©THEBRIGHT EXAM SOLUTIONS
11/05/2024 12:06 PM
Tax Exam 1 Questions With Correct
Answers
Four standards of a good tax - answer✔1)Sufficient
2)Efficient
3)Convenient
4)Fair
A tax is sufficient if - answer✔it generates enough funds to pay for the public goods and services and
allows a government to balance its budget
A tax is efficient if - answer✔it is an effective fiscal policy tool for regulating the economy
static forecast - answer✔assumes base stays the same
dynamic forecast - answer✔estimate change in base due to change in rate
income effect - answer✔work to maintain after-tax income
substitution effect - answer✔substitute between labor and leisure
a tax is convenient if - answer✔government view: tax is easy to administer, understand, and offers few
opportunities for noncompliance
taxpayer vie: easy to pay, easy to compute, and requires minimal time to comply
a tax is fair if - answer✔the taxpayer has the ability to pay the tax
horizontal equity - answer✔the same ability for everyone to pay
vertical equity - answer✔the greater the ability to pay then the greater of tax
proportional tax rate - answer✔imposes constant tax rate throughout the tax base
average tax rate - answer✔the average level of taxation on each dollar of taxable income
, ©THEBRIGHT EXAM SOLUTIONS
11/05/2024 12:06 PM
effective tax rate - answer✔the average rate of taxation on each dollar of total income
marginal tax rate - answer✔the tax rate that applies to the next additional dollar of taxable income
if cash inflow is not taxable, after-tax cash flow = - answer✔before-tax cash flow
if cash outflow is not deductible, after-tax cash flow = - answer✔before-tax cash flow
if cash flow is taxable, after-tax cash flow = - answer✔before-tax cash flow x (1-t)
what do taxes do in relation to borrowing? - answer✔they reduce the cost of borrowing if interest is
deductible
tax avoidance - answer✔legitimate means of reducing taxes legally
tax evasion - answer✔willful attempt to defraud the government of revenue
tax consequences of a transaction depend on the interaction of 4 variables - answer✔1)time period
variable
2)entity variable
3)jurisdiction variable
4)character variable
time period variable types of deferral strategies - answer✔1) defer recognition of income into the future
2)accelerate recognition of deductions
constructive receipt requires most taxpayers to recognize service revenue if - answer✔the taxpayer has
control over the payment and there are no substantial restrictions on the use of the property or a
substantial risk of forfeiture
entity variable has two variables - answer✔1) income shifting
2)deduction shifting
income shifting - answer✔arranging transactions to transfer income from a high tax rate entity to a low
tax rate entity
deduction shifting - answer✔Arranging transactions to transfer deductions from a low tax rate entity to
a high tax rate entity
assignment of income - answer✔-Requires income to be taxed to the taxpayer who actually earns the
income
-Merely attributing a paycheck or dividend to another taxpayer does not transfer tax liability
taxable income items are characterized as either - answer✔ordinary income or capital gain
11/05/2024 12:06 PM
Tax Exam 1 Questions With Correct
Answers
Four standards of a good tax - answer✔1)Sufficient
2)Efficient
3)Convenient
4)Fair
A tax is sufficient if - answer✔it generates enough funds to pay for the public goods and services and
allows a government to balance its budget
A tax is efficient if - answer✔it is an effective fiscal policy tool for regulating the economy
static forecast - answer✔assumes base stays the same
dynamic forecast - answer✔estimate change in base due to change in rate
income effect - answer✔work to maintain after-tax income
substitution effect - answer✔substitute between labor and leisure
a tax is convenient if - answer✔government view: tax is easy to administer, understand, and offers few
opportunities for noncompliance
taxpayer vie: easy to pay, easy to compute, and requires minimal time to comply
a tax is fair if - answer✔the taxpayer has the ability to pay the tax
horizontal equity - answer✔the same ability for everyone to pay
vertical equity - answer✔the greater the ability to pay then the greater of tax
proportional tax rate - answer✔imposes constant tax rate throughout the tax base
average tax rate - answer✔the average level of taxation on each dollar of taxable income
, ©THEBRIGHT EXAM SOLUTIONS
11/05/2024 12:06 PM
effective tax rate - answer✔the average rate of taxation on each dollar of total income
marginal tax rate - answer✔the tax rate that applies to the next additional dollar of taxable income
if cash inflow is not taxable, after-tax cash flow = - answer✔before-tax cash flow
if cash outflow is not deductible, after-tax cash flow = - answer✔before-tax cash flow
if cash flow is taxable, after-tax cash flow = - answer✔before-tax cash flow x (1-t)
what do taxes do in relation to borrowing? - answer✔they reduce the cost of borrowing if interest is
deductible
tax avoidance - answer✔legitimate means of reducing taxes legally
tax evasion - answer✔willful attempt to defraud the government of revenue
tax consequences of a transaction depend on the interaction of 4 variables - answer✔1)time period
variable
2)entity variable
3)jurisdiction variable
4)character variable
time period variable types of deferral strategies - answer✔1) defer recognition of income into the future
2)accelerate recognition of deductions
constructive receipt requires most taxpayers to recognize service revenue if - answer✔the taxpayer has
control over the payment and there are no substantial restrictions on the use of the property or a
substantial risk of forfeiture
entity variable has two variables - answer✔1) income shifting
2)deduction shifting
income shifting - answer✔arranging transactions to transfer income from a high tax rate entity to a low
tax rate entity
deduction shifting - answer✔Arranging transactions to transfer deductions from a low tax rate entity to
a high tax rate entity
assignment of income - answer✔-Requires income to be taxed to the taxpayer who actually earns the
income
-Merely attributing a paycheck or dividend to another taxpayer does not transfer tax liability
taxable income items are characterized as either - answer✔ordinary income or capital gain
