TAX: is a payment required by a government that is unrelated to any
specific benefit or service received from the government. The general
purpose of a
... [Show More] tax is to fund the operations of the government (to raise
revenue)
TAX BASE: defines what is actually taxed and is usually expressed in
monetary terms, whereas the tax rate determines the level of taxes
imposed on the tax base and is usually expressed as a percentage.
FLAT TAX: single tax applied to an entire base.
GRADUATED TAX: taxes in which the tax base is divided into a series of
monetary amounts, or brackets, where each successive bracket is taxed at
a different (gradually higher or gradually lower) percentage rate.
BRACKETS: base is divided into a series of monetary amounts and each
successive bracket is taxed at a different (gradually higher or gradually
lower) percentage rate.
MARGINAL TAX RATE: applies to the next additional increment of a
taxpayer’s taxable income (or deductions). Change in tax/change in
taxable income. *Useful in tax planning
AVERAGE TAX RATE: represents a taxpayer’s average level of taxation on
each dollar of taxable income.
EFFECTIVE TAX RATE: 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.
Tax liability divided by ALL income (taxable and nontaxable)
3 Basic Tax Rate Structures: Proportional, Progressive, Regressive
PROPORTIONAL TAX RATE STRUCTURE: AKA flat tax, imposes a constant
tax rate throughout the tax base. Tax Base x Tax Rate Example: Corp
Income Tax
PROGRESSIVE TAX RATE STRUCTURE: imposes an increasing marginal tax
rate as the tax base increases. As the tax base increases, both the
marginal tax rate and the taxes paid increase. Common examples of
progressive tax rate structures include federal and most state income
taxes.
REGRESSIVE TAX RATE STRUCTURE: imposes a decreasing marginal tax
rate as the tax base increases. As the tax base increases, the taxes paid
increase, but the marginal tax rate decreases. Regressive tax rate
structures are not common. In the United States, the Social Security tax
and federal and state unemployment taxes employ a regressive tax rate
structure.
Employment taxes consist of the Old Age, Survivors, and Disability
Insurance (OASDI) tax, commonly called the Social Security tax, and the
Medical Health Insurance (MHI) tax, known as the Medicare tax. The
Social Security tax pays the monthly retirement, survivor, and disability
benefits for qualifying individuals, whereas the Medicare tax pays for
medical insurance for individuals who are elderly or disabled.
Employers are also required to pay federal and state unemployment
taxes, which fund temporary unemployment benefits for individuals
terminated from their jobs without cause.
EXCISE TAXES (PROPORTIONAL): taxes levied on the retail sale of
particular products. Differ from other taxes in that the tax base for an
excise tax typically depends on the quantity purchased rather than a
monetary amount.
TRANSFER TAXES—estate and gift taxes—can be substantial for certain
individual taxpayers and have been the subject of much debate in recent
years. The estate tax (labeled the “death tax” by its opponents) and gift
taxes are based on the fair market values of wealth transfers made upon
death or by gift,
AD VALOREM TAXES: tax base for each is the fair market value of the
property, and both are generally collected annually (if imposed at all).
EXPLICIT TAXES: directly imposed by a government and are easily
quantified. Implicit taxes, on the other hand, are indirect taxes—not paid
directly to the government—that result from a tax advantage the
government grants to certain transactions to satisfy social, economic, or
other objectives.
IMPLICIT TAXES: reduced before-tax return that a tax-favored asset
produces because of its tax-advantaged status.
Judging the sufficiency of a tax system means assessing the amount of the
tax revenues it must generate and ensuring that it provides them.
One option in forecasting revenue is to ignore how taxpayers may alter
their activities in response to a tax law change and instead base projected
tax revenues on the existing state of transactions, a process referred to as
static forecasting. However, this type of forecasting may result in a large
discrepancy in projected versus actual tax revenues if taxpayers do
change their behavior.
The other choice is to attempt to account for possible taxpayer responses
to the tax law change, a process referred to as dynamic forecasting
*Taxes can be estimated in annual income remains the same*
The income effect predicts that when taxpayers are taxed more (when,
say, a tax rate inc [Show Less]