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Exam 1: An Introduction to Tax

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Question 1

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) Issue treasury bonds
B) Cut funding to various federal projects
C) 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) B) and E)

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D

Question 2

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

A) True
B) False

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Question 3

Multiple Choice

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

Which of the following is true regarding tax-advantaged assets?

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

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

The largest federal tax, in terms of revenue collected, is the social security tax.

Implicit taxes are indirect taxes on tax-favored assets.

Consider the following tax rate structures. Is it horizontally equitable? Why or why not? Is it vertically equitable? Why or why not?

Given the following tax structure, what is the minimum tax that would need to be assessed on Dora to make the tax progressive with respect to average tax rates? What is the minimum tax that would need to be assessed on Dora to make the tax progressive with respect to effective tax rates? $\begin{array} { l c r c } \underline{\text { Taxpayer }} & \underline{\text { Salary }} & \underline{\text { Muni-Bond Interest }} & \underline{\text { Total Tax} } \\\text { Diego } & 30,000 & 10,000 & 1,500 \\\text { Dora } & 50,000 & 5,000 & ? ? ?\end{array}$

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

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

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?

What interest rate would the city of Mitchell have to pay in order to make Jackson indifferent between investing in the city of Mitchell and the Sundial, Inc. bonds for year 2014?

If Susie earns $750,000 in taxable income and files as head of household for year 2014, what is Susie's average tax rate (rounded) ?

Which of the following statements is true?

How much explicit tax would Curtis incur on interest earned on the Initech, Inc. bond?

Consider the following tax rate structure. Is it horizontally equitable? Why or why not? Is it vertically equitable? Why or why not?

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

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 2014, what is his current marginal tax rate?