Federal Taxation Chapters 1-3 Exam
100% Correct!!
What important questions should you ask yourself about taxes for business decisions? -
ANSWERSWhat organizational form should a business use?
Where should the business be located?
How should the business compensate employees?
How should the business acquisitions be structured?
What is the appropriated mix of debt and equity for the business?
Should the business rent or own its equipment and property?
How should the business distribute profits to its owners?
Define tax. - ANSWERSa payment required by a government that is unrelated to any
specific benefit or service received from the government
What is the general purpose of a tax? - ANSWERSto fund the operations of the
government (to raise revenue)
How do taxes and fines differ? - ANSWERStaxes are not meant to punish or prevent
illegal behavior
Define sin taxes. - ANSWERShigh surcharges imposed on the purchase of goods that
are considered socially less desirable
What are the key components of the definition of a tax? - ANSWERSthe payment is
required, imposed by a government agency, and not tied directly to the benefit received
by the taxpayer
Define earmarked tax. Why is it considered a tax? - ANSWERStax assessed for a
specific purpose (e.i. education); the payment made by the taxpayer does not directly
relate to the specific benefit received by the taxpayer
How do you calculate tax? - ANSWERStax = tax base * tax rate
Define tax base and tax rate. - ANSWERStax base - the item that is being taxed
tax rate - the level of taxes imposed on the tax base, usually expressed as a percentage
Define flat tax. - ANSWERSa tax in which a single tax rate is applied throughout the tax
base
Define graduated taxes. - ANSWERStaxes 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
, What are the three basic tax rate structures? - ANSWERSproportional, progressive, and
regressive
Define marginal tax rate. - ANSWERSthe tax rate that applies to the next additional
increment of a taxpayer's taxable income (or to deductions; marginal tax rate = change
in tax / change in taxable income
Define average tax rate. - ANSWERStaxpayer/s average level of taxation on each dollar
of taxable income; average tax rate = total tax/taxable income
Define effective tax rate. - ANSWERSthe taxpayer's average rate of taxation on each
dollar of total income; effective tax rate = total tax/total income
When will the effective and average tax rates be equal? - ANSWERSwhen the taxpayer
has no nontaxable income
Define proportional tax rate structure. - ANSWERSflat tax; imposes a constant tax rate
throughout the tax base; as tax base increases, taxes paid increases proportionally
What is the corporate tax rate? - ANSWERS21%
Define progressive tax rate structure. - ANSWERSimposes an increasing marginal tax
rate as the tax base increases; as tax base increases, both marginal tax rate and taxes
paid increases
What is the relationship between the average tax rate and marginal tax rate in a
progressive tax rate structure? - ANSWERSaverage tax rate is always less than or
equal to marginal tax rate
Define regressive tax rate structure. - ANSWERSimposes a decreasing marginal tax
rate as the tax base increases; as the tax base increases, the taxes paid increase, but
the marginal tax rate decreases
What are examples of taxes that use a regressive tax rate structure? - ANSWERSsocial
security and federal and state unemployment taxes
Define value-added tax. - ANSWERSa tax imposed on the producer of goods (and
services) based on the value added to the goods (services) at each stage of production;
common in Europe
Define income tax. - ANSWERSa tax in which the tax base is income; income taxes are
imposed by the federal government and by most states
What did the 16th amendment do? - ANSWERSremove any doubt as to whether
income taxes were allowed by the constitution
100% Correct!!
What important questions should you ask yourself about taxes for business decisions? -
ANSWERSWhat organizational form should a business use?
Where should the business be located?
How should the business compensate employees?
How should the business acquisitions be structured?
What is the appropriated mix of debt and equity for the business?
Should the business rent or own its equipment and property?
How should the business distribute profits to its owners?
Define tax. - ANSWERSa payment required by a government that is unrelated to any
specific benefit or service received from the government
What is the general purpose of a tax? - ANSWERSto fund the operations of the
government (to raise revenue)
How do taxes and fines differ? - ANSWERStaxes are not meant to punish or prevent
illegal behavior
Define sin taxes. - ANSWERShigh surcharges imposed on the purchase of goods that
are considered socially less desirable
What are the key components of the definition of a tax? - ANSWERSthe payment is
required, imposed by a government agency, and not tied directly to the benefit received
by the taxpayer
Define earmarked tax. Why is it considered a tax? - ANSWERStax assessed for a
specific purpose (e.i. education); the payment made by the taxpayer does not directly
relate to the specific benefit received by the taxpayer
How do you calculate tax? - ANSWERStax = tax base * tax rate
Define tax base and tax rate. - ANSWERStax base - the item that is being taxed
tax rate - the level of taxes imposed on the tax base, usually expressed as a percentage
Define flat tax. - ANSWERSa tax in which a single tax rate is applied throughout the tax
base
Define graduated taxes. - ANSWERStaxes 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
, What are the three basic tax rate structures? - ANSWERSproportional, progressive, and
regressive
Define marginal tax rate. - ANSWERSthe tax rate that applies to the next additional
increment of a taxpayer's taxable income (or to deductions; marginal tax rate = change
in tax / change in taxable income
Define average tax rate. - ANSWERStaxpayer/s average level of taxation on each dollar
of taxable income; average tax rate = total tax/taxable income
Define effective tax rate. - ANSWERSthe taxpayer's average rate of taxation on each
dollar of total income; effective tax rate = total tax/total income
When will the effective and average tax rates be equal? - ANSWERSwhen the taxpayer
has no nontaxable income
Define proportional tax rate structure. - ANSWERSflat tax; imposes a constant tax rate
throughout the tax base; as tax base increases, taxes paid increases proportionally
What is the corporate tax rate? - ANSWERS21%
Define progressive tax rate structure. - ANSWERSimposes an increasing marginal tax
rate as the tax base increases; as tax base increases, both marginal tax rate and taxes
paid increases
What is the relationship between the average tax rate and marginal tax rate in a
progressive tax rate structure? - ANSWERSaverage tax rate is always less than or
equal to marginal tax rate
Define regressive tax rate structure. - ANSWERSimposes a decreasing marginal tax
rate as the tax base increases; as the tax base increases, the taxes paid increase, but
the marginal tax rate decreases
What are examples of taxes that use a regressive tax rate structure? - ANSWERSsocial
security and federal and state unemployment taxes
Define value-added tax. - ANSWERSa tax imposed on the producer of goods (and
services) based on the value added to the goods (services) at each stage of production;
common in Europe
Define income tax. - ANSWERSa tax in which the tax base is income; income taxes are
imposed by the federal government and by most states
What did the 16th amendment do? - ANSWERSremove any doubt as to whether
income taxes were allowed by the constitution
