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13 Cards in this Set
- Front
- Back
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tax rate
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the percentage rate applied to the tax base
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tax base
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the amount to which the tax rate is applied to determine the tax due.
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What are the 3 types of tax rate structures?
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1. Progressive tax rate
2. Proportional (flat) tax rate 3. Regressive tax rate |
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progressive tax rate
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a tax where the tax rate increases as the tax base increases
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proportional (flat) tax rate
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a tax where the tax rate is the same for all taxpayers regardless of their tax base
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regressive tax rate
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a tax where the tax rate decreases with an increase in the tax base.
e.g. of regressive taxes are Social Security and sales taxes. |
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Assume a tax system with a tax of $1,000 on taxable income of $10,000 and a $1,500 tax on taxable income of $20,000. Is the tax rate progressive, regressive, or flat?
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The tax system is regressive. Even though the amount of tax has increase, the tax rate decreased from 10% ($1,000/$10,000) to 7.5% ($1500/$20,000) as the tax base increased.
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marginal tax rate
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the tax rate applied to an incremental amount of taxable income that is added to the tax base.
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average tax rate
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the tax rate that is computed by dividing the total tax liability by the amount of taxable income.
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effective tax rate
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the tax rate that is computed by dividing the total tax liability by total ecomomic income.
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economic income
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income that includes all types of economic income that a taxpayer has for the year.
Economic income is broader than taxable income and includes all types of eludible incomes, such as tax-exempt bond interest. |
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Why is marginal tax rate much more important in the tax planning process than the aveerage tax rate?
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Because tax planning is done at the margin. When the taxpayer wants to know how much they can save through tx planning, the appropriate marginal tax rate produce the answer, not the average tax rate.
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How is taxable income and tax due computed?
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Total income (income from whatever source derived)
Minus: Exclusions (specially defined items, such as tax-exempt bond interest) Equals: Gross Income Minus: Deductions (business expenses and itemized deductions), and Exemptions (not applicable for corporations) Equals: Taxable Income Multiplied by: Applicable tax rate Equals: Income tax before credits Minus: Tax credits Equals: Total tax liability Minus: Prepayments Equals: Tax due or refund |
