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Exam 1: An Introduction to Tax

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Question 1

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Jackson has the choice to invest in city of Mitchell bonds or Sundial, Incorporated corporate bonds that pay 9.5 percent interest. Jackson is a single taxpayer who earns $75,500 annually. Assume that the city of Mitchell bonds and the Sundial, Incorporated bonds have similar risk. What interest rate would the city of Mitchell have to pay in order to make Jackson indifferent between investing in the city of Mitchell and the Sundial, Incorporated bonds for 2020? (Use tax rate schedule.)

A) 7) 41 percent
B) 9) 50 percent
C) 7) 61 percent
D) 6) 81 percent
E) None of the choices are correct

F) C) and D)
G) A) and E)

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Question 2

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A 1 percent charge imposed by a local government on football tickets sold is not considered a tax if all proceeds are earmarked to fund local schools.

A) True
B) False

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Question 3

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Which of the following would not be a failure of the horizontal equity concept?

Heather, a single taxpayer who files as a head of household, earns $60,000 in taxable income and $5,000 in interest from an investment in city of Oxford bonds. Using the U.S. tax rate schedule for year 2020, how much federal tax will she owe? What is her average tax rate? What is her effective tax rate? What is her current marginal tax rate? If Heather has an additional $20,000 of tax deductions, what is her marginal tax rate on these deductions? (Round the tax rates to two decimal places, e.g., .12345 as 12.35 percent.)(Use tax rate schedule.)

Which of the following taxes represents the largest portion of U.S. federal tax revenues?

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

Curtis invests $450,000 in a city of Athens bond that pays 6.50 percent interest. Alternatively, Curtis could have invested the $450,000 in a bond recently issued by Initech, Incorporated that pays 7.75 percent interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24 percent. How much implicit tax would Curtis pay on the city of Athens bond?

Ariel invests $50,000 in a city of Las Vegas bond that pays 5 percent interest. Alternatively, Ariel could have invested the $50,000 in a bond recently issued by Jittery Joe's, Incorporated that pays 8 percent interest with similar non-tax characteristics as the city of Las Vegas bond (e.g., similar risk). Assume that Ariel's marginal tax rate is 24 percent. What is her after-tax rate of return for the city of Las Vegas bond? For the Jittery Joe's, Incorporated bond? How much explicit tax does Ariel pay on the city of Las Vegas bond? How much implicit tax does she pay on the city of Las Vegas bond? How much explicit tax would she have paid on the Jittery Joe's, Incorporated bond? Which bond should she choose?

Marc, a single taxpayer, earns $122,000 in taxable income and $3,800 in interest from an investment in city of Birmingham bonds. Using the U.S. tax rate schedule for year 2020, what is his current marginal tax rate?(Use tax rate schedule.)

In a regressive tax rate system, the marginal tax rate will often be greater than the average tax rate.

Leonardo, who is married but files separately, earns $80,400 of taxable income. He also has $15,400 in city of Tulsa bonds. His wife, Theresa, earns $50,400 of taxable income.If Leonardo earned an additional $30,400 of taxable income this year, what would be the marginal tax rate on the extra income for 2020? (Use tax rate schedule.) (Round your final answer to two decimal places.)

Horizontal equity is defined in terms of taxpayers in similar situations whereas vertical equity is defined in terms of taxpayers in different situations.

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

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

Curtis invests $250,000 in a city of Athens bond that pays 7 percent interest. Alternatively, Curtis could have invested the $250,000 in a bond recently issued by Initech, Incorporated that pays 9percent interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24 percent. What is Curtis's after-tax rate of return on the city of Athens bond?

The 9 ^th Amendment to the U.S. Constitution removed all doubt that a federal income tax was allowed under the U.S. Constitution.

Nelson has the choice between investing in a city of Fruithurst bond at 6.1 percent or a J.B. Ribs, Incorporated bond at 7.6 percent. Assuming that both bonds have the same nontax characteristics and that Nelson has a 40 percent marginal tax rate, in which bond should he invest? What interest rate offered by J.B. Ribs, Incorporated would make Nelson indifferent between investing in the two bonds?

Ricky and Lucy are debating several types of taxes. Their debate has focused on the different types of tax rate structures and whether they are "fair." Please define each tax rate structure, provide examples of each structure, and discuss how each structure may be viewed with respect to vertical equity.

Which of the following is a tax? I. A 1 percent special sales tax for funding local road construction. II) A fee paid to the state for a license to practice as an attorney. III) An income tax imposed by Philadelphia on persons working within the city limits. IV) A special property assessment for installing a new water system in the taxpayer's neighborhood.

A flat tax is an example of a graduated tax system.