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Exam 1: An Introduction to Tax

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Question 21

True/False

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While sales taxes are quite common, currently the U.S. federal government does not impose a sales tax.

A) True
B) False

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Question 22

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Taxes influence which of the following decisions?

A) business decisions
B) personal decisions
C) political decisions
D) investment decisions
E) All of these

F) A) and B)
G) D) and E)

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Question 23

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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 non-tax 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?

One key characteristic of a tax is that it is a required payment to a governmental agency.

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 non-tax characteristics as the city of Las Vegas bond (e.g., similar risk). Assume that Ariel's marginal tax rate is 25%. What is her after-tax 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?

A use tax is typically imposed by a state on goods purchased within the state.

The income and substitution effects are two opposing effects that one could consider in static forecasting.

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? $\begin{array}{llcc} \underline{ \text {Taxpayer } } &\underline{ \text {Salary}}&\underline{ \text {Total Tax}} \\\\ \text {Fantasia } &20,000&1,500\\ \text {Simon } &30,000&2,000\\ \text { Carrie } &20,000&???\\\end{array}$

Which of the following principles encourages a vertically equitable tax system?

The estate tax is assessed based on the fair market values of transfers made during a taxpayer's life.

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) ?

Which of the following is considered a tax?

In terms of effective tax rates, the sales tax can be viewed as a regressive tax.

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 2014, 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%)

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

The tax base for the federal income tax is taxable income.

Which of the following is true?

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 2014, 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%)

What is Curtis's after-tax rate of return on the city of Athens bond?

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.