Chp 1: An Introduction To Tax

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Ad valorem tax

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A tax based on the value of property.

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Average Tax rate

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A taxpayer's average level of taxation on each dollar of taxable income.

total tax/taxable income

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Bracket

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a subset of the tax base subject to a specific tax rate.

Brackets are common to graduated taxes.

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Certainty

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1. One of the criteria used to evaluate tax systems.

2. Taxpayers should be able to determine when, where, and how much tax to pay.

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Convenience

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1. One of the criteria used to evaluate tax systems.

2. Tax system should be designed to facilitate the collection of tax revenues without undue hardship on the taxpayer or the government.

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dynamic forecasting

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The process of forecasting tax revenues that incorporates into the forecast how taxpayers may alter their activities in response to a tax law change.

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Earmarked Tax

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A tax assessed for a specific purpose(e.g. for education)

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Economy

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1. One of the criteria used to evaluate tax systems.

2. A tax system should minimize its compliance and administration costs.

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Effective tax rate

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Taxpayer's average rate of taxation on each dollar of total income(taxable and nontaxable income)

Total tax/total income

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Employment Taxes

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Taxes consisting of Old Age, Survivors, and Disability Insurance(OASDI) tax, commonly called the Social Security Tax, and the Medical Health Insurance tax(MHI) known as the Medicare Tax.

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Equity

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1. One of the criteria used to evaluate the tax system.

2. Tax system is considered fair or equitable if the tax is based on the taxpayer's ability to pay

3. Taxpayers with a greater ability to pay tax, pay more tax.

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Estate

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Fiduciary legal entity that comes into existence upon a person's death and is empowered by the probate court to gather and transfer the decedent's real and personal property.

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Excise taxes

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1. Taxes levied on the retail sale of particular products.

2. Differ from other taxes in that the tax base depends on the quantity purchased, rather than a monetary amount.

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Explicit Tax

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A tax directly imposed by a government.

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Flat Tax

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A tax in which a single tax rate is applied throughout the tax base.

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Gift

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A transfer of property where no, or inadequate, consideration is paid for the property.

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Graduated taxes

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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.

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Horizontal equity

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1. One of the dimensions of equity.

2. Achieved if taxpayers in similar situations pay the same tax.

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Implicit tax

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1. Indirect taxes that result from a tax advantage the government grants to certain transactions to satisfy social, economic,l or other objectives.

2. Reduced before-tax return that a tax-favored asset produces because of its tax-advantaged status.

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Income Effect

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1. One of the two basic responses that a taxpayer may have when taxes increase.

2. Predicts that when taxpayers are taxed more, they will work harder to generate the same after-tax dollars.

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Income tax

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1. A tax in which the tax base is income.

2. Imposed by the federal government and most states.

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Local tax

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Taxes imposed by local governments(cities, countries, school districts)

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Marginal tax rate

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The tax rate that applies to the next additional increment of a taxpayer's taxable income(or to deductions).

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Medicare tax

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1. MHI Tax.

2. Helps pay medical costs for qualifying individuals.

3. Tax rate for employees is 1.45% on salary or wages up to $200,000(varies with married filing status).

4. Tax rate is 2.35% on salary or wages in excess of $200,000(varies with married filing status)

5. For employers, tax rate is 1.45% of employee salary or wages, regardless of the amount of salary or wages.

6. Self-employed taxpayers pay both the the employee and employer medicare tax.

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Personal Property Tax

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A tax on the fair market value of all types of tangible and intangible property, except real property.

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Progressive Tax rate structure

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1. Tax rate structure that imposes an increasing marginal tax rate as the tax base increases.

2. As the tax base increases, both the marginal tax rate and the taxes paid increase.

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Proportional tax rate structure

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1. Also known as a flat tax, this tax rate structure imposes a constant tax rate throughout the tax base.

2. As the tax base increases, the taxes paid increase proportionally.

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Real property tax

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A tax on the fair market value of land and structures permanently attached to land.

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Regressive Tax rate structure

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1. Tax rate structure that imposes a decreasing marginal tax rate as the tax base increases.

2. As the tax base increases, the taxes paid increase, but the marginal tax rate decreases.

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Sales Tax

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1. A tax imposed on the retail price of goods.

2. Retailers are responsible for collecting and remitting the tax; typically collected at the point of sale.

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Self-employment tax

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1. Social Security and Medicare taxes paid by the self-employed on a taxpayer's net earnings from self-employment.

2. Synonymous with FICA tax.

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Sin Taxes

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Taxes imposed on the purchase of goods that are considered socially less desirable.

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Social Security Tax

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1. OASDI tax.

2. Intended to provide basic pension coverage for the retired and disabled.

3. Employees pay Social Security tax at a rate of 6.2%(4.2% in 2011 and 2012) on the wage base(employers also pay 6.2%).

4. Self-employed taxpayers are subject to a Social Security tax at a rate of 12.4% on their net earnings from self-employment.

5. The base on which Social Security taxes are paid is limited to an annually determined amount of wages and/or net earnings from self-employment.

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State tax

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A tax imposed by one of the 50 U.S. states.

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Static Forecasting

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The process of forecasting tax revenues based on the existing state of transactions while ignoring how taxpayers may alter their activities in response to a tax law change.

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Substitution effect

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1. One of the two basic responses that a taxpayer may have when taxes increase.

2. Predicts that when taxpayers are taxed more, rather than work more, they will substitute nontaxable activities(e.g. leisure pursuits) for taxable ones because the marginal value of taxable activities has decreased.

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Sufficiency

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1. A standard for evaluating a good tax system.

2. Assessing the aggregate size of tax revenues that must be generated and ensuring that the tax system provides these revenues.

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Tax

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A payment required by a government that is unrelated to any specific benefit or service received from the government.

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Tax base

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The item that is being taxed(e.g., purchase price of a good, taxable income, etc.)

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Tax rate

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The level of taxes imposed on the tax base, usually expressed as a percentage.

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Transfer taxes

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1. Taxes on the transfer of wealth from one taxpayer to another.

2. Estate and gift taxes are two examples of transfer taxes.

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Unemployment taxes

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The tax pays for the temporary unemployment benefits for individuals terminated from their jobs without cause.

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Use tax

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A tax imposed on the retail price of goods owned, possessed, or consumed within a state that were not purchased within the state.

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Value-added tax

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A tax imposed on the producer of goods(and services) on the value of goods added at each state of production. Are common in Europe.

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Vertical Equity

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1. One of the dimensions of equity

2. Achieved when taxpayers with a greater ability to pay tax, pay more taxes relative to taxpayers with a lesser ability to pay tax.