Question 1

One benefit of a sin tax (e.g., a tax on cigarettes) is that it should increase the demand for the products being taxed.

Accepted Answer

A sin tax is designed to discourage the consumption of products that are considered harmful to an individual or society. Therefore, the goal of a sin tax is to decrease demand for the products being taxed, not increase it.

Question 2

Common examples of sin taxes include the taxes imposed on airline tickets and gasoline.

Accepted Answer

Sin taxes are typically taxes on products or activities that are considered socially undesirable, such as tobacco, alcohol, and gambling. While taxes on airline tickets and gasoline do generate revenue for government, they are not typically considered sin taxes.

Question 3

The effective tax rate, in general, provides a better depiction of a taxpayer's tax burden than the average tax rate.

Accepted Answer

The effective tax rate takes into account all deductions, exemptions, and credits that reduce a taxpayer's taxable income and therefore provide a more accurate measure of the actual tax burden than the average tax rate, which is just the ratio of total tax paid to total income.

Question 4

Taxes influence business decisions such as where a business should locate or how a business should be structured.

Accepted Answer

Taxes can have a significant impact on a business's bottom line and profitability, and thus can influence decisions on where to locate or how to structure the business. For example, a business may choose to locate in an area with lower tax rates or incentives, or may choose to structure as a partnership or LLC to take advantage of certain tax benefits.

Question 5

The tax base for the federal income tax is taxable income.

Accepted Answer

Taxable income is the amount of income that is subject to tax after deductions, exemptions, and credits have been applied. It is used as the tax base for the federal income tax.

Question 6

A flat tax is an example of a graduated tax system.

Accepted Answer

A flat tax system is characterized by a constant tax rate that applies to all income levels, while a graduated tax system (also known as a progressive tax system) applies higher tax rates to higher income levels.

Question 7

A taxpayer's average tax rate is the most appropriate tax rate to use in tax planning.

Accepted Answer

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 additional tax deductions.

Question 8

Margaret recently received a parking ticket. This is a common example of a local tax.

Accepted Answer

Parking tickets are typically fines or penalties for violating parking regulations, not a form of local tax.

Question 9

One key characteristic of a tax is that it is a required payment to a governmental agency.

Accepted Answer

A tax is a mandatory payment that citizens and businesses must make to a government agency, whether it is local, state, or national. Failure to pay taxes can result in penalties, fines, and legal consequences.

Question 10

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

Accepted Answer

Taxes can influence personal decisions such as whether to buy a house, have children, or invest in certain types of savings accounts.

Question 11

A 1% charge imposed by a local government on football tickets sold is not considered a tax if all proceeds are earmarked to fund local schools.

Accepted Answer

A charge imposed by a government on goods or services, regardless of its purpose, is considered a tax.

Question 12

The main difficulty in calculating an income tax is determining the correct amount of the tax base.

Accepted Answer

The tax base is the amount of income or other financial activity subject to taxation, so determining the correct tax base is essential in calculating an accurate income tax. Other factors such as tax rates and deductions can also impact the final amount of tax owed, but determining the tax base is an important first step.

Question 13

George recently paid $50 to renew his driver's license. The $50 payment is considered a tax.

Accepted Answer

A tax is a payment required by a government that is unrelated to any specific benefit or service received by the government.

Question 14

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

Accepted Answer

A sales tax is actually an example of a regressive tax rate structure where individuals with lower incomes pay a higher percentage of their income in taxes compared to those with higher incomes.

Question 15

The two components of the tax calculation are the tax rate and the taxpayer's status.

Accepted Answer

Tax equals the tax base multiplied by the tax rate.

Question 16

In a proportional (flat) tax rate system, the marginal tax rate will always equal the average tax rate.

Accepted Answer

In a proportional (flat) tax rate system, everyone pays the same percentage of their income in taxes. Therefore, the marginal tax rate (the tax rate on the last dollar earned) and the average tax rate (total taxes paid divided by total income earned) will always be the same percentage. Therefore, the statement is true.

Question 17

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

Accepted Answer

The effective tax rate is calculated by dividing the taxpayer's total tax by their taxable and nontaxable income. This provides a more accurate representation of the taxpayer's overall tax burden than just looking at their marginal tax rate.

Question 18

Tax policy rarely plays an important part in presidential campaigns.

Accepted Answer

Tax policy often plays a crucial role in presidential campaigns, as candidates propose their plans for tax reform and use them as a selling point to voters. Examples include Ronald Reagan's tax cuts in 1980 and Barack Obama's proposed tax increases on the wealthy in 2012.

Question 19

In a regressive tax rate system, the marginal tax rate will often be greater than the average tax rate.

Accepted Answer

In a regressive tax rate system, the marginal tax rate will often be less than the average tax rate. This is because as income increases, the percentage of income paid in taxes decreases. Therefore, the average tax rate decreases as income increases, while the marginal tax rate remains constant or decreases slightly.

Question 20

In addition to raising revenues, specific U.S. taxes may have other objectives (e.g., economic or social objectives).

Accepted Answer

Yes, specific U.S. taxes may have other objectives beyond raising revenues, such as promoting economic growth or addressing social issues. For example, tax credits for businesses investing in renewable energy sources like solar power aim to encourage green innovation and reduce carbon emissions. Similarly, the Affordable Care Act implemented a tax penalty for individuals without health insurance to incentivize greater participation in the healthcare system and reduce the number of uninsured Americans.

Quiz 1: An Introduction to Tax