ACCESS Test Bank for McGraw-Hill's Taxation of Individuals and Business
Entities 2023 Edition 14th Edition Spilker
Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al.
Chapter 1
An Introduction to Tax
INSTRUCTOR’S MANUAL
Learning Objectives
1-1. Demonstrate how taxes influence basic business, investment, personal, and political decisions.
1-2. Discuss what constitutes a tax and the general objectives of taxation.
1-3. Describe the different tax rate structures and calculate a tax.
1-4. Identify the various federal, state, and local taxes.
1-5. Apply appropriate criteria to evaluate alternate tax systems.
Teaching Suggestions
This chapter provides an overview of why taxes are important, what a tax is, how to calculate a tax,
various tax rates and tax rate structures, different types of federal, state, and local taxes, and how to
evaluate a tax system. One intent of the chapter is to get students thinking about the pervasive influence
of taxes and thus why it is important for a business or accounting student to understand taxes. Discussing
how taxes affect decisions that they will face (buying a house, investing for retirement, etc.) is an
effective way to pique students’ interest.
This chapter also provides an opportunity to motivate students by discussing the political importance of
taxes and the debate over alternative tax systems. Throughout most of the chapter, you can tie the material
discussed back to the debate over alternative tax systems. This is easily done in the section on evaluating
alternative tax systems and alternative tax rate structures but may also be done for other parts of the text.
For example, when discussing how to calculate a tax, you can point out that once the tax base is
computed, it is very easy to calculate virtually any tax. The difficulty is in determining the tax base. The
implication of this understanding is that the tax rate structure (e.g., progressive versus proportional) has
little effect on tax complexity.
In teaching this chapter, the time that you spend in class will vary based on how much discussion that you
want to incorporate regarding evaluating tax systems and implicit taxes. Most of the concepts in this
chapter are relatively straightforward, and thus, the chapter provides students with an introduction to tax
without overwhelming them on the first day or so of class. This is particularly important if your students
have some trepidation regarding their first tax course.
Implicit tax is typically a difficult concept for students to understand. The text provides a good overview
of implicit tax. If you plan to cover implicit tax in some detail, you might alert students that this is a
difficult concept and that they should be careful to get familiar with this discussion in the text prior to
class.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
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,ACCESS Test Bank for McGraw-Hill's Taxation of Individuals and Business ACCESS Test Bank for McGraw-Hill's Taxation of Individuals and Business
Entities 2023 Edition 14th Edition Spilker Entities 2023 Edition 14th Edition Spilker
Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al. Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al.
Assignment Matrix P1-41 20 min. Medium X
P1-42 20 min. Hard X X
Learning Objectives Text Features P1-43 15 min. Medium X X X
P1-44 15 min. Medium X X X
P1-45 15 min. Medium X X X
Research
Planning
Problem
P1-46 15 min. Medium X X X
Forms
Time
LO1
LO2
LO3
LO4
LO5
Difficulty P1-47 20 min. Hard X
P1-48 20 min. Hard X
DQ1-1 5 min. Easy X P1-49 20 min. Hard X X
DQ1-2 5 min. Easy X P1-50 20 min. Hard X X
DQ1-3 5 min. Easy X P1-51 20 min. Hard X
DQ1-4 5 min. Easy X P1-52 20 min. Hard X
DQ1-5 5 min. Medium X P1-53 20 min. Hard X
DQ1-6 5 min. Medium X P1-54 20 min. Hard X
DQ1-7 5 min. Medium X P1-55 20 min. Hard X
DQ1-8 10 min. Medium X P1-56 20 min. Hard X
DQ1-9 5 min. Medium X P1-57 25 min. Hard X X X
DQ1-10 10 min. Medium X P1-58 25 min. Hard X X X
DQ1-11 15 min. Medium X P1-59 25 min. Medium X X
DQ1-12 5 min. Medium X P1-60 25 min. Medium X X
DQ1-13 15 min. Medium X
DQ1-14 10 min. Medium X
DQ1-15 5 min. Easy X Lecture Notes
DQ1-16 15 min. Medium X
DQ1-17 5 min. Easy X 1) Who Cares About Taxes and Why?
a) Businesses
DQ1-18 5 min. Easy X
b) Politicians
DQ1-19 10 min. Medium X c) Individuals
DQ1-20 10 min. Medium X 2) What Qualifies as a Tax?
DQ1-21 10 min. Easy X a) Definition of a tax
DQ1-22 10 min. Easy X i) Key components of definition: payment is required, imposed by a government agency, and
DQ1-23 15 min. Medium X not directly tied to any benefit received by the taxpayer from the government
DQ1-24 15 min. Medium X b) Earmarked tax—definition and why this is considered a tax
c) Quiz students on tax definition using examples in the PowerPoint slides.
DQ1-25 15 min. Medium X
3) How to Calculate a Tax
DQ1-26 15 min. Medium X a) Tax = Tax Base × Tax Rate
DQ1-27 15 min. Medium X i) Tax Base—what is actually taxed, usually expressed in monetary terms
DQ1-28 15 min. Medium X ii) Tax Rate—level of taxes imposed on the tax base, usually expressed as a percentage
DQ1-29 15 min. Medium X X iii) Flat taxes
DQ1-30 20 min. Medium X X iv) Graduated taxes
DQ1-31 15 min. Medium X X v) Brackets
DQ1-32 15 min. Medium X b) Different ways to measure tax rates
DQ1-33 15 min. Medium X i) Marginal tax rate
P1-34 20 min. Medium X (1) Definition—tax rate that applies to the next additional increment of a taxpayer’s taxable
P1-35 20 min. Medium X income (or deductions)
P1-36 20 min. Medium X
P1-37 20 min. Medium X
P1-38 20 min. Medium X
P1-39 20 min. Medium X
P1-40 20 min. Medium X
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
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,ACCESS Test Bank for McGraw-Hill's Taxation of Individuals and Business ACCESS Test Bank for McGraw-Hill's Taxation of Individuals and Business
Entities 2023 Edition 14th Edition Spilker Entities 2023 Edition 14th Edition Spilker
Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al. Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al.
DTax (New Total Tax - Old Total Tax) v) Transfer taxes: The estate tax and gift taxes are based on the fair market values of wealth
(2) Formula— = transfers upon death or by gift, respectively.
DTaxable Income (New Taxable Income - Old Taxable Income) b) State and local taxes
(3) Useful in tax planning i) Income tax: Most states impose an income tax. The calculation varies by state.
ii) Average tax rate ii) Sales and use taxes: The tax base for a sales tax is the retail sales of goods and some services.
(1) Definition—a taxpayer’s average level of taxation on each dollar of taxable income Retailers collect and remit this tax. The tax base for the use tax is the retail price of goods
Total Tax owned, possessed, or consumed within a state that were not purchased within the state. The
(2) Formula— purpose of a use tax is to discourage taxpayers from buying goods out of state in order to
Taxable Income
(3) Useful in budgeting tax expenses or comparing the relative tax burdens of taxpayers avoid or minimize the sales tax in their home state.
iii) Effective tax rate iii) Property taxes: Assessed on the fair market value of real property and personal property.
(1) Definition—taxpayer’s average rate of taxation on each dollar of total income, including These are ad valorem taxes.
taxable and nontaxable income iv) Excise taxes
c) Implicit taxes
Total Tax i) Indirect taxes that result from a tax advantage the government grants to certain transactions.
(2) Formula—
Total Income ii) Defined as the reduced before-tax return that a tax-favored asset produces because of its tax-
(3) Provides the best depiction of a taxpayer’s tax burden advantaged status.
iv) Work example in the PowerPoint slides calculating tax liability, marginal, average, and iii) Difficult to quantify but important to understand in evaluating the relative tax burdens of tax-
effective tax rates. advantaged investments.
c) Tax rate structures iv) Walk through examples of implicit taxes in text.
i) Proportional tax rate structure 5) Evaluating Alternative Tax Systems
(1) Definition—also known as a flat tax, imposes a constant tax rate throughout the tax base a) Sufficiency
(2) As the tax base increases, the taxes paid increase proportionally. i) Involves assessing the aggregate size of the tax revenues that must be generated and making
(3) The marginal tax rate remains constant and equals the average tax rate across the tax sure that the tax system provides these revenues.
base. ii) Static forecasting: Forecasting revenue ignores how taxpayers might alter their activities in
(4) The most common example of a proportional tax is a sales tax. response to a tax law change and to base projected tax revenues on the existing state of
ii) Progressive tax rate structure transactions.
(1) Definition—imposes an increasing marginal tax rate as the tax base increases. iii) Dynamic forecasting: Forecasting that tries to predict possible responses by taxpayers to new
(2) As the tax base increases, both the marginal tax rate and the taxes paid increase. tax laws.
(3) Common examples of progressive tax rate structures include federal and state income iv) Income effect: As tax rates go up, people will work harder to maintain same after-tax income.
taxes and federal estate and gift taxes. v) Substitution effect: As tax rates go up, people will substitute nontaxable activities because the
iii) Regressive tax rate structure marginal value of taxable ones has decreased.
(1) Definition—imposes a decreasing marginal tax rate as the tax base increases. vi) Equity: A tax system is considered fair or equitable if the tax is based on the taxpayer’s
(2) As the tax base increases, the taxes paid increase, but the marginal tax rate decreases. ability to pay.
(3) Regressive tax rate structures are not common. In the United States, the Social Security vii) Horizontal equity: Two taxpayers in similar situations pay the same tax.
tax and federal and state unemployment taxes employ a regressive tax rate structure. viii) Vertical equity: Taxpayers with greater ability to pay tax pay more tax relative to taxpayers
iv) Discuss how different taxes can be viewed as having different rate structures when you with a lesser ability to pay tax. Vertical equity can be viewed in terms of tax dollars paid or
consider effective tax rates versus marginal tax rates (e.g., the sales tax). tax rates. Vertical equity may also be evaluated using effective tax rates instead of simply
4) Types of Taxes considering the tax rate structure.
a) Federal taxes ix) Certainty: Taxpayers should be able to determine when to pay the tax, where to pay the tax,
i) Income tax: Imposed on individuals, corporations, estates, and trusts. The largest federal tax. and how to determine the tax.
ii) Employment taxes: Employment taxes consist of the OASDI tax (Social Security tax) and the b) Convenience
MHI tax (Medicare tax). The tax base for these taxes is wages or salary and employers and i) A tax system should be designed to be collected without undue hardship to the taxpayer.
employees split these taxes equally. Self-employed individuals must pay these taxes in their c) Economy
entirety. i) A tax system should minimize the compliance and administration costs associated with the
iii) Unemployment taxes: Employers are also required to pay federal and state unemployment tax system.
taxes, which fund temporary unemployment benefits for individuals terminated from their
jobs without cause.
iv) Excise taxes: A tax based on quantity of goods or services purchased. Common examples
include taxes on alcohol, diesel fuel, gasoline, and tobacco products and on services such as
telephone use and air transportation.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
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, ACCESS Test Bank for McGraw-Hill's Taxation of Individuals and Business ACCESS Test Bank for McGraw-Hill's Taxation of Individuals and Business
Entities 2023 Edition 14th Edition Spilker Entities 2023 Edition 14th Edition Spilker
Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al. Solutions Manual—Taxation of Individuals and Business Entities, by Spilker et al.
d) Compare the income tax and sales tax using the equity, certainty, convenience, and economy
criteria.
e) Evaluating tax systems—the trade-off
Chapter 1
i) Much of the debate regarding alternative tax systems reduces to a choice between simplicity An Introduction to Tax
and fairness.
ii) Those taxes that generally are simpler and easier to administer are typically viewed as less SOLUTIONS MANUAL
fair. Those taxes that may be viewed as more fair are often more complex to administer.
Discussion Questions
Class Activities
(1) [LO 1] Jessica’s friend Zachary once stated that he couldn’t understand why
1. Suggested class activities someone would take a tax course. Why is this a rather naïve view?
o Designing a tax system: Tell students that the class has just seceded from the United States and Taxes are a part of everyday life and have a financial effect on many of the
needs to develop a tax system sufficient to generate $XX, XXX from the class members. Have major personal decisions that individuals face (e.g., investment decisions,
the students break into groups of three to five to design a tax system. As part of this task, they are evaluating alternative job offers, saving for education expenses, gift or estate
to evaluate the advantages and disadvantages of their tax. The group judged by the class to have planning, etc.).
the most advantageous tax system receives bonus participation points for the day.
o What is fair? Put two different tax systems in front of the class—one a proportional tax rate, one
(2) [LO 1] What are some aspects of business that require knowledge of taxation?
a progressive tax system. Poll the class by show of hands to determine which tax system each
person views as being fairer. Either in groups or as a class, have the students discuss why they
What are some aspects of personal finance that require knowledge of taxation?
view a specific system as being fairer. After the discussion, poll the class by show of hands to
determine if anyone has changed their view of which tax is fairer. Then discuss with the class that Taxes play an important role in fundamental business decisions such as the
there is no right answer as to which system is fairer. Instead, the answer depends on a person’s following:
individual views on fairness. • What organizational form should a business use?
o One versus the class: Have one student volunteer as the “one” with the other class members • Where should the business locate?
being the “group.” Use the key facts boxes in the text to develop multiple-choice questions (A, B, • How should business acquisitions be structured?
C answers) and then quiz the volunteer and the class on the questions. The volunteer and each • How should the business compensate employees?
class member will need to write the letters A, B, and C on separate sheets of paper and then hold
up their appropriate response to the question. Once a student (either the “one” or a member of the • What is the appropriate mix of debt and equity for the business?
“group”) misses a question, he or she is eliminated from the competition. After six (or some other • Should the business rent or own its equipment and property?
number) of questions, those students left standing receive bonus participation points for the day. • How should the business distribute profits to its owners?
o Discuss current tax policy topics: Find a few recent articles discussing tax reform, the current One must consider all transaction costs (including taxes) to evaluate the
income distribution, or the millionaire surtax. Post the articles so that students can read before merits of a transaction.
class and ask a few questions to begin the class discussion.
Common personal financial decisions that taxes influence include: choosing
2. Research activities investments, retirement planning, choosing to rent or buy a home, evaluating
alternative job offers, saving for education expenses, and doing gift or estate
o Show the class the IRS website and some of the materials included in the website—e.g.,
planning.
publications, IRS forms, etc.
o Have students research the presidential candidates’ tax platforms and compare and contrast the
likely changes to the Internal Revenue Code.
(3) [LO 1] Describe some ways in which taxes affect the political process in the
United States.
U.S. presidential candidates often distinguish themselves from their
opponents based upon their tax rhetoric. Likewise, the major political
parties generally have very diverse views of the appropriate way to tax the
public. Determining who is taxed, what is taxed, and how much is taxed are
difficult questions. Voters must have a basic understanding of taxes to
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. 1
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Entities 2023 Edition 14th Edition Spilker
Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al.
Chapter 1
An Introduction to Tax
INSTRUCTOR’S MANUAL
Learning Objectives
1-1. Demonstrate how taxes influence basic business, investment, personal, and political decisions.
1-2. Discuss what constitutes a tax and the general objectives of taxation.
1-3. Describe the different tax rate structures and calculate a tax.
1-4. Identify the various federal, state, and local taxes.
1-5. Apply appropriate criteria to evaluate alternate tax systems.
Teaching Suggestions
This chapter provides an overview of why taxes are important, what a tax is, how to calculate a tax,
various tax rates and tax rate structures, different types of federal, state, and local taxes, and how to
evaluate a tax system. One intent of the chapter is to get students thinking about the pervasive influence
of taxes and thus why it is important for a business or accounting student to understand taxes. Discussing
how taxes affect decisions that they will face (buying a house, investing for retirement, etc.) is an
effective way to pique students’ interest.
This chapter also provides an opportunity to motivate students by discussing the political importance of
taxes and the debate over alternative tax systems. Throughout most of the chapter, you can tie the material
discussed back to the debate over alternative tax systems. This is easily done in the section on evaluating
alternative tax systems and alternative tax rate structures but may also be done for other parts of the text.
For example, when discussing how to calculate a tax, you can point out that once the tax base is
computed, it is very easy to calculate virtually any tax. The difficulty is in determining the tax base. The
implication of this understanding is that the tax rate structure (e.g., progressive versus proportional) has
little effect on tax complexity.
In teaching this chapter, the time that you spend in class will vary based on how much discussion that you
want to incorporate regarding evaluating tax systems and implicit taxes. Most of the concepts in this
chapter are relatively straightforward, and thus, the chapter provides students with an introduction to tax
without overwhelming them on the first day or so of class. This is particularly important if your students
have some trepidation regarding their first tax course.
Implicit tax is typically a difficult concept for students to understand. The text provides a good overview
of implicit tax. If you plan to cover implicit tax in some detail, you might alert students that this is a
difficult concept and that they should be careful to get familiar with this discussion in the text prior to
class.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
1-1
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,ACCESS Test Bank for McGraw-Hill's Taxation of Individuals and Business ACCESS Test Bank for McGraw-Hill's Taxation of Individuals and Business
Entities 2023 Edition 14th Edition Spilker Entities 2023 Edition 14th Edition Spilker
Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al. Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al.
Assignment Matrix P1-41 20 min. Medium X
P1-42 20 min. Hard X X
Learning Objectives Text Features P1-43 15 min. Medium X X X
P1-44 15 min. Medium X X X
P1-45 15 min. Medium X X X
Research
Planning
Problem
P1-46 15 min. Medium X X X
Forms
Time
LO1
LO2
LO3
LO4
LO5
Difficulty P1-47 20 min. Hard X
P1-48 20 min. Hard X
DQ1-1 5 min. Easy X P1-49 20 min. Hard X X
DQ1-2 5 min. Easy X P1-50 20 min. Hard X X
DQ1-3 5 min. Easy X P1-51 20 min. Hard X
DQ1-4 5 min. Easy X P1-52 20 min. Hard X
DQ1-5 5 min. Medium X P1-53 20 min. Hard X
DQ1-6 5 min. Medium X P1-54 20 min. Hard X
DQ1-7 5 min. Medium X P1-55 20 min. Hard X
DQ1-8 10 min. Medium X P1-56 20 min. Hard X
DQ1-9 5 min. Medium X P1-57 25 min. Hard X X X
DQ1-10 10 min. Medium X P1-58 25 min. Hard X X X
DQ1-11 15 min. Medium X P1-59 25 min. Medium X X
DQ1-12 5 min. Medium X P1-60 25 min. Medium X X
DQ1-13 15 min. Medium X
DQ1-14 10 min. Medium X
DQ1-15 5 min. Easy X Lecture Notes
DQ1-16 15 min. Medium X
DQ1-17 5 min. Easy X 1) Who Cares About Taxes and Why?
a) Businesses
DQ1-18 5 min. Easy X
b) Politicians
DQ1-19 10 min. Medium X c) Individuals
DQ1-20 10 min. Medium X 2) What Qualifies as a Tax?
DQ1-21 10 min. Easy X a) Definition of a tax
DQ1-22 10 min. Easy X i) Key components of definition: payment is required, imposed by a government agency, and
DQ1-23 15 min. Medium X not directly tied to any benefit received by the taxpayer from the government
DQ1-24 15 min. Medium X b) Earmarked tax—definition and why this is considered a tax
c) Quiz students on tax definition using examples in the PowerPoint slides.
DQ1-25 15 min. Medium X
3) How to Calculate a Tax
DQ1-26 15 min. Medium X a) Tax = Tax Base × Tax Rate
DQ1-27 15 min. Medium X i) Tax Base—what is actually taxed, usually expressed in monetary terms
DQ1-28 15 min. Medium X ii) Tax Rate—level of taxes imposed on the tax base, usually expressed as a percentage
DQ1-29 15 min. Medium X X iii) Flat taxes
DQ1-30 20 min. Medium X X iv) Graduated taxes
DQ1-31 15 min. Medium X X v) Brackets
DQ1-32 15 min. Medium X b) Different ways to measure tax rates
DQ1-33 15 min. Medium X i) Marginal tax rate
P1-34 20 min. Medium X (1) Definition—tax rate that applies to the next additional increment of a taxpayer’s taxable
P1-35 20 min. Medium X income (or deductions)
P1-36 20 min. Medium X
P1-37 20 min. Medium X
P1-38 20 min. Medium X
P1-39 20 min. Medium X
P1-40 20 min. Medium X
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
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Entities 2023 Edition 14th Edition Spilker Entities 2023 Edition 14th Edition Spilker
Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al. Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al.
DTax (New Total Tax - Old Total Tax) v) Transfer taxes: The estate tax and gift taxes are based on the fair market values of wealth
(2) Formula— = transfers upon death or by gift, respectively.
DTaxable Income (New Taxable Income - Old Taxable Income) b) State and local taxes
(3) Useful in tax planning i) Income tax: Most states impose an income tax. The calculation varies by state.
ii) Average tax rate ii) Sales and use taxes: The tax base for a sales tax is the retail sales of goods and some services.
(1) Definition—a taxpayer’s average level of taxation on each dollar of taxable income Retailers collect and remit this tax. The tax base for the use tax is the retail price of goods
Total Tax owned, possessed, or consumed within a state that were not purchased within the state. The
(2) Formula— purpose of a use tax is to discourage taxpayers from buying goods out of state in order to
Taxable Income
(3) Useful in budgeting tax expenses or comparing the relative tax burdens of taxpayers avoid or minimize the sales tax in their home state.
iii) Effective tax rate iii) Property taxes: Assessed on the fair market value of real property and personal property.
(1) Definition—taxpayer’s average rate of taxation on each dollar of total income, including These are ad valorem taxes.
taxable and nontaxable income iv) Excise taxes
c) Implicit taxes
Total Tax i) Indirect taxes that result from a tax advantage the government grants to certain transactions.
(2) Formula—
Total Income ii) Defined as the reduced before-tax return that a tax-favored asset produces because of its tax-
(3) Provides the best depiction of a taxpayer’s tax burden advantaged status.
iv) Work example in the PowerPoint slides calculating tax liability, marginal, average, and iii) Difficult to quantify but important to understand in evaluating the relative tax burdens of tax-
effective tax rates. advantaged investments.
c) Tax rate structures iv) Walk through examples of implicit taxes in text.
i) Proportional tax rate structure 5) Evaluating Alternative Tax Systems
(1) Definition—also known as a flat tax, imposes a constant tax rate throughout the tax base a) Sufficiency
(2) As the tax base increases, the taxes paid increase proportionally. i) Involves assessing the aggregate size of the tax revenues that must be generated and making
(3) The marginal tax rate remains constant and equals the average tax rate across the tax sure that the tax system provides these revenues.
base. ii) Static forecasting: Forecasting revenue ignores how taxpayers might alter their activities in
(4) The most common example of a proportional tax is a sales tax. response to a tax law change and to base projected tax revenues on the existing state of
ii) Progressive tax rate structure transactions.
(1) Definition—imposes an increasing marginal tax rate as the tax base increases. iii) Dynamic forecasting: Forecasting that tries to predict possible responses by taxpayers to new
(2) As the tax base increases, both the marginal tax rate and the taxes paid increase. tax laws.
(3) Common examples of progressive tax rate structures include federal and state income iv) Income effect: As tax rates go up, people will work harder to maintain same after-tax income.
taxes and federal estate and gift taxes. v) Substitution effect: As tax rates go up, people will substitute nontaxable activities because the
iii) Regressive tax rate structure marginal value of taxable ones has decreased.
(1) Definition—imposes a decreasing marginal tax rate as the tax base increases. vi) Equity: A tax system is considered fair or equitable if the tax is based on the taxpayer’s
(2) As the tax base increases, the taxes paid increase, but the marginal tax rate decreases. ability to pay.
(3) Regressive tax rate structures are not common. In the United States, the Social Security vii) Horizontal equity: Two taxpayers in similar situations pay the same tax.
tax and federal and state unemployment taxes employ a regressive tax rate structure. viii) Vertical equity: Taxpayers with greater ability to pay tax pay more tax relative to taxpayers
iv) Discuss how different taxes can be viewed as having different rate structures when you with a lesser ability to pay tax. Vertical equity can be viewed in terms of tax dollars paid or
consider effective tax rates versus marginal tax rates (e.g., the sales tax). tax rates. Vertical equity may also be evaluated using effective tax rates instead of simply
4) Types of Taxes considering the tax rate structure.
a) Federal taxes ix) Certainty: Taxpayers should be able to determine when to pay the tax, where to pay the tax,
i) Income tax: Imposed on individuals, corporations, estates, and trusts. The largest federal tax. and how to determine the tax.
ii) Employment taxes: Employment taxes consist of the OASDI tax (Social Security tax) and the b) Convenience
MHI tax (Medicare tax). The tax base for these taxes is wages or salary and employers and i) A tax system should be designed to be collected without undue hardship to the taxpayer.
employees split these taxes equally. Self-employed individuals must pay these taxes in their c) Economy
entirety. i) A tax system should minimize the compliance and administration costs associated with the
iii) Unemployment taxes: Employers are also required to pay federal and state unemployment tax system.
taxes, which fund temporary unemployment benefits for individuals terminated from their
jobs without cause.
iv) Excise taxes: A tax based on quantity of goods or services purchased. Common examples
include taxes on alcohol, diesel fuel, gasoline, and tobacco products and on services such as
telephone use and air transportation.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
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, ACCESS Test Bank for McGraw-Hill's Taxation of Individuals and Business ACCESS Test Bank for McGraw-Hill's Taxation of Individuals and Business
Entities 2023 Edition 14th Edition Spilker Entities 2023 Edition 14th Edition Spilker
Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al. Solutions Manual—Taxation of Individuals and Business Entities, by Spilker et al.
d) Compare the income tax and sales tax using the equity, certainty, convenience, and economy
criteria.
e) Evaluating tax systems—the trade-off
Chapter 1
i) Much of the debate regarding alternative tax systems reduces to a choice between simplicity An Introduction to Tax
and fairness.
ii) Those taxes that generally are simpler and easier to administer are typically viewed as less SOLUTIONS MANUAL
fair. Those taxes that may be viewed as more fair are often more complex to administer.
Discussion Questions
Class Activities
(1) [LO 1] Jessica’s friend Zachary once stated that he couldn’t understand why
1. Suggested class activities someone would take a tax course. Why is this a rather naïve view?
o Designing a tax system: Tell students that the class has just seceded from the United States and Taxes are a part of everyday life and have a financial effect on many of the
needs to develop a tax system sufficient to generate $XX, XXX from the class members. Have major personal decisions that individuals face (e.g., investment decisions,
the students break into groups of three to five to design a tax system. As part of this task, they are evaluating alternative job offers, saving for education expenses, gift or estate
to evaluate the advantages and disadvantages of their tax. The group judged by the class to have planning, etc.).
the most advantageous tax system receives bonus participation points for the day.
o What is fair? Put two different tax systems in front of the class—one a proportional tax rate, one
(2) [LO 1] What are some aspects of business that require knowledge of taxation?
a progressive tax system. Poll the class by show of hands to determine which tax system each
person views as being fairer. Either in groups or as a class, have the students discuss why they
What are some aspects of personal finance that require knowledge of taxation?
view a specific system as being fairer. After the discussion, poll the class by show of hands to
determine if anyone has changed their view of which tax is fairer. Then discuss with the class that Taxes play an important role in fundamental business decisions such as the
there is no right answer as to which system is fairer. Instead, the answer depends on a person’s following:
individual views on fairness. • What organizational form should a business use?
o One versus the class: Have one student volunteer as the “one” with the other class members • Where should the business locate?
being the “group.” Use the key facts boxes in the text to develop multiple-choice questions (A, B, • How should business acquisitions be structured?
C answers) and then quiz the volunteer and the class on the questions. The volunteer and each • How should the business compensate employees?
class member will need to write the letters A, B, and C on separate sheets of paper and then hold
up their appropriate response to the question. Once a student (either the “one” or a member of the • What is the appropriate mix of debt and equity for the business?
“group”) misses a question, he or she is eliminated from the competition. After six (or some other • Should the business rent or own its equipment and property?
number) of questions, those students left standing receive bonus participation points for the day. • How should the business distribute profits to its owners?
o Discuss current tax policy topics: Find a few recent articles discussing tax reform, the current One must consider all transaction costs (including taxes) to evaluate the
income distribution, or the millionaire surtax. Post the articles so that students can read before merits of a transaction.
class and ask a few questions to begin the class discussion.
Common personal financial decisions that taxes influence include: choosing
2. Research activities investments, retirement planning, choosing to rent or buy a home, evaluating
alternative job offers, saving for education expenses, and doing gift or estate
o Show the class the IRS website and some of the materials included in the website—e.g.,
planning.
publications, IRS forms, etc.
o Have students research the presidential candidates’ tax platforms and compare and contrast the
likely changes to the Internal Revenue Code.
(3) [LO 1] Describe some ways in which taxes affect the political process in the
United States.
U.S. presidential candidates often distinguish themselves from their
opponents based upon their tax rhetoric. Likewise, the major political
parties generally have very diverse views of the appropriate way to tax the
public. Determining who is taxed, what is taxed, and how much is taxed are
difficult questions. Voters must have a basic understanding of taxes to
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