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18 Cards in this Set

  • Front
  • Back
What did Holmes believe about Taxes?
That taxes are what we pay for a civilized society.
What is the theory of Horizontal Equity?
To treat those similarly situated in the same way.
What is the theory of Vertical Equity?
Those who are not similarly situated should not be treated in the same way.
What is the theory of Efficiency?
Tax should interfere as little as possible with people's economic behavior.
What is the theory of Administrability?
The simpler and more objective the system, the better.
What is the theory of Progressivity?
That those who are better off should pay at a higher rate.
What is the Progressivity Rate Structure?
10% on income from $1 to $10K
20% on income from 10K to 50K
30% on income from 50K to 100K
35% on all income above $100K
How is the Marginal Rate used?
It is used to make decisions and understand the impact of taxes.
What are the four criteria for Tax Rules?
1. Fairness (horizontal and vertical equity);
2. Administrative Feasibility (Cost; Objectivity; and Simplicity)
3. Economic Effects/Efficiency (Unintended effects; and Intended effects.)
4. Impact of Changing Rule (short-term [transition]; and long-term).
What is a TP's "Average/ Effective Tax Rate"?
The average percentage of tax you pay on your taxable income.
What is a TP's Marginal Rate?
The rate at which their last dollar is taxed (based upon a tax rate structure).
Why is it important for a TP to know his Marginal Tax Rate?
Because it helps them to make decisions and understand the impact of taxes. For example, it tells them how much an additional deduction will save the in taxes; Also helps them in deciding to take on additional work by figuring out how much money they will earn "after tax" and thus whether taking the additional work is worth the effort. If they're going to pay 35% tax on $1000 of income, is it really worth it?
Basic Computation to Determine Tax Due:
GI - Ded(s) = AGI
TI * TR = Tax (before credit)
Tax - Tax Credits = Tax Due
What is the difference between a credit and a deduction?
A credit reduces taxes; a deduction reduces taxable income.
What is a progressive tax rate structure?
As taxpayer's income increases, the rate of tax increases.
Definition of Marginal Rate
The rate applicable to the last dollar of income earned by the TP is the TP's marginal rate.
Definition of Effective Rate
TP's liability for the year, divided by his taxable income for the year. (It is the same as the TP's average rate).
Should we use Tax Law to encourage or discourage behavior?
yes. Tax law is going to have economic effect and consequences, so why shouldn't we take advantage of them? Taxes are something that reach a lot of people.