Solutions Manual—Taxation of Individuals, by Spilker et al.
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SOLUTION MANUAL FOR gy gy
McGraw-
Hill's Taxation of Individuals 2024 Edition, 15th Editio
gy gy gy gy gy gy gy
n Spilker
gy
Chapter 1-14 gy
Chapter 1 gy
An Introduction to Tax
gy gy gy
Discussion Questions gy
(1) [LO 1] Jessica’s friend Zachary once stated that he couldn’t understand why
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someone would take a tax course. Why is this a rather naïve view?
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Taxes are a part of everyday life and have a financial effect on many of the major
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personal decisions that individuals face (e.g., investment decisions, evaluating alt
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ernative job offers, saving for education expenses, gift or estate planning, etc.).
gy gy gy gy gy gy gy gy gy gy gy
(2) [LO 1] What are some aspects of business that require knowledge of taxation?
gy gy gy gy gy gy gy gy gy gy gy gy g
What are some aspects of personal finance that require knowledge of taxation?
y gy gy gy gy gy gy gy gy gy gy gy
Taxes play an important role in fundamental business decisions such as the followi
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ng:
What organizational form should a business use? gy gy gy gy gy gy
Where should the business locate? gy gy gy gy
How should business acquisitions be structured? gy gy gy gy gy
How should the business compensate employees? gy gy gy gy gy
What is the appropriate mix of debt and equity for the business?
gy gy gy gy gy gy gy gy gy gy gy
Should the business rent or own its equipment and property? gy gy gy gy gy gy gy gy gy
How should the business distribute profits to its owners? gy gy gy gy gy gy gy gy
One must consider all transaction costs (including taxes) to evaluate the merits of
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a transaction.
gy
Common personal financial decisions that taxes influence include: choosing inves
gy gy gy gy gy gy gy gy gy
tments, retirement planning, choosing to rent or buy a home, evaluating alternative
gy gy gy gy gy gy gy gy gy gy gy
job offers, saving for education expenses, and doing gift or estate planning.
gy gy gy gy gy gy gy gy gy gy gy gy
(3) [LO 1] Describe some ways in which taxes affect the political process in the
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United States. gy
U.S. presidential candidates often distinguish themselves from their opponents
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© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
1
, Solutions Manual—Taxation of Individuals, by Spilker et al. gy gy gy gy gy gy gy
based upon their tax rhetoric. Likewise, the major political parties generally have
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very diverse views of the appropriate way to tax the public. Determining who is ta
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
xed, what is taxed, and how much is taxed are difficult questions. Voters must hav
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
e a basic understanding of taxes to evaluate the merits of alternative tax proposals
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offered by opposing political candidates and their political parties.
gy gy gy gy gy gy gy gy gy
(4) [LO 2] Courtney recently received a speeding ticket on her way to the university.
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Her fine was $200. Is this considered a tax? Why or why not?
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The $200 speeding ticket is not considered a tax. Instead, it is considered a fine
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
or penalty. Taxes differ from fines and penalties because taxes are not intended t
gy gy gy gy gy gy gy gy gy gy gy gy gy
o punish or prevent illegal behavior.
gy gy gy gy gy
(5) [LO 2] Marlon and Latoya recently started building a house. They had to pay
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$300 to the county government for a building permit. Is the $300 payment a tax?
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Why or why not? gy gy gy
The building permit is not considered a tax because $300 payment is directly linke
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d to a benefit that they received (i.e., the ability to build a house).
gy gy gy gy gy gy gy gy gy gy gy gy gy
(6) [LO 2] To help pay for the city’s new stadium, the city of Birmingham recently
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
enacted a 1 percent surcharge on hotel rooms. Is this a tax? Why or why not?
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
The 1 percent surcharge is a tax. The 1 percent surcharge is an earmarked tax –
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
i.e., collected for a specific purpose. The surcharge is considered a tax because th
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
e tax payments made by taxpayers do not directly relate to the specific benefit rece
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
ived by the taxpayers.gy gy gy
(7) [LO 2] As noted in Example 1-
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2, tolls, parking meter fees, and annual licensing fees are not considered taxes.
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Can you identify other fees that are similar?
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There are several possible answers to this question. Some common examples inc
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lude entrance fees to national parks, tag fees paid to local/state government for a
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utomobiles, boats, etc. gy gy
(8) [LO 2] If the general objective of our tax system is to raise revenue, why does the
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
income tax allow deductions for charitable contributions and retirement plan cont
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ributions?
In addition to the general objective of raising revenue, Congress uses the federal ta
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x system to encourage certain behavior and discourage other behavior. The charit
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able contribution deduction is intended to encourage taxpayers to support the initi
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atives of charitable organizations, whereas deductions for retirement contribution
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s are intended to encourage retirement savings. Another objective of the tax system
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is to redistribute wealth.
gy gy gy gy
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
2
, Solutions Manual—Taxation of Individuals, by Spilker et al. gy gy gy gy gy gy gy
(9) [LO 2] One common argument for imposing so-
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called sin taxes is the social goal of reducing demand for such products. Using ci
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
garettes as an example, is there a segment of the population that might be sensiti
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ve to price and for whom high taxes might discourage purchases?
gy gy gy gy gy gy gy gy gy gy
The most obvious segment sensitive to price may be teenagers and younger adults t
gy gy gy gy gy gy gy gy gy gy gy gy gy
hat typically have less disposable income, although price sensitivity or elasticity w
gy gy gy gy gy gy gy gy gy gy gy
ill vary by taxpayer.
gy gy gy
(10) [LO 3] Dontae stated that he didn’t want to earn any more money because it
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
would ―put him in a higher tax bracket.‖ What is wrong with Dontae’s reasoni
gy gy gy gy gy gy gy gy gy gy gy gy gy
ng?
Although earning additional taxable income may increase Dontae‘s marginal tax r
gy gy gy gy gy gy gy gy gy gy
ate (i.e., put him in a higher tax bracket), the additional income earned does not af
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
fect the taxes that Dontae will pay on his existing income. Moving to a higher tax
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
bracket simply means that Dontae will pay a higher tax rate on the additional inco
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
me earned (not on the income that he already has).
gy gy gy gy gy gy gy gy gy
(11) [LO 3] Describe the three different tax rates discussed in the chapter and how
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taxpayers might use them. gy gy gy
The marginal tax rate is the tax rate that applies to the taxpayer‘s additional
gy gy gy gy gy gy gy gy gy gy gy gy gy
taxable income or deductions that the taxpayer is evaluating in a decision. Specific
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ally,
ΔTax ΔTax
(NewTotalTax OldTotalTax) (New
gy
Marginal Tax Rate g y g y g y
gy gy gy
ableIncome TaxableIncome OldTaxableIncome) gy
The marginal tax rate is particularly useful in tax planning because it represents th
gy gy gy gy gy gy gy gy gy gy gy gy gy
e rate of taxation or savings that would apply to additional taxable income or tax
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
deductions.
The average tax rate represents the taxpayer‘s average level of taxation on each
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dollar of taxable income. Specifically,
gy gy gy gy
TotalTax
Average Tax Rate = gy gy gy
TaxableIncome
The average tax rate is often used in budgeting tax expense as a portion of income (
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i.e., what percent of taxable income earned is paid in tax).
gy gy gy gy gy gy gy gy gy gy
The effective tax rate represents the taxpayer‘s average rate of taxation on each
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dollar of total income (i.e., taxable and nontaxable income). Specifically,
gy gy gy gy gy gy gy gy gy
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
3
, Solutions Manual—Taxation of Individuals, by Spilker et al.gy gy gy gy gy gy gy
Total Tax
Effective Tax Rate = g y
gy gy gy
Total Income gy
The effective tax rate provides a depiction of a taxpayer‘s tax burden because it de
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picts the taxpayer‘s total tax paid as a ratio of the sum of both taxable and nontax
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
able income earned. gy gy
(12) [LO 3] Which is a more appropriate tax rate to use to compare taxpayers’ tax
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
burdens – the average or the effective tax rate? Why?
gy gy gy gy gy gy gy gy gy
Relative to the average tax rate, the effective tax rate provides a better depiction
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of a taxpayer‘s tax burden because it depicts the taxpayer‘s total tax paid as a r
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
atio of the sum of both taxable and nontaxable income earned.
gy gy gy gy gy gy gy gy gy gy
(13) [LO 3] Describe the differences between a proportional, progressive, and
gy gy gy gy gy gy gy gy gy gy
regressive tax rate structure. gy gy gy
A proportional (flat) tax rate structure imposes a constant tax rate throughout the t
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ax base. In other words, as the tax base increases, the taxes paid increases, but th
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
e marginal tax rate remains constant. Because the marginal tax rate is constant ac
gy gy gy gy gy gy gy gy gy gy gy gy gy
ross all levels of the tax base, the average tax rate remains constant across the tax
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base and always equals the marginal tax rate. Common examples of proportional
y gy gy gy gy gy gy gy gy gy gy gy gy
taxes include sales taxes and excise taxes (i.e., taxes based on quantity such as gal
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
lons of gas purchased).
gy gy gy
A progressive tax rate structure imposes an increasing marginal tax rate as the ta
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x base increases. In other words, as the tax base increases, both the marginal tax
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
rate and the taxes paid increase. Common examples of progressive tax rate struct
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ures include federal and most state income taxes and federal estate and gift taxes.
gy gy gy gy gy gy gy gy gy gy gy gy gy
A regressive tax rate structure imposes a decreasing marginal tax rate as the tax
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base increases. In other words, as the tax base increases, the taxes paid increase
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s, but the marginal tax rate decreases. Regressive tax rate structures are not com
gy gy gy gy gy gy gy gy gy gy gy gy gy
mon. In the United States, the Social Security tax and the federal employment tax
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
employ a regressive tax rate structure. However, there are other regressive taxes
gy gy gy gy gy gy gy gy gy gy gy gy
when the tax is viewed in terms of effective tax rates. For example, a sales tax by d
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
efinition is a proportional tax – gy gy gy gy gy
i.e., as taxable purchases increase, the sales tax rate (i.e., the marginal tax rate) r
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
emains constant. gy
Nonetheless, when you consider that the proportion of your total income spent on tgy gy gy gy gy gy gy gy gy gy gy gy gy
axable purchases likely decreases as your total income increases, you can see the s
gy gy gy gy gy gy gy gy gy gy gy gy gy
ale tax as a regressive tax.
gy gy gy gy gy
(14) [LO 3] Arnold and Lilly recently had a discussion about whether a sales tax is a
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
proportional tax or a regressive tax. Arnold argued that a sales tax is regressive.
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
Lilly countered that the sales tax is a flat tax. Who was correct?
gy gy gy gy gy gy gy gy gy gy gy gy
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
4
gy gy gy gy gy gy gy
SOLUTION MANUAL FOR gy gy
McGraw-
Hill's Taxation of Individuals 2024 Edition, 15th Editio
gy gy gy gy gy gy gy
n Spilker
gy
Chapter 1-14 gy
Chapter 1 gy
An Introduction to Tax
gy gy gy
Discussion Questions gy
(1) [LO 1] Jessica’s friend Zachary once stated that he couldn’t understand why
gy gy gy gy gy gy gy gy gy gy gy
someone would take a tax course. Why is this a rather naïve view?
gy gy gy gy gy gy gy gy gy gy gy gy
Taxes are a part of everyday life and have a financial effect on many of the major
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
personal decisions that individuals face (e.g., investment decisions, evaluating alt
gy gy gy gy gy gy gy gy gy
ernative job offers, saving for education expenses, gift or estate planning, etc.).
gy gy gy gy gy gy gy gy gy gy gy
(2) [LO 1] What are some aspects of business that require knowledge of taxation?
gy gy gy gy gy gy gy gy gy gy gy gy g
What are some aspects of personal finance that require knowledge of taxation?
y gy gy gy gy gy gy gy gy gy gy gy
Taxes play an important role in fundamental business decisions such as the followi
gy gy gy gy gy gy gy gy gy gy gy gy
ng:
What organizational form should a business use? gy gy gy gy gy gy
Where should the business locate? gy gy gy gy
How should business acquisitions be structured? gy gy gy gy gy
How should the business compensate employees? gy gy gy gy gy
What is the appropriate mix of debt and equity for the business?
gy gy gy gy gy gy gy gy gy gy gy
Should the business rent or own its equipment and property? gy gy gy gy gy gy gy gy gy
How should the business distribute profits to its owners? gy gy gy gy gy gy gy gy
One must consider all transaction costs (including taxes) to evaluate the merits of
gy gy gy gy gy gy gy gy gy gy gy gy gy
a transaction.
gy
Common personal financial decisions that taxes influence include: choosing inves
gy gy gy gy gy gy gy gy gy
tments, retirement planning, choosing to rent or buy a home, evaluating alternative
gy gy gy gy gy gy gy gy gy gy gy
job offers, saving for education expenses, and doing gift or estate planning.
gy gy gy gy gy gy gy gy gy gy gy gy
(3) [LO 1] Describe some ways in which taxes affect the political process in the
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
United States. gy
U.S. presidential candidates often distinguish themselves from their opponents
gy gy gy gy gy gy gy gy
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
1
, Solutions Manual—Taxation of Individuals, by Spilker et al. gy gy gy gy gy gy gy
based upon their tax rhetoric. Likewise, the major political parties generally have
gy gy gy gy gy gy gy gy gy gy gy gy
very diverse views of the appropriate way to tax the public. Determining who is ta
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
xed, what is taxed, and how much is taxed are difficult questions. Voters must hav
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
e a basic understanding of taxes to evaluate the merits of alternative tax proposals
gy gy gy gy gy gy gy gy gy gy gy gy gy
offered by opposing political candidates and their political parties.
gy gy gy gy gy gy gy gy gy
(4) [LO 2] Courtney recently received a speeding ticket on her way to the university.
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
Her fine was $200. Is this considered a tax? Why or why not?
gy gy gy gy gy gy gy gy gy gy gy gy
The $200 speeding ticket is not considered a tax. Instead, it is considered a fine
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
or penalty. Taxes differ from fines and penalties because taxes are not intended t
gy gy gy gy gy gy gy gy gy gy gy gy gy
o punish or prevent illegal behavior.
gy gy gy gy gy
(5) [LO 2] Marlon and Latoya recently started building a house. They had to pay
gy gy gy gy gy gy gy gy gy gy gy gy gy
$300 to the county government for a building permit. Is the $300 payment a tax?
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
Why or why not? gy gy gy
The building permit is not considered a tax because $300 payment is directly linke
gy gy gy gy gy gy gy gy gy gy gy gy gy
d to a benefit that they received (i.e., the ability to build a house).
gy gy gy gy gy gy gy gy gy gy gy gy gy
(6) [LO 2] To help pay for the city’s new stadium, the city of Birmingham recently
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
enacted a 1 percent surcharge on hotel rooms. Is this a tax? Why or why not?
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
The 1 percent surcharge is a tax. The 1 percent surcharge is an earmarked tax –
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
i.e., collected for a specific purpose. The surcharge is considered a tax because th
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
e tax payments made by taxpayers do not directly relate to the specific benefit rece
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
ived by the taxpayers.gy gy gy
(7) [LO 2] As noted in Example 1-
gy gy gy gy gy gy
2, tolls, parking meter fees, and annual licensing fees are not considered taxes.
gy gy gy gy gy gy gy gy gy gy gy gy gy
Can you identify other fees that are similar?
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There are several possible answers to this question. Some common examples inc
gy gy gy gy gy gy gy gy gy gy gy
lude entrance fees to national parks, tag fees paid to local/state government for a
gy gy gy gy gy gy gy gy gy gy gy gy gy
utomobiles, boats, etc. gy gy
(8) [LO 2] If the general objective of our tax system is to raise revenue, why does the
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
income tax allow deductions for charitable contributions and retirement plan cont
gy gy gy gy gy gy gy gy gy gy
ributions?
In addition to the general objective of raising revenue, Congress uses the federal ta
gy gy gy gy gy gy gy gy gy gy gy gy gy
x system to encourage certain behavior and discourage other behavior. The charit
gy gy gy gy gy gy gy gy gy gy gy
able contribution deduction is intended to encourage taxpayers to support the initi
gy gy gy gy gy gy gy gy gy gy gy
atives of charitable organizations, whereas deductions for retirement contribution
gy gy gy gy gy gy gy gy
s are intended to encourage retirement savings. Another objective of the tax system
gy gy gy gy gy gy gy gy gy gy gy gy
is to redistribute wealth.
gy gy gy gy
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
2
, Solutions Manual—Taxation of Individuals, by Spilker et al. gy gy gy gy gy gy gy
(9) [LO 2] One common argument for imposing so-
gy gy gy gy gy gy gy
called sin taxes is the social goal of reducing demand for such products. Using ci
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
garettes as an example, is there a segment of the population that might be sensiti
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
ve to price and for whom high taxes might discourage purchases?
gy gy gy gy gy gy gy gy gy gy
The most obvious segment sensitive to price may be teenagers and younger adults t
gy gy gy gy gy gy gy gy gy gy gy gy gy
hat typically have less disposable income, although price sensitivity or elasticity w
gy gy gy gy gy gy gy gy gy gy gy
ill vary by taxpayer.
gy gy gy
(10) [LO 3] Dontae stated that he didn’t want to earn any more money because it
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
would ―put him in a higher tax bracket.‖ What is wrong with Dontae’s reasoni
gy gy gy gy gy gy gy gy gy gy gy gy gy
ng?
Although earning additional taxable income may increase Dontae‘s marginal tax r
gy gy gy gy gy gy gy gy gy gy
ate (i.e., put him in a higher tax bracket), the additional income earned does not af
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
fect the taxes that Dontae will pay on his existing income. Moving to a higher tax
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
bracket simply means that Dontae will pay a higher tax rate on the additional inco
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
me earned (not on the income that he already has).
gy gy gy gy gy gy gy gy gy
(11) [LO 3] Describe the three different tax rates discussed in the chapter and how
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
taxpayers might use them. gy gy gy
The marginal tax rate is the tax rate that applies to the taxpayer‘s additional
gy gy gy gy gy gy gy gy gy gy gy gy gy
taxable income or deductions that the taxpayer is evaluating in a decision. Specific
gy gy gy gy gy gy gy gy gy gy gy gy
ally,
ΔTax ΔTax
(NewTotalTax OldTotalTax) (New
gy
Marginal Tax Rate g y g y g y
gy gy gy
ableIncome TaxableIncome OldTaxableIncome) gy
The marginal tax rate is particularly useful in tax planning because it represents th
gy gy gy gy gy gy gy gy gy gy gy gy gy
e rate of taxation or savings that would apply to additional taxable income or tax
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
deductions.
The average tax rate represents the taxpayer‘s average level of taxation on each
gy gy gy gy gy gy gy gy gy gy gy gy
dollar of taxable income. Specifically,
gy gy gy gy
TotalTax
Average Tax Rate = gy gy gy
TaxableIncome
The average tax rate is often used in budgeting tax expense as a portion of income (
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
i.e., what percent of taxable income earned is paid in tax).
gy gy gy gy gy gy gy gy gy gy
The effective tax rate represents the taxpayer‘s average rate of taxation on each
gy gy gy gy gy gy gy gy gy gy gy gy
dollar of total income (i.e., taxable and nontaxable income). Specifically,
gy gy gy gy gy gy gy gy gy
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
3
, Solutions Manual—Taxation of Individuals, by Spilker et al.gy gy gy gy gy gy gy
Total Tax
Effective Tax Rate = g y
gy gy gy
Total Income gy
The effective tax rate provides a depiction of a taxpayer‘s tax burden because it de
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
picts the taxpayer‘s total tax paid as a ratio of the sum of both taxable and nontax
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
able income earned. gy gy
(12) [LO 3] Which is a more appropriate tax rate to use to compare taxpayers’ tax
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
burdens – the average or the effective tax rate? Why?
gy gy gy gy gy gy gy gy gy
Relative to the average tax rate, the effective tax rate provides a better depiction
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
of a taxpayer‘s tax burden because it depicts the taxpayer‘s total tax paid as a r
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
atio of the sum of both taxable and nontaxable income earned.
gy gy gy gy gy gy gy gy gy gy
(13) [LO 3] Describe the differences between a proportional, progressive, and
gy gy gy gy gy gy gy gy gy gy
regressive tax rate structure. gy gy gy
A proportional (flat) tax rate structure imposes a constant tax rate throughout the t
gy gy gy gy gy gy gy gy gy gy gy gy gy
ax base. In other words, as the tax base increases, the taxes paid increases, but th
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
e marginal tax rate remains constant. Because the marginal tax rate is constant ac
gy gy gy gy gy gy gy gy gy gy gy gy gy
ross all levels of the tax base, the average tax rate remains constant across the tax
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy g
base and always equals the marginal tax rate. Common examples of proportional
y gy gy gy gy gy gy gy gy gy gy gy gy
taxes include sales taxes and excise taxes (i.e., taxes based on quantity such as gal
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
lons of gas purchased).
gy gy gy
A progressive tax rate structure imposes an increasing marginal tax rate as the ta
gy gy gy gy gy gy gy gy gy gy gy gy gy
x base increases. In other words, as the tax base increases, both the marginal tax
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
rate and the taxes paid increase. Common examples of progressive tax rate struct
gy gy gy gy gy gy gy gy gy gy gy gy
ures include federal and most state income taxes and federal estate and gift taxes.
gy gy gy gy gy gy gy gy gy gy gy gy gy
A regressive tax rate structure imposes a decreasing marginal tax rate as the tax
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
base increases. In other words, as the tax base increases, the taxes paid increase
gy gy gy gy gy gy gy gy gy gy gy gy g y
s, but the marginal tax rate decreases. Regressive tax rate structures are not com
gy gy gy gy gy gy gy gy gy gy gy gy gy
mon. In the United States, the Social Security tax and the federal employment tax
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
employ a regressive tax rate structure. However, there are other regressive taxes
gy gy gy gy gy gy gy gy gy gy gy gy
when the tax is viewed in terms of effective tax rates. For example, a sales tax by d
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
efinition is a proportional tax – gy gy gy gy gy
i.e., as taxable purchases increase, the sales tax rate (i.e., the marginal tax rate) r
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
emains constant. gy
Nonetheless, when you consider that the proportion of your total income spent on tgy gy gy gy gy gy gy gy gy gy gy gy gy
axable purchases likely decreases as your total income increases, you can see the s
gy gy gy gy gy gy gy gy gy gy gy gy gy
ale tax as a regressive tax.
gy gy gy gy gy
(14) [LO 3] Arnold and Lilly recently had a discussion about whether a sales tax is a
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
proportional tax or a regressive tax. Arnold argued that a sales tax is regressive.
gy gy gy gy gy gy gy gy gy gy gy gy gy gy
Lilly countered that the sales tax is a flat tax. Who was correct?
gy gy gy gy gy gy gy gy gy gy gy gy
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy gy
4