3. pmt is not tied directly to the benefit rec’d by the taxpayer
What is the general definition of a tax?
It is a pmt required by a gov't that is unrelated to any specific benefit or service received from the gov’t.
Margaret travels to Birmingham where she rents a room & dines at several restaurants. The price she pays for her room & meals includes an additional 2% city surcharge to fund roadway construction in Birmingham. Is this a tax?
Yes. The pmt is required by local gov’t & does not directly relate to a specific benefit that Margaret receives.
What is a sin tax?
tax meant to discourage certain behaviors
Give an example of a sin tax?
High surcharges on alcohol & tobacco
What is an earmarked tax?
A tax that is assessed for a specific purpose & pmt made by the taxpayer does not directly relate to the specific benefit rec’d by the taxpayer.
What is an example of an earmarked tax?
a 1% sales tax on education
Margaret’s parents recently built a house & were assessed $1k by their county gov’t to connect to the county sewer system. Is this a tax?
No. The assessment was mandatory & it was paid to a local gov’t. However, the pmt does directly relate to a specific benefit (sewer service) received by the payee.
What is the formula to calculate a tax?
Tax = Tax Rate * Tax Base
What is the tax base?
What is actually taxed & is usually
expressed in monetary terms
What is the tax rate?
determines the level of taxes imposed on the tax
base & is expressed as a %
Can different portions of a tax base be taxed differently?
yes
What is a flat tax?
A single tax applied to an entire base
What is a graduated tax?
Base is divided into several monetary amounts or brackets, & each successive bracket is taxed at a gradually higher or gradually lower tax rate.
What are the 3 different ways to measure tax rates?
MTR, AVG tax rate, & Effective Tax rate
What is the definition of a marginal tax rate & the formula?
Applies to the next additional increment of a taxpayers taxable income or deduction.
MTR = Change in Tax/Change in Taxable Income
= (new tax-Old tax)/(New taxable Income-Old taxable income)
What is the definition of the avg tax rate & it's formula?
represents the avg level of taxation on each dollar of taxable income.
ATR= Total Tax/Taxable Income
Used for budgeting tax expense
ATR is generally lower than the MTR.
Which is generally lower? ATR or MTR?
ATR is generally lower
What is ATR generally used for?
Used for budgeting tax expense
What is the definition of the Effective tax Rate?
represents the avg level of taxation on each dollar of taxable income.
What is the formula for the Effective Tax Rate?
Effective Tax Rate = Total Tax/Total Income
What does the Effective tax rate provide a better descirption of than the ATR does?
It shows the taxpayers tax burden
The effective tax rate is generally equal to or lower than which tax rate?
ATR
The effective Tax Rate captures the incidenc of taxation, which relates to the ultimate conomic burden of a tax. T/F?
True
What are the 3 types of Tax Rate Structures?
Proportional, Progressive & Regressive
Which tupe of tax rate structure is aka a "Flat Tax"?
Proportional Tax Rate Structure
What is the definition of a proportional tax rate structure?
- It has a constant tax rate throughout the base.
- As the tax base increases, so do taxes paid.
- The MTR is equal to the PTR cause it’s rate is the same throughout. This
means that the ATR is also the same.
What is the formula for calculating a proportional tax rate structure?
PTR = Tax Base* Tax Rate
Which type of tax is an example of a proportional tax rate structure?
Sales Tax
What is the definition of a progressive tax rate structure?
- has an increasing MTR as the tax base increases.
-As the tax base increases, so do the MTR & taxes paid increase
- The ATR in a Progressive tax rate structure will always be less than or equal
to the MTR.
What is an example of a progressive tax rate structure?
Federal & State Income Taxes
What is the definition of a regressive tax rate structure?
- has a decreasing MTR as the tax base increases.
- As the tax base increases, the taxes paid increases, but the MTR decreases.
- Not a common structure in the US
Give an example of a regressive tax rate structure
Social Security, Federal & State Unemployment taxes.
Which tax is the most significant revenue making tax in the US?
Federal Income tax
What is an excise tax?
- levied on the retail sale of particular products like alcohol, diesel, gas,
tobacco, telephone use, & air transportation.
- Can also be levied at the state level
- Differs from other taxes in that the tax base depends on the quantity purchased,
not a monetary amount.
What is a transfer tax?
- aka estate & gift taxes
- Very minor tax in revenue collection
- Levied on the fair market values of wealth when death or fit occurs.