Income Tax Review Flashcards

Flashcards for reviewing key vocabulary and concepts related to income tax, covering topics such as tax base, capital gains, tax units, economic effects, and different tax systems.

Tax Base

Base Imponible; the amount of income or value used to calculate an individual's or a company's tax liability.

Net Base

Base Liquidable; the tax base after deductions have been applied.

Tax Rate

Tipo de gravamen; the percentage at which income is taxed. Applied to the tax base to compute the tax payable.

Tax Payable

Cuota Íntegra; the total amount of tax due before any tax credits are applied.

Tax Credits

Deducciones; amounts subtracted directly from the tax payable to reduce the overall tax liability.

Net Tax

Cuota Líquida; the tax payable after tax credits have been subtracted.

Withholdings

Pagos a cuenta; taxes withheld from income during the year and paid to the government on the taxpayer's behalf.

Final Payment Due

Cuota diferencial; the remaining tax amount that must be paid after withholdings are accounted for.

Tax Liability

Deuda Tributaria; the total amount of taxes owed to the government.

Taxable Event

Hecho Imponible; an event that triggers a tax liability, such as earning income or selling an asset.

Taxpayer

Contribuyente; a person or entity responsible for paying taxes.

Gross Income

Total income from all sources before any deductions or expenses.

Deductible Expenses

Expenses that can be subtracted from gross income to reduce the taxable income.

Taxable Income

The amount of income subject to tax, calculated by subtracting deductions and exemptions from gross income.

Tax Credits

Amounts that can be subtracted directly from the amount of tax owed.

Average Tax Rate (ATR)

Total Tax Payable / Taxable Income; the average percentage of income paid in taxes.

Marginal Tax Rate (MTR)

Change in Tax / Change in Income; the tax rate applied to the next dollar of income earned.

Statutory Tax Rate

Tax rates directly derived from the legal schedule.

Effective Tax Rate

The actual tax rate paid after taking into account allowances, deductions, and tax credits which reduce taxable income.

Fiscal Drag

The effect of inflation on income tax, where nominal increases in income can push individuals into higher tax brackets even if their real income has not increased.

Bracket Creep

Inflation has the same effect as a rise in tax rates; people nominally earns more money and, due to progressivity, their tax rates will increase.

Haig-Simons Comprehensive Income Definition

Taxable resources are the change in individual’s power to consume during the year. It equals to: Y = C + (We − Wb).

Accretion Criterion

Allocating the increase in net wealth generated in each year to the tax period.

Accrual Criterion

Records revenues and expenses when they are incurred, regardless of when cash is exchanged.

Cash Criterion

Records revenues and expenses when cash is received or paid.

Splitting

Average TI; Calculate ATR; Apply ATR to all TI. Corrects accumulation no matter if it exists of not.

Economic Effect- Labor supply

A proportional income tax implies a reduction in work reward: disposable wage w·(1-t); Income effect (IE): individual is now poorer, so she reacts increasing the hours of work; Substitution effect (SE): relative prices of work and leisure have change. Leisure is cheaper, or the reward for working is lower  she reacts reducing work.

Economic Effect-saving

A proportional tax on interests' income is introduced (and interest payments are deductible expenses);After the tax, the budget line changes, taking it into account: Similar effects as tax on labour: having taxes on saving, I will save less (consumption is now more profitable)

Nordic Dual Tax

Income from work is taxed progressively (you can’t choose the moment where the income is produced), but capital income is taxed proportionately (you can choose the moment).

Flat Tax

Broad definition of taxable income (I): no deductions, no tax credits (efficiency); Equity: the minimum exempt (M) gives progressivity to the tax. But progressivity grows a lot at the beginning but finally it grows smoothly; Combines efficiency (tax evasion) and equity (it is progressive).

Negative income tax

main elements: Tax rate (TR), Minimum Exempt (MTE). BI amount BI = MTE x TR 𝑇 = 𝐼 − 𝑀 · 𝑡; 𝑇