SOLUTION MANUAL FOR b b
Principles of Taxation for Business and Investment Planning 2020 23rd Edition
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by Sally Jones, Shelley Rhoades Catanach
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Chapter 1 Taxes and Taxing Jurisdictions
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Questions and Problems for Discussion
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1. Tax payments differ from government fines and penalties because they aren‘t intended to
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deter or punish unacceptable behavior. Tax payments differ from fees or user charges
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because they don‘t entitle the payer to a specific government good or service, such as a
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postage stamp or a driver‘s license. Tax payments also differ from fees or user charges
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because they are compulsory.
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2. This payment has characteristics of a tax, a penalty, and a user fee. The compulsory payment
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is not specifically punitive but does apply selectively to those companies most likely
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responsible for the polluted condition of Green River. However, these same companies may
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be the entities that benefit most from the environmental clean-up.
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3. This payment more closely resembles a fee for a government service than a transaction-based
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tax because the transaction occurs between a private party and the jurisdiction itself, rather
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than between private parties engaging in a market transaction. The payment also entitles the
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payer to a specific benefit (the right to marry under law).
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4. To the extent that the decline in exterior maintenance reduces the value of Mr. Powell‘s
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apartment complex, he bears the incidence of the increased property tax. To the extent that
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the decline reduces the value of adjoining properties or makes the neighborhood less
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attractive, the owners of the adjoining properties and the neighborhood residents share the
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incidence of the tax increase.
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5. People who don‘t directly use public schools (such as Mr. and Mrs. Ahern or people who don‘t
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have children) indirectly benefit from a public education system for the general population.
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Arguably, public education contributes to a skilled workforce and improves the cultural and
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social environment in which Mr. and Mrs. Ahern live. Based on this argument, Mr. and Mrs.
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Ahern should not be exempt from the local property tax.
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6. The consumers who pay the same price for a smaller bar of soap of lesser quality bear
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the incidence of the new gross receipts tax.
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7. Real property can‘t be hidden or moved, and its ownership (legal title) is a matter of
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public record. In contrast, personal property is mobile and may be easily concealed.
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Moreover, jurisdictions may not have an effective means to discover or trace ownership
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of personal property.
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8. Arguably, private golf courses beautify the locality and are environmentally more desirable
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than other commercial activities. They also may require more acreage than other businesses
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and, therefore, would be at a competitive disadvantage without a preferential real property
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tax rate.
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9. Many jurisdictions that levy property taxes provide an exemption for public institutions, such
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as state universities or private colleges. If University K is entitled to such an exemption,
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every commercial building or residence acquired by the University reduces the local
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jurisdiction‘s property tax base.
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,10. Excise taxes are imposed on a much narrower range of consumer goods and services
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than sales taxes. Consequently, people can more readily avoid purchasing the specific
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good or service subject to excise tax.
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11. The tax increase may have reduced the aggregate demand for consumer goods and,
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consequently, municipal residents are buying fewer goods. A second possibility is that
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municipal residents are traveling to other jurisdictions with lower tax rates or making more
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purchases through mail order catalogs or on-line.
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12. From a political perspective, liquor and cigarettes sales make an excellent tax base because
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consumption of the two products is purely discretionary, and any decline in consumption
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because of the tax is socially desirable. From an economic perspective, these sales are a
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good tax base because the demand for liquor and cigarettes is relatively price inelastic. In
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other words, people who drink and smoke on a regular basis buy these products regardless
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of a heavy excise tax.
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13. The federal income has the broader base. The federal payroll tax is imposed on wages,
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salaries, and other forms of compensation earned by employees. The federal income tax is
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imposed on all types of compensation as well as net business profit, investment income, and
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any other income item from whatever source derived.
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14. A property tax is a periodic (usually annual) tax levied on the ownership of property and
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based on the value of the property on a particular assessment date. A transfer tax is a
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transaction- based tax levied on the transfer of property from one party to another. A transfer
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tax is based on the value of the property at date of transfer.
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15. If the federal government could ―piggy back‖ a national sales tax on existing state sales tax
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collection systems, the federal government could avoid creating a new federal agency for
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collecting the tax. In contrast, the federal government would have to create a new collection
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system for a national VAT. However, a national VAT would be less likely to cause
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jurisdictional conflict between the federal government and the states because states don‘t
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depend on VATs as a source of revenue.
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16. The Internal Revenue Code is federal statutory law, enacted by Congress and signed by the
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President. Technically, Treasury regulations only interpret and explain the statute and aren‘t
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laws in their own right. Thus, regulations are less authoritative than the Code itself. However,
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because Congress authorized the Treasury to write regulations, they are the government‘s
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official interpretation of statutory law. Practically, the regulations carry considerable
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authoritative weight.
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Application Problems b
1. a. b The statement of facts identifies three taxpayers: Mr. Josh Kenney, JK Services, and
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JK Realty.
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b. The government of the locality in which Mr. Kenney resides, the state government of
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Vermont, and the U.S. government have jurisdiction to tax Mr. Kenney. The local
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governments of the four counties in which JK Services conducts business, the state
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government of Vermont, and the U.S. government have jurisdiction to tax JK Services.
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The city of Boston, the state government of Massachusetts, and the U.S. government
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have jurisdiction to tax JK Realty.
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2. a. b b The United States has jurisdiction to tax Mrs. May because she is a permanent resident.
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b. The United States has jurisdiction to tax Mrs. May only on the U.S. source rental
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income generated by the Manhattan real estate.
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, c. The United States does not have jurisdiction to tax Mrs. May.
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d. The United States has jurisdiction to tax Mrs. May because she is a U.S. citizen.
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3. a. The United States has jurisdiction to tax Mr. Tompkin because he is a U.S citizen.
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b. The United States has jurisdiction to tax Mr. Tompkin only on the U.S. source rental
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income generated by the Buffalo real estate.
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c. The United States has jurisdiction to tax Mr. Tompkin because he is a permanent resident.
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d. The United States has jurisdiction to tax Mr. Tompkin on his share of the U.S.
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source business income generated by Sophic Partnership.
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4. State A: b
Volume of sales before rate increaseb b b b b $800,000,000
Original tax rate b b .05
Revenue before rate increase b b b $40,000,000
Volume of sales after rate increase b b b b b $710,000,000
New tax rate b b .06
Revenue after rate increase b b b $42,600,000
Additional revenue ($42,600,000 − $40,000,000) b b b b $2,600,000
State Z: b
Volume of sales added to tax base b b b b b b $50,000,000
Tax rate b .05
Additional revenue b $2,500,000
5. a. b b The property tax is $8,300 ($415,000 2%).
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b. The property tax is $19,000 ([$500,000 2%] + [$225,000 4%]).
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6. a. b b The property tax is $39,000 ($1.3 million 3%).
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b. The property tax is $85,000 ([$2 million 3%] + [$2.5 million 1%]).
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7. Increase in County G‘s aggregate assessed property tax value
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bAssessed value of Lexon‘s new facility
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Net increase in County G‘s tax base
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bTax rate b
b .04
Net effect on County G‘s current year revenue
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8. a. b Value of property purchased in State K
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Use tax rate in State H
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b.06
Pre credit use tax
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Sales tax paid to State K
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Use tax owed to State H
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b. Value of property purchased in State L
b b b b b b $750,000
Use tax rate in State H
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.06 b
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, Pre credit use tax
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Sales tax paid to State L
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Use tax owed to State H
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bEducation.
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