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Chapter 1 Income Tax
Terms in this set (34)
Government should tax only to raise money for its essential functions. Tax relief stimulates economy by keeping money in businesses hands to grow and hire more employees. Trickle down.
Raise certain taxes to provide money for government spending, which in turn generates business. fair tax across the board.
What is a tax?
Are the price we pay for a civilized society. Is a payment required by a government agency that is unrelated to any specific benefit service received from the government agency.
Key Components of a tax
Payment is required
Payment imposed by government agency (federal, state, local)
Payment not tied directly to benefit received by the taxpayer.
How to calculate tax?
Tax base * Tax rate
Level of taxes imposed on the tax base and is usually expressed as a percentage.
Defines what is actually taxed and is usually expressed in monetary terms.
Proportional Tax Rate (Flat Tax)
Imposes a constant tax rate throughout the tax base.
Progressive Tax Rate
Imposes an increasing marginal tax rate as the tax base increases.
Regressive Tax Rate
Imposes a decreasing marginal tax rate as the tax base increases.
Marginal Tax Rate
The tax rate that applies to the next additional increment of a taxpayer's taxable income.
Average tax rate
The taxpayer's average level of taxation on each dollar of taxable income.
Used in budgeting tax expense as a portion of income
Effective tax rate
The taxpayers average rate of taxation on each dollar of total income (both taxable and non taxable).
Useful in comparing the relative tax burdens of taxpayers. Shows true economic burden.
Average Tax rate formula
Total tax / taxable income
Effective tax rate formula
Total tax / total income
Marginal Tax rate formula
(New total tax - Old Total Tax ) / (New taxable income - Old taxable income)
Employment and unemployment taxes
State and Local Taxes
Sales and use taxes
Represent approximately 46.2% of all tax revenues collected in the USA.
Levied on individuals, corporations, estates, and trusts
Employment and Unemployment taxes
Second largest group of taxes imposed by the US government
Employment taxes include the OASDI (SS) and the MHI (medicare tax)
Unemployment taxes fund temporary unemployment benefits for individuals from their jobs without cause.
Third largest group of taxes imposed by the US government.
Levied on the quantity of products sold.
Levied on the fair market values of wealth transfers upon death or by gift.
Annual gift exclusion 14,000
Tax base for a sales tax is the retail sales of goods and some services.
Tax base for the use tax is the retail price of goods owned, possessed or consumed within a state that were not purchased within the state.
Are ad valorem taxes, meaning that the tax base for each is the fair market value of the property.
Personal property taxes includes taxes on all other types of property, both tangible and intangible
State Income taxes
Most state taxable income calculations largely conform to the federal taxable income calculations, while a limited number of modifications.
State Excise taxes
States typically impose excise taxes on items subject to federal excise tax.
Not paid directly to government
Result from a tax advantage the government grants to certain transactions to satisfy social, economic, and other objectives.
The reduced before tax return that a tax favored asset produces because of its tax advantaged status.
Taxes directly imposed by a government and are easily quantified
Involves assessing the aggregate size of the tax revenues that must be generated and making sure that the tax system provides these revenues. When taxes meet revenue needs.
How the tax burden should be distributed across taxpayers. Everyone pays tax.
Taxpayers should be able to determine when to pay the tax, where to pay the tax, and how to determine the tax
Tax system should be designed to be collected without undue hardship to the taxpayer. no undue hardship to taxpayer.
Should minimize the compliance and administration costs associated with the tax system.
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