate the entire family (his parents, spouse, children, etc.) to either state after the move. What types of taxes may influence his decision of where to locate his business? What nontax factors may influence the decision?
Taxes will affect several aspects of Jed’s decision. Jed should consider differences in Georgia and Tennessee for (1) business taxes (e.g., corporate taxes), (2) individual income taxes, (3) excise taxes on beer, (4) real estate taxes (business and personal), (5) estate taxes (e.g., for wealth transfers from his parents), and (6) sales taxes. 
AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0101 Demonstrate how taxes influence basic business, investment, personal, and political decisions. Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 3 Hard Topic: Evaluating Alternative Tax Systems Topic: Who Cares About Taxes and Why? 
113.  Congress would like to increase tax revenues by 20 percent. Assume that the average taxpayer in the United States earns $80,000 and pays an average tax rate of 17.5%. If the income effect is larger than the substitution effect, what average tax rate will result in a 20 percent increase in tax revenues? This is an example of what type of forecasting?
Based on the information above, the average taxpayer pays $14,000 of tax (i.e., $80,000 × 17.5%), leaving $66,000 of income after tax. A 20 percent increase in revenues would mean that the average taxpayer pays $16,800 in tax ($14,000 × 1.20). With this new tax amount, we can solve for the tax rate that would generate this tax amount. 
AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Blooms: Apply Learning Objective: 0105 Apply appropriate criteria to evaluate alternate tax systems. Level of Difficulty: 3 Hard Topic: Evaluating Alternative Tax Systems 
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