Federal Income Taxes I - Chapter 1

Info to study from chapter 1 of the Federal Income Taxes I class

tax rate

level of taxes imposed on the tax based; expressed usually as a percentage (%)

tax base

defines what’s actually taxed; expressed usually in monetary terms ($)

marginal tax rate

applies to the next addition increment of a taxpayer’s taxable income

average tax rate

taxpayer’s average level of taxation on each dollar of taxable income

effective tax rate

taxpayer’s average rate of taxation on each dollar of total income (both taxable and nontaxable); provides a better depiction of a taxpayer’s burden than the average tax rate

proportional (flat) tax rate structure

imposes a constant tax rate throughout the tax base (e.g., Federal corporate tax income, sales tax)

progressive tax rate structure

imposes an increasing marginal tax rate as the tax base increases (e.g., federal income taxes)

static forecasting

ignores how taxpayers might alter activities in response to a tax law change; bases projected tax revenues on existing state of transactions

dynamic forecasting

tries to predict possible responses by taxpayers to new tax laws

income effect

if tax rates go up, people will work harder

substitution effect

if tax rates go up, people substitute nontaxable activities

horizontal equity

taxpayers in similar situations pay the same tax

vertical equity

taxpayers able to pay more tax pay more tax

earmarked tax

tax that’s assessed for a specific purpose

graduated tax

base is divided into a series of monetary amounts, or brackets, and each is taxed at a different rate

excise tax

based on quantity sold of particular products

real property

buildings and land

personal property

cars and boats

implicit tax

the reduced before tax return that a tax-favored asset produces because of its tax-advantaged status

sufficiency

assesses the aggregate size of the tax revenues that must be generated and making sure the tax system provides those revenues

equity

how the tax burden should be distributed across taxpayers

certainty

taxpayers should be able to determine when to pay the tax, how to determine the tax, and where to pay the tax

convenience

the system should be designed to be collected without undue hardship to the taxpayer

economy

should minimize compliance and administration costs associated with the system

tax formula

tax = tax rate × tax base

choices influenced by taxes

investments, evaluating alternative job offers, saving for education expenses, performing gift or estate planning

estate (death) tax

tax paid for an estate

commonly assessed by state/local governments

• sales tax

• income tax

• property tax

use tax

a tax imposed on the retail price of goods owned, possessed, or consumed within a state that were not purchased within the state

regressive tax rate structure

imposes a decreasing marginal tax rate as the tax base increases (e.g., Social Security tax, federal/state unemployment taxes)