ACC330 Midterm Exam 1 With Accurate Solutions
Tax - ANSWER Money raised to run/support the cost of the government. Taxes aren't like
fines because they aren't a punishment, but they aren't voluntary either. Taxes are
pervasive because they are so widespread, come in many varieties, and affect all
aspects of life. Taxes are dynamic because they change so often.
Taxpayer - ANSWER A person or organization required by law to pay a tax to a
governmental authority. "Person" = people and corporations, because corps are
distinct from their shareholders and they have their own rights. Corps are taxpayers in
their own right. We are all taxpayers
Incidence - ANSWER The ultimate economic burden represented by a tax. Who bears
the ultimate burden of the tax. People assume the person/organization paying the tax
bears the incidence, but sometimes the burden can be shifted to another party (ex: govt
raises taxes for a corp, so they raise prices. Thus the consumer bears the incidence).
Jurisdiction - ANSWER Right of the govt. to levy tax on a specific person/organization.
Comes from a link between govt. and the taxpayer (like they live here). Federal, state,
county, municipality. Govt. can also tax anyone who makes money here.
Basic formula for calculating taxes - ANSWER Tax= rate x base. Where base is taxable
income and rate is the tax rate. Revenue earned from this is all the tax collected by the
govt. and available for public use.
Different rate structures - ANSWER Flat= a single percentage applying to the entire tax
base.
Graduated= multiple percentages applying to specified brackets of the tax base.
Two main types of taxes - ANSWER Transactional based tax= triggered when an event
occurs (like someone buying something). This includes normal sales tax, estate tax, as
well as excise taxes. People can control this sometimes in that if they avoided the event
they wouldn't have to pay the tax.
Activity based tax= comes from the cumulative result of an ongoing activity (like your
job). This includes the income tax- imposed on the periodic inflow of wealth from a
person's economic activities.
Earmarked taxes - ANSWER Revenues from some taxes are reserved to finance specific
projects. Ex: property taxes earmarked to pay for the public school system. Another
example is Social Security.
Local taxes - ANSWER These are largely property taxes. They are imposed on real
property taxes and personal property taxes. These are also called ad valorem taxes.
Real= tax on the ownership of real property in the jurisdiction. This is called realty (land
,and buildings on that land). Levied every year and based on the market value of the
realty determined by the local govt. Tax assessors update/change the the tax base on
properties ever 6-8 yrs.
Personal= tax on ownership of any asset that isn't realty. This is called personalty.
Individuals determine the value of these assets. Includes household tangibles (cars,
etc.), business tangibles (inventory), and intangibles (stocks and bonds, marketable
securities).
Abatements - ANSWER Temporary tax exemptions for a period of time provided by the
govt. This is to lure commercial enterprises in, and benefit the local economy.
State taxes - ANSWER Sales and income taxes account for like 90% of this.
Sales tax= based on retail price of tangible personalty. Levied on the purchaser, paid to
the govt. by the seller.
Use tax= Similar to sales tax but applies to goods that a person didn't pay sales tax on.
This is usually stuff purchased online. This is usually very easy for people to avoid bc
they can just lie about it.
Excise tax= sin taxes. Levied on stuff like alcohol and cigarettes.
Personal income tax= obv.
Corporate income tax= also obv.
Federal taxes - ANSWER Started in 1913. We use the Internal Revenue Code of 1986.
Income tax is the biggest source of general revenue for the govt. Social Security and
Medicare are the two biggest programs.
Employment tax= pay for Social Security and Medicare. Based on wages paid to
employees by employers, and net income from self employed people.
Unemployment tax= based on annual compensation paid to employees. These are
earmarked to provide benefits for unemployed people.
Excise tax= same as state.
Transfer tax= based on the value of an individual's wealth transferred by gift or at death.
Income tax= obv. Makes the most $$$$$.
Foreign taxes - ANSWER Income tax= obv.
Value-added tax (VAT)= levied on firms engaged in any phase of the production of
goods. Based on the incremental value that the firm adds to the goods. Manufacturer M
sells to Firm W. Costs M $40 to make something, and it sells it to W for $46. M owes a tax
on that $6 (a small percentage). If W sells it for $50, it owes a tax on the $4 value it added
on each unit sold.
, Jurisdictional competition - ANSWER Taxing jurisdictions overlap, and thus diff. parts of
the govt. are competing for the same revenues. As a result, sometimes diff. taxes in diff.
jurisdictions cause business to move around for the benefit. This creates competition
between jurisdictions who want economic benefits for their area.
Taxes are dynamic - ANSWER Taxes are in a constant state of flux. Always changing and
being reassessed. Tax base can change, tax rate can change, etc.
Sources of federal tax law - ANSWER Statutory law= Internal revenue code of 1986.
Divided into sections, subsections, paragraphs, subparagraphs and so on.
Administrative pronouncements= Department of the Treasury writes treasury
regulations that interpret the rules in the IRC. The IRS (Internal Revenue Service) is
responsible for enforcement of the law and collection of the tax. They provide more
rulings (explain how IRS applies the tax law to a set of facts) and procedures (advise
taxpayers how to comply with admin/procedural matters). These are published in IRBs
(Internal Revenue Bulletins) compiled into semiannual Cumulative Bulletins (CBs).
Judicial decisions= People who disagree with how the tax law applies to the situation
can take the issue to federal court. The decisions handed down each year clarify the tax
law further.
Incidence Example - ANSWER Mr. P owns an apartment complex. Since his taxes
increase, he spends less on exterior maintenance and landscaping. Thus, Mr. P bears
the incidence of the tax in that his property values go down, and his neighbors bear the
incidence of the tax because their property values might go down too.
Difference between the authority of the IRC vs Treasury regulations. - ANSWER IRC is
actual law, and thus has the most weight. Treasury regulations just interpret the IRC.
However, since congress authorized the Treasury to write the regulations, they are the
official govt. interpretation of the IRC law, and are very important too.
Sales tax example - ANSWER City govt increased sales tax from 1% to 2%. However the
cities sales tax revenues only increased by 30%, even though they doubled the rate.
Why? The tax increase might have reduced the aggregate demand for consumer goods.
Another possibility is people are traveling to other jurisdictions with lower tax rates, or
buying stuff through mail catalogs or online.
Jurisdiction example - ANSWER Does the U.S. have jurisdiction to tax:
1. Mrs. CM who is a citizen of Brazil and permanent resident of Florida. YES bc she is a
permanent resident.
2. Mrs. CM who is a citizen and resident of Brazil, but owns a real estate company in the
U.S. that makes 100k a year. YES but only on the income from her business.
3. Mrs. CM who is a citizen and resident of Brazil, and has no property or business in the
U.S. NO.
Tax - ANSWER Money raised to run/support the cost of the government. Taxes aren't like
fines because they aren't a punishment, but they aren't voluntary either. Taxes are
pervasive because they are so widespread, come in many varieties, and affect all
aspects of life. Taxes are dynamic because they change so often.
Taxpayer - ANSWER A person or organization required by law to pay a tax to a
governmental authority. "Person" = people and corporations, because corps are
distinct from their shareholders and they have their own rights. Corps are taxpayers in
their own right. We are all taxpayers
Incidence - ANSWER The ultimate economic burden represented by a tax. Who bears
the ultimate burden of the tax. People assume the person/organization paying the tax
bears the incidence, but sometimes the burden can be shifted to another party (ex: govt
raises taxes for a corp, so they raise prices. Thus the consumer bears the incidence).
Jurisdiction - ANSWER Right of the govt. to levy tax on a specific person/organization.
Comes from a link between govt. and the taxpayer (like they live here). Federal, state,
county, municipality. Govt. can also tax anyone who makes money here.
Basic formula for calculating taxes - ANSWER Tax= rate x base. Where base is taxable
income and rate is the tax rate. Revenue earned from this is all the tax collected by the
govt. and available for public use.
Different rate structures - ANSWER Flat= a single percentage applying to the entire tax
base.
Graduated= multiple percentages applying to specified brackets of the tax base.
Two main types of taxes - ANSWER Transactional based tax= triggered when an event
occurs (like someone buying something). This includes normal sales tax, estate tax, as
well as excise taxes. People can control this sometimes in that if they avoided the event
they wouldn't have to pay the tax.
Activity based tax= comes from the cumulative result of an ongoing activity (like your
job). This includes the income tax- imposed on the periodic inflow of wealth from a
person's economic activities.
Earmarked taxes - ANSWER Revenues from some taxes are reserved to finance specific
projects. Ex: property taxes earmarked to pay for the public school system. Another
example is Social Security.
Local taxes - ANSWER These are largely property taxes. They are imposed on real
property taxes and personal property taxes. These are also called ad valorem taxes.
Real= tax on the ownership of real property in the jurisdiction. This is called realty (land
,and buildings on that land). Levied every year and based on the market value of the
realty determined by the local govt. Tax assessors update/change the the tax base on
properties ever 6-8 yrs.
Personal= tax on ownership of any asset that isn't realty. This is called personalty.
Individuals determine the value of these assets. Includes household tangibles (cars,
etc.), business tangibles (inventory), and intangibles (stocks and bonds, marketable
securities).
Abatements - ANSWER Temporary tax exemptions for a period of time provided by the
govt. This is to lure commercial enterprises in, and benefit the local economy.
State taxes - ANSWER Sales and income taxes account for like 90% of this.
Sales tax= based on retail price of tangible personalty. Levied on the purchaser, paid to
the govt. by the seller.
Use tax= Similar to sales tax but applies to goods that a person didn't pay sales tax on.
This is usually stuff purchased online. This is usually very easy for people to avoid bc
they can just lie about it.
Excise tax= sin taxes. Levied on stuff like alcohol and cigarettes.
Personal income tax= obv.
Corporate income tax= also obv.
Federal taxes - ANSWER Started in 1913. We use the Internal Revenue Code of 1986.
Income tax is the biggest source of general revenue for the govt. Social Security and
Medicare are the two biggest programs.
Employment tax= pay for Social Security and Medicare. Based on wages paid to
employees by employers, and net income from self employed people.
Unemployment tax= based on annual compensation paid to employees. These are
earmarked to provide benefits for unemployed people.
Excise tax= same as state.
Transfer tax= based on the value of an individual's wealth transferred by gift or at death.
Income tax= obv. Makes the most $$$$$.
Foreign taxes - ANSWER Income tax= obv.
Value-added tax (VAT)= levied on firms engaged in any phase of the production of
goods. Based on the incremental value that the firm adds to the goods. Manufacturer M
sells to Firm W. Costs M $40 to make something, and it sells it to W for $46. M owes a tax
on that $6 (a small percentage). If W sells it for $50, it owes a tax on the $4 value it added
on each unit sold.
, Jurisdictional competition - ANSWER Taxing jurisdictions overlap, and thus diff. parts of
the govt. are competing for the same revenues. As a result, sometimes diff. taxes in diff.
jurisdictions cause business to move around for the benefit. This creates competition
between jurisdictions who want economic benefits for their area.
Taxes are dynamic - ANSWER Taxes are in a constant state of flux. Always changing and
being reassessed. Tax base can change, tax rate can change, etc.
Sources of federal tax law - ANSWER Statutory law= Internal revenue code of 1986.
Divided into sections, subsections, paragraphs, subparagraphs and so on.
Administrative pronouncements= Department of the Treasury writes treasury
regulations that interpret the rules in the IRC. The IRS (Internal Revenue Service) is
responsible for enforcement of the law and collection of the tax. They provide more
rulings (explain how IRS applies the tax law to a set of facts) and procedures (advise
taxpayers how to comply with admin/procedural matters). These are published in IRBs
(Internal Revenue Bulletins) compiled into semiannual Cumulative Bulletins (CBs).
Judicial decisions= People who disagree with how the tax law applies to the situation
can take the issue to federal court. The decisions handed down each year clarify the tax
law further.
Incidence Example - ANSWER Mr. P owns an apartment complex. Since his taxes
increase, he spends less on exterior maintenance and landscaping. Thus, Mr. P bears
the incidence of the tax in that his property values go down, and his neighbors bear the
incidence of the tax because their property values might go down too.
Difference between the authority of the IRC vs Treasury regulations. - ANSWER IRC is
actual law, and thus has the most weight. Treasury regulations just interpret the IRC.
However, since congress authorized the Treasury to write the regulations, they are the
official govt. interpretation of the IRC law, and are very important too.
Sales tax example - ANSWER City govt increased sales tax from 1% to 2%. However the
cities sales tax revenues only increased by 30%, even though they doubled the rate.
Why? The tax increase might have reduced the aggregate demand for consumer goods.
Another possibility is people are traveling to other jurisdictions with lower tax rates, or
buying stuff through mail catalogs or online.
Jurisdiction example - ANSWER Does the U.S. have jurisdiction to tax:
1. Mrs. CM who is a citizen of Brazil and permanent resident of Florida. YES bc she is a
permanent resident.
2. Mrs. CM who is a citizen and resident of Brazil, but owns a real estate company in the
U.S. that makes 100k a year. YES but only on the income from her business.
3. Mrs. CM who is a citizen and resident of Brazil, and has no property or business in the
U.S. NO.
