TAX4001- Exam 1 (CH 1 & 2) Questions
With Correct Answers
Tax - answerA payment required by a government that is unrelated to any specific benefit or service
received from the government.
To fund the operations of the government (to raise revenue) - answerThe Purpose of taxes:
1) The payment i...
Tax - answer✔A payment required by a government that is unrelated to any specific benefit or service
received from the government.
To fund the operations of the government (to raise revenue) - answer✔The Purpose of taxes:
1) The payment is required (it is not voluntary)
2) The payment is imposed by a government agency (federal, state or local)
3) The payment is not tied directly to the benefit received by the taxpayer - answer✔Key components of
the definition of a tax:
Sin Tax - answer✔Impose relatively high surcharges on alcohol and tobacco products to discourage legal
behaviors.
Is a Tax - answer✔Affordable Car Act
Earmarked Tax - answer✔A tax that is assessed for a specific purpose.
Tax= Tax Base x Tax Rate - answer✔Tax formula
Tax Base - answer✔What is actually taxed and is usually expressed in monetary terms
Tax Rate - answer✔Determines the level of taxes imposed on the tax base and is usually expressed as a
percentage. (Different portions of a tax base may be taxed at different rates)
Flat Tax - answer✔A single tax applied to an entire base
Graduated Taxes - answer✔The base is divided into a series of monetary amounts (BRACKETS) and each
successive bracket is taxed at a different (gradually higher or gradually lower) percentage rate.
Marginal Tax Rate - answer✔Is the tax rate that applies to the NEXT ADDITIONAL INCREMENT (Dollar) of
a taxpayer's taxable income (or deductions)
Is useful in tax planning
Marginal Tax Rate= (New Total Tax- Old Total Tax)/ (New Taxable Income- Old Taxable Income)
*Use Schedule to determine federal income tax
Average Tax Rate - answer✔Represents a taxpayer's average level of taxation on each dollar of taxable
income.
Useful in budgeting tax expenses
Average Tax Rate= Total Tax/ Taxable Income
Effective Tax Rate - answer✔Represents the taxpayer's average rate of taxation on each dollar of total
income (sometimes referred to as economic income), including taxable and nontaxable income.
Useful in comparing the relative tax burdens of taxpayers
Effective Tax Rate= Total Tax/ Total Income
Proportional Tax Rate Structure - answer✔Also known as Flat Tax, imposes a constant tax rate
throughout the tax base. (Example: Sales Tax)
Proportional Tax= Tax Base x Tax Rate
Progressive Tax Rate Structure - answer✔Imposes an increasing marginal tax rate as the tax base
increases. (Example: Federal and most state Income Taxes)
Regressive Tax Rate Structure - answer✔Imposes a decreasing marginal tax rate as the tax base
increases. Not Common. (Example: Social Security Tax and State Unemployment Taxes)
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