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Solution Manual for McGraw-Hill’s Essentials of Federal Taxation 2024 Edition, 15th Edition By Brian Spilker

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Solutions Manual—Essentials of Federal Taxation, by Spilker et al. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. 1 Chapter 1 An Introduction to Tax SOLUTIONS MANUAL Discussion Questions (1) [LO 1] Jessica’s ...

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Solutions Manual—Essentials of Federal Taxation, by Spilker et al.

Chapter 1
An Introduction to Tax

SOLUTIONS MANUAL

Discussion Questions

(1) [LO 1] Jessica’s friend Zachary once stated that he couldn’t understand why
someone would take a tax course. Why is this a rather naïve view?

Taxes are a part of everyday life and have a financial effect on many of the major
personal decisions that individuals face (e.g., investment decisions, evaluating
alternative job offers, saving for education expenses, gift or estate planning, etc.).

(2) [LO 1] What are some aspects of business that require knowledge of taxation?
What are some aspects of personal finance that require knowledge of taxation?

Taxes play an important role in fundamental business decisions such as the
following:
• What organizational form should a business use?
• Where should the business locate?
• How should business acquisitions be structured?
• How should the business compensate employees?
• What is the appropriate mix of debt and equity for the business?
• Should the business rent or own its equipment and property?
• How should the business distribute profits to its owners?
One must consider all transaction costs (including taxes) to evaluate the merits of
a transaction.

Common personal financial decisions that taxes influence include: choosing
investments, retirement planning, choosing to rent or buy a home, evaluating
alternative job offers, saving for education expenses, and doing gift or estate
planning.

(3) [LO 1] Describe some ways in which taxes affect the political process in the
United States.

U.S. presidential candidates often distinguish themselves from their opponents
based upon their tax rhetoric. Likewise, the major political parties generally have
very diverse views of the appropriate way to tax the public. Determining who is
taxed, what is taxed, and how much is taxed are difficult questions. Voters must
have a basic understanding of taxes to evaluate the merits of alternative tax

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
1

, Solutions Manual—Essentials of Federal Taxation, by Spilker et al.

proposals offered by opposing political candidates and their political parties.

(4) [LO 2] Courtney recently received a speeding ticket on her way to the university.
Her fine was $200. Is this considered a tax? Why or why not?

The $200 speeding ticket is not considered a tax. Instead, it is considered a fine
or penalty. Taxes differ from fines and penalties because taxes are not intended
to punish or prevent illegal behavior.

(5) [LO 2] Marlon and Latoya recently started building a house. They had to pay
$300 to the county government for a building permit. Is the $300 payment a tax?
Why or why not?

The building permit is not considered a tax because $300 payment is directly
linked to a benefit that they received (i.e., the ability to build a house).

(6) [LO 2] To help pay for the city’s new stadium, the city of Birmingham recently
enacted a 1 percent surcharge on hotel rooms. Is this a tax? Why or why not?

The 1 percent surcharge is a tax. The 1 percent surcharge is an earmarked tax –
i.e., collected for a specific purpose. The surcharge is considered a tax because
the tax payments made by taxpayers do not directly relate to the specific benefit
received by the taxpayers.

(7) [LO 2] As noted in Example 1-2, tolls, parking meter fees, and annual licensing
fees are not considered taxes. Can you identify other fees that are similar?

There are several possible answers to this question. Some common examples
include entrance fees to national parks, tag fees paid to local/state government
for automobiles, boats, etc.

(8) [LO 2] If the general objective of our tax system is to raise revenue, why does the
income tax allow deductions for charitable contributions and retirement plan
contributions?

In addition to the general objective of raising revenue, Congress uses the federal
tax system to encourage certain behavior and discourage other behavior. The
charitable contribution deduction is intended to encourage taxpayers to support
the initiatives of charitable organizations, whereas deductions for retirement
contributions are intended to encourage retirement savings. Another objective of
the tax system is to redistribute wealth.

(9) [LO 2] One common argument for imposing so-called sin taxes is the social goal
of reducing demand for such products. Using cigarettes as an example, is there a

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
2

, Solutions Manual—Essentials of Federal Taxation, by Spilker et al.

segment of the population that might be sensitive to price and for whom high
taxes might discourage purchases?

The most obvious segment sensitive to price may be teenagers and younger adults
that typically have less disposable income, although price sensitivity or elasticity
will vary by taxpayer.

(10) [LO 3] Dontae stated that he didn’t want to earn any more money because it
would “put him in a higher tax bracket.” What is wrong with Dontae’s
reasoning?

Although earning additional taxable income may increase Dontae’s marginal tax
rate (i.e., put him in a higher tax bracket), the additional income earned does not
affect the taxes that Dontae will pay on his existing income. Moving to a higher
tax bracket simply means that Dontae will pay a higher tax rate on the additional
income earned (not on the income that he already has).

(11) [LO 3] Describe the three different tax rates discussed in the chapter and how
taxpayers might use them.

The marginal tax rate is the tax rate that applies to the taxpayer’s additional
taxable income or deductions that the taxpayer is evaluating in a decision.
Specifically,

ΔTax (NewTotalTax − OldTotalTax)
Marginal Tax Rate = =
ΔTaxableIncome (NewTaxableIncome − OldTaxableIncome)

The marginal tax rate is particularly useful in tax planning because it represents
the rate of taxation or savings that would apply to additional taxable income or
tax deductions.

The average tax rate represents the taxpayer’s average level of taxation on each
dollar of taxable income. Specifically,

TotalTax
Average Tax Rate =
TaxableIncome

The average tax rate is often used in budgeting tax expense as a portion of income
(i.e., what percent of taxable income earned is paid in tax).

The effective tax rate represents the taxpayer’s average rate of taxation on each
dollar of total income (i.e., taxable and nontaxable income). Specifically,

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
3

, Solutions Manual—Essentials of Federal Taxation, by Spilker et al.

Total Tax
Effective Tax Rate =
Total Income

The effective tax rate provides a depiction of a taxpayer’s tax burden because it
depicts the taxpayer’s total tax paid as a ratio of the sum of both taxable and
nontaxable income earned.

(12) [LO 3] Which is a more appropriate tax rate to use to compare taxpayers’ tax
burdens – the average or the effective tax rate? Why?

Relative to the average tax rate, the effective tax rate provides a better depiction
of a taxpayer’s tax burden because it depicts the taxpayer’s total tax paid as a
ratio of the sum of both taxable and nontaxable income earned.

(13) [LO 3] Describe the differences between a proportional, progressive, and
regressive tax rate structure.

A proportional (flat) tax rate structure imposes a constant tax rate throughout the
tax base. In other words, as the tax base increases, the taxes paid increases, but
the marginal tax rate remains constant. Because the marginal tax rate is constant
across all levels of the tax base, the average tax rate remains constant across the
tax base and always equals the marginal tax rate. Common examples of
proportional taxes include sales taxes and excise taxes (i.e., taxes based on
quantity such as gallons of gas purchased).

A progressive tax rate structure imposes an increasing marginal tax rate as the
tax base increases. In other words, as the tax base increases, both the marginal
tax rate and the taxes paid increase. Common examples of progressive tax rate
structures include federal and most state income taxes and federal estate and gift
taxes.

A regressive tax rate structure imposes a decreasing marginal tax rate as the tax
base increases. In other words, as the tax base increases, the taxes paid
increases, but the marginal tax rate decreases. Regressive tax rate structures are
not common. In the United States, the Social Security tax and the federal
employment tax employ a regressive tax rate structure. However, there are other
regressive taxes when the tax is viewed in terms of effective tax rates. For
example, a sales tax by definition is a proportional tax – i.e., as taxable purchases
increase, the sales tax rate (i.e., the marginal tax rate) remains constant.
Nonetheless, when you consider that the proportion of your total income spent on
taxable purchases likely decreases as your total income increases, you can see the
sale tax as a regressive tax.

(14) [LO 3] Arnold and Lilly recently had a discussion about whether a sales tax is a
proportional tax or a regressive tax. Arnold argued that a sales tax is regressive.
Lilly countered that the sales tax is a flat tax. Who was correct?

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
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