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Exam 1: An Introduction to Tax

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Question 31

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Al believes that SUVs have negative social and environmental effects because of their increased carbon monoxide emissions. He proposes eliminating sales taxes on smaller automobiles in favor of higher sales taxes levied on SUVs. Al performs some calculations and comes to the conclusion that based on the current number of SUVs owned in the U.S. exactly the same amount of total sales tax will be collected under his reformed system. Which of the following concepts explains why Al's idea may not work?

A) The ability to pay principle
B) Horizontal equity
C) Substitution effect
D) Vertical equity
E) None of these

F) B) and D)
G) All of the above

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Question 32

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Estimated tax payments are one way the federal income tax system addresses the "certainty" criterion in evaluating tax systems.

A) True
B) False

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Question 33

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Consider the following tax rate structure. Is it horizontally equitable? Why or why not? Is it vertically equitable? Why or why not?

Regressive tax rate structures are typically considered to be vertically equitable.

Given the following tax structure, what amount of tax would need to be assessed on Carrie to make the tax horizontally equitable? What is the minimum tax that Simon should pay to make the tax structure vertically equitable based on Fantasia's tax rate? This would result in what type of tax rate structure? $\begin{array} { ccc } \underline{\text { Taxpayer }} & \underline{\text { Salary }} & \underline{\text { Total Tax}} \\\\\text { Fantasia} & 20,000 & 1,500\\\text { Simon} & 30,000 & 2,000\\\text { Carrie} & 20,000 & ???\\\end{array}$

Congress recently approved a new, bigger budget for the IRS. What taxation concept evaluates the cost of administering our tax law?

In addition to raising revenues, specific U.S. taxes may have other objectives (e.g., economic or social objectives).

A common example of an employment related tax is the Medicare tax.

One benefit of a sin tax (e.g., a tax on cigarettes) is that it should increase the demand for the products being taxed.

Marc, a single taxpayer, earns $60,000 in taxable income and $5,000 in interest from an investment in city of Birmingham Bonds. Using the U.S. tax rate schedule for year 2014, what is his average tax rate (rounded) ?

The largest federal tax, in terms of revenue collected, is the social security tax.

Which of the following is true regarding tax-advantaged assets?

George recently paid $50 to renew his driver's license. The $50 payment is considered a tax.

The tax base for the federal income tax is taxable income.

One key characteristic of a tax is that it is a required payment to a governmental agency.

In a proportional (flat) tax rate system, the marginal tax rate will always equal the average tax rate.

A taxpayer's average tax rate is the most appropriate tax rate to use in tax planning.

Tax policy rarely plays an important part in presidential campaigns.

The estate tax is assessed based on the fair market values of transfers made during a taxpayer's life.

To calculate a tax, you need to know: I. the tax base II) the taxing agency III) the tax rate IV) the purpose of the tax