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Exam 1: An Introduction to Tax

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Question 51

Multiple Choice

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Which of the following federal government actions would make sense if a tax system fails to provide sufficient tax revenue?

A) Only issue treasury bonds
B) Only cut funding to various federal projects
C) Only increase federal spending
D) Issue treasury bonds and cut funding to various federal projects but not increase federal spending
E) None of these

F) A) and E)
G) A) and B)

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Question 52

Multiple Choice

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The substitution effect:

A) Predicts that taxpayers will work harder to pay for consumer products when tax rates increase
B) Is one of the effects considered in static forecasting
C) Results in the government collecting more aggregate tax revenue than under the income effect
D) Is typically more descriptive for taxpayers with lower disposable income
E) None of these

F) A) and C)
G) C) and E)

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Question 53

Multiple Choice

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Leonardo earns $80,000 of taxable income. He also has $15,000 in city of Tulsa bonds. His wife, Theresa, earns $50,000 of taxable income. If Leonardo and his wife file married filing jointly in 2016, what would be their average tax rate (rounded) ?

Curtis invests $250,000 in a city of Athens bond that pays 7% interest. Alternatively, Curtis could have invested the $250,000 in a bond recently issued by Initech, Inc. that pays 9% interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 28%. What is Curtis's after-tax rate of return on the city of Athens bond?

A sales tax is a common example of a progressive tax rate structure.

Which of the following principles encourages a vertically equitable tax system?

Marc, a single taxpayer, earns $60,000 in taxable income and $5,000 in interest from an investment in city of Birmingham Bonds. Using the U.S. tax rate schedule for year 2016, how much federal tax will he owe?

Taxes influence many types of business decisions but generally do not influence personal decisions.

Curtis invests $250,000 in a city of Athens bond that pays 7% interest. Alternatively, Curtis could have invested the $250,000 in a bond recently issued by Initech, Inc. that pays 9% interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 28%. If Curtis invested in the Initech, Inc. bonds, what would be his after-tax rate of return from this investment?

The effective tax rate expresses the taxpayer's total tax as a percentage of the taxpayer's taxable and nontaxable income.

Relative to explicit taxes, implicit taxes are much easier to estimate.

The estate tax is assessed based on the fair market values of transfers made during a taxpayer's life.

Curtis invests $250,000 in a city of Athens bond that pays 7% interest. Alternatively, Curtis could have invested the $250,000 in a bond recently issued by Initech, Inc. that pays 9% interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 28%. How much implicit tax would Curtis pay on the city of Athens bond?

Estimated tax payments are one way the federal income tax system addresses the "certainty" criterion in evaluating tax systems.

Curtis invests $250,000 in a city of Athens bond that pays 7% interest. Alternatively, Curtis could have invested the $250,000 in a bond recently issued by Initech, Inc. that pays 9% interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 28%. How much explicit tax would Curtis incur on interest earned on the Initech, Inc. bond?

Ricky and Lucy are debating several types of taxes. Their debate has focused on the different types of tax rate structures and whether they are "fair." Please define each tax rate structure, provide examples of each structure, and discuss how each structure may be viewed with respect to vertical equity.

Nelson has the choice between investing in a city of Fruithurst bond at 4% or a J.B. Ribs, Inc. bond at 6.5%. Assuming that both bonds have the same non-tax characteristics and that Nelson has a 40% marginal tax rate, in which bond should he invest? What interest rate offered by J.B. Ribs, Inc. would make Nelson indifferent between investing in the two bonds?

Which of the following is true?

In terms of effective tax rates, the sales tax can be viewed as a regressive tax.

The difficulty in calculating a tax is typically in the determination of: