Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al. Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al.
INSTRUCTOR’S MANUAL for McGraw-Hill’s Essentials of Federal
Taxation 2024 Edition, 15th Edition By Brian Spilker
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
© 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.
1-1 1-2
, Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al. Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al.
have some trepidation regarding their first tax course.
Assignment Matrix
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 Learning Objectives Text Features
difficult concept and that they should be careful to get familiar with this discussion in the text prior to
class.
Research
Planning
Forms
LO1
LO2
LO3
LO4
LO5
Difficulty
DQ1-1 5 min. Easy X
DQ1-2 5 min. Easy X
DQ1-3 5 min. Easy X
DQ1-4 5 min. Easy X
DQ1-5 5 min. Medium X
DQ1-6 5 min. Medium X
DQ1-7 5 min. Medium X
DQ1-8 10 min. Medium X
DQ1-9 5 min. Medium X
DQ1-10 10 min. Medium X
DQ1-11 15 min. Medium X
DQ1-12 5 min. Medium X
DQ1-13 15 min. Medium X
DQ1-14 10 min. Medium X
DQ1-15 5 min. Easy X
DQ1-16 15 min. Medium X
DQ1-17 5 min. Easy X
DQ1-18 5 min. Easy X
DQ1-19 10 min. Medium X
DQ1-20 10 min. Medium X
DQ1-21 10 min. Easy X
DQ1-22 10 min. Easy X
DQ1-23 15 min. Medium X
DQ1-24 15 min. Medium X
DQ1-25 15 min. Medium X
DQ1-26 15 min. Medium X
DQ1-27 15 min. Medium X
DQ1-28 15 min. Medium X
DQ1-29 15 min. Medium X X
DQ1-30 20 min. Medium X X
DQ1-31 15 min. Medium X X
DQ1-32 15 min. Medium X
DQ1-33 15 min. Medium X
P1-34 20 min. Medium X
P1-35 20 min. Medium X
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.
1-3 1-4
, Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al. Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al.
Tax
P1-41 20 min. Medium X (2)(2) Formula — = (New Total Tax − Old Total Tax)
P1-42 20 min. Hard X X Taxable Income (New Taxable Income − Old Taxable Income)
P1-43 15 min. Medium X X X (3) Useful in tax planning
P1-44 15 min. Medium X X X ii) Average tax rate
P1-45 15 min. Medium X X X (1) Definition—a taxpayer’s average level of taxation on each dollar of taxable income
P1-46 15 min. Medium X X X Total Tax
P1-47 20 min. Hard X (2)(2) Formula —
P1-48 20 min. Hard X Taxable Income
(3) Useful in budgeting tax expenses or comparing the relative tax burdens of taxpayers
P1-49 20 min. Hard X X
iii) Effective tax rate
P1-50 20 min. Hard X X
(1) Definition—taxpayer’s average rate of taxation on each dollar of total income, including
P1-51 20 min. Hard X
taxable and nontaxable income
P1-52 20 min. Hard X
Total Tax
P1-53 20 min. Hard X (2)(2) Formula —
P1-54 20 min. Hard X Taxable Income
P1-55 20 min. Hard X (3) Provides the best depiction of a taxpayer’s tax burden
P1-56 20 min. Hard X iv) Work example in the PowerPoint slides calculating tax liability, marginal, average, and
P1-57 25 min. Hard X X X effective tax rates.
P1-58 25 min. Hard X X X c) Tax rate structures
P1-59 25 min. Medium X X i) Proportional tax rate structure
P1-60 25 min. Medium X X (1) Definition—also known as a flat tax, imposes a constant tax rate throughout the tax base
(2) As the tax base increases, the taxes paid increase proportionally.
(3) The marginal tax rate remains constant and equals the average tax rate across the tax
Lecture Notes base.
(4) The most common example of a proportional tax is a sales tax.
1) Who Cares About Taxes and Why? ii) Progressive tax rate structure
a) Businesses (1) Definition—imposes an increasing marginal tax rate as the tax base increases.
b) Politicians (2) As the tax base increases, both the marginal tax rate and the taxes paid increase.
c) Individuals (3) Common examples of progressive tax rate structures include federal and state income
2) What Qualifies as a Tax? taxes and federal estate and gift taxes.
a) Definition of a tax iii) Regressive tax rate structure
i) Key components of definition: payment is required, imposed by a government agency, and (1) Definition—imposes a decreasing marginal tax rate as the tax base increases.
not directly tied to any benefit received by the taxpayer from the government (2) As the tax base increases, the taxes paid increase, but the marginal tax rate decreases.
b) Earmarked tax—definition and why this is considered a tax (3) Regressive tax rate structures are not common. In the United States, the Social Security
c) Quiz students on tax definition using examples in the PowerPoint slides. tax and federal and state unemployment taxes employ a regressive tax rate structure.
3) How to Calculate a Tax iv) Discuss how different taxes can be viewed as having different rate structures when you
a) Tax = Tax Base × Tax Rate consider effective tax rates versus marginal tax rates (e.g., the sales tax).
i) Tax Base—what is actually taxed, usually expressed in monetary terms 4) Types of Taxes
ii) Tax Rate—level of taxes imposed on the tax base, usually expressed as a percentage a) Federal taxes
iii) Flat taxes i) Income tax: Imposed on individuals, corporations, estates, and trusts. The largest federal tax.
iv) Graduated taxes ii) Employment taxes: Employment taxes consist of the OASDI tax (Social Security tax) and the
v) Brackets MHI tax (Medicare tax). The tax base for these taxes is wages or salary and employers and
b) Different ways to measure tax rates employees split these taxes equally. Self-employed individuals must pay these taxes in their
i) Marginal tax rate entirety.
(1) Definition—tax rate that applies to the next additional increment of a taxpayer’s taxable iii) Unemployment taxes: Employers are also required to pay federal and state unemployment
income (or deductions) 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.
1-5 1-6
, Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al. Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al.
v) Transfer taxes: The estate tax and gift taxes are based on the fair market values of wealth d) Compare the income tax and sales tax using the equity, certainty, convenience, and economy
transfers upon death or by gift, respectively. criteria.
b) State and local taxes e) Evaluating tax systems—the trade-off
i) Income tax: Most states impose an income tax. The calculation varies by state. i) Much of the debate regarding alternative tax systems reduces to a choice between simplicity
ii) Sales and use taxes: The tax base for a sales tax is the retail sales of goods and some services. and fairness.
Retailers collect and remit this tax. The tax base for the use tax is the retail price of goods ii) Those taxes that generally are simpler and easier to administer are typically viewed as less
owned, possessed, or consumed within a state that were not purchased within the state. The fair. Those taxes that may be viewed as more fair are often more complex to administer.
purpose of a use tax is to discourage taxpayers from buying goods out of state in order to
avoid or minimize the sales tax in their home state.
iii) Property taxes: Assessed on the fair market value of real property and personal property. Class Activities
These are ad valorem taxes.
iv) Excise taxes 1. Suggested class activities
c) Implicit taxes
i) Indirect taxes that result from a tax advantage the government grants to certain transactions. o Designing a tax system: Tell students that the class has just seceded from the United States and
ii) Defined as the reduced before-tax return that a tax-favored asset produces because of its tax- needs to develop a tax system sufficient to generate $XX, XXX from the class members. Have
advantaged status. the students break into groups of three to five to design a tax system. As part of this task, they are
iii) Difficult to quantify but important to understand in evaluating the relative tax burdens of tax- to evaluate the advantages and disadvantages of their tax. The group judged by the class to have
advantaged investments. the most advantageous tax system receives bonus participation points for the day.
iv) Walk through examples of implicit taxes in text. o What is fair? Put two different tax systems in front of the class—one a proportional tax rate, one
5) Evaluating Alternative Tax Systems a progressive tax system. Poll the class by show of hands to determine which tax system each
a) Sufficiency person views as being fairer. Either in groups or as a class, have the students discuss why they
i) Involves assessing the aggregate size of the tax revenues that must be generated and view a specific system as being fairer. After the discussion, poll the class by show of hands to
making sure that the tax system provides these revenues. determine if anyone has changed their view of which tax is fairer. Then discuss with the class that
ii) Static forecasting: Forecasting revenue ignores how taxpayers might alter their there is no right answer as to which system is fairer. Instead, the answer depends on a person’s
activities in response to a tax law change and to base projected tax revenues on the individual views on fairness.
existing state of transactions. o One versus the class: Have one student volunteer as the “one” with the other class members
being the “group.” Use the key facts boxes in the text to develop multiple-choice questions (A, B,
iii) Dynamic forecasting: Forecasting that tries to predict possible responses by taxpayers C answers) and then quiz the volunteer and the class on the questions. The volunteer and each
to new tax laws. class member will need to write the letters A, B, and C on separate sheets of paper and then hold
iv) Income effect: As tax rates go up, people will work harder to maintain same after-tax up their appropriate response to the question. Once a student (either the “one” or a member of the
income. “group”) misses a question, he or she is eliminated from the competition. After six (or some other
v) Substitution effect: As tax rates go up, people will substitute nontaxable activities number) of questions, those students left standing receive bonus participation points for the day.
because the marginal value of taxable ones has decreased. o Discuss current tax policy topics: Find a few recent articles discussing tax reform, the current
vi) Equity: A tax system is considered fair or equitable if the tax is based on the income distribution, or the millionaire surtax. Post the articles so that students can read before
taxpayer’s ability to pay. class and ask a few questions to begin the class discussion.
vii) Horizontal equity: Two taxpayers in similar situations pay the same tax.
viii) Vertical equity: Taxpayers with greater ability to pay tax pay more tax relative to 2. Research activities
taxpayers with a lesser ability to pay tax. Vertical equity can be viewed in terms of o Show the class the IRS website and some of the materials included in the website—e.g.,
tax dollars paid or tax rates. Vertical equity may also be evaluated using effective tax publications, IRS forms, etc.
rates instead of simply considering the tax rate structure. o Have students research the presidential candidates’ tax platforms and compare and contrast the
ix) Certainty: Taxpayers should be able to determine when to pay the tax, where to pay likely changes to the Internal Revenue Code.
the tax, and how to determine the tax.
b) Convenience
i) A tax system should be designed to be collected without undue hardship to the taxpayer.
c) Economy
i) A tax system should minimize the compliance and administration costs associated with the
tax system.
ii) Can be viewed from the taxpayer’s and government’s perspective.
© 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.
1-7 1-8
INSTRUCTOR’S MANUAL for McGraw-Hill’s Essentials of Federal
Taxation 2024 Edition, 15th Edition By Brian Spilker
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
© 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.
1-1 1-2
, Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al. Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al.
have some trepidation regarding their first tax course.
Assignment Matrix
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 Learning Objectives Text Features
difficult concept and that they should be careful to get familiar with this discussion in the text prior to
class.
Research
Planning
Forms
LO1
LO2
LO3
LO4
LO5
Difficulty
DQ1-1 5 min. Easy X
DQ1-2 5 min. Easy X
DQ1-3 5 min. Easy X
DQ1-4 5 min. Easy X
DQ1-5 5 min. Medium X
DQ1-6 5 min. Medium X
DQ1-7 5 min. Medium X
DQ1-8 10 min. Medium X
DQ1-9 5 min. Medium X
DQ1-10 10 min. Medium X
DQ1-11 15 min. Medium X
DQ1-12 5 min. Medium X
DQ1-13 15 min. Medium X
DQ1-14 10 min. Medium X
DQ1-15 5 min. Easy X
DQ1-16 15 min. Medium X
DQ1-17 5 min. Easy X
DQ1-18 5 min. Easy X
DQ1-19 10 min. Medium X
DQ1-20 10 min. Medium X
DQ1-21 10 min. Easy X
DQ1-22 10 min. Easy X
DQ1-23 15 min. Medium X
DQ1-24 15 min. Medium X
DQ1-25 15 min. Medium X
DQ1-26 15 min. Medium X
DQ1-27 15 min. Medium X
DQ1-28 15 min. Medium X
DQ1-29 15 min. Medium X X
DQ1-30 20 min. Medium X X
DQ1-31 15 min. Medium X X
DQ1-32 15 min. Medium X
DQ1-33 15 min. Medium X
P1-34 20 min. Medium X
P1-35 20 min. Medium X
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.
1-3 1-4
, Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al. Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al.
Tax
P1-41 20 min. Medium X (2)(2) Formula — = (New Total Tax − Old Total Tax)
P1-42 20 min. Hard X X Taxable Income (New Taxable Income − Old Taxable Income)
P1-43 15 min. Medium X X X (3) Useful in tax planning
P1-44 15 min. Medium X X X ii) Average tax rate
P1-45 15 min. Medium X X X (1) Definition—a taxpayer’s average level of taxation on each dollar of taxable income
P1-46 15 min. Medium X X X Total Tax
P1-47 20 min. Hard X (2)(2) Formula —
P1-48 20 min. Hard X Taxable Income
(3) Useful in budgeting tax expenses or comparing the relative tax burdens of taxpayers
P1-49 20 min. Hard X X
iii) Effective tax rate
P1-50 20 min. Hard X X
(1) Definition—taxpayer’s average rate of taxation on each dollar of total income, including
P1-51 20 min. Hard X
taxable and nontaxable income
P1-52 20 min. Hard X
Total Tax
P1-53 20 min. Hard X (2)(2) Formula —
P1-54 20 min. Hard X Taxable Income
P1-55 20 min. Hard X (3) Provides the best depiction of a taxpayer’s tax burden
P1-56 20 min. Hard X iv) Work example in the PowerPoint slides calculating tax liability, marginal, average, and
P1-57 25 min. Hard X X X effective tax rates.
P1-58 25 min. Hard X X X c) Tax rate structures
P1-59 25 min. Medium X X i) Proportional tax rate structure
P1-60 25 min. Medium X X (1) Definition—also known as a flat tax, imposes a constant tax rate throughout the tax base
(2) As the tax base increases, the taxes paid increase proportionally.
(3) The marginal tax rate remains constant and equals the average tax rate across the tax
Lecture Notes base.
(4) The most common example of a proportional tax is a sales tax.
1) Who Cares About Taxes and Why? ii) Progressive tax rate structure
a) Businesses (1) Definition—imposes an increasing marginal tax rate as the tax base increases.
b) Politicians (2) As the tax base increases, both the marginal tax rate and the taxes paid increase.
c) Individuals (3) Common examples of progressive tax rate structures include federal and state income
2) What Qualifies as a Tax? taxes and federal estate and gift taxes.
a) Definition of a tax iii) Regressive tax rate structure
i) Key components of definition: payment is required, imposed by a government agency, and (1) Definition—imposes a decreasing marginal tax rate as the tax base increases.
not directly tied to any benefit received by the taxpayer from the government (2) As the tax base increases, the taxes paid increase, but the marginal tax rate decreases.
b) Earmarked tax—definition and why this is considered a tax (3) Regressive tax rate structures are not common. In the United States, the Social Security
c) Quiz students on tax definition using examples in the PowerPoint slides. tax and federal and state unemployment taxes employ a regressive tax rate structure.
3) How to Calculate a Tax iv) Discuss how different taxes can be viewed as having different rate structures when you
a) Tax = Tax Base × Tax Rate consider effective tax rates versus marginal tax rates (e.g., the sales tax).
i) Tax Base—what is actually taxed, usually expressed in monetary terms 4) Types of Taxes
ii) Tax Rate—level of taxes imposed on the tax base, usually expressed as a percentage a) Federal taxes
iii) Flat taxes i) Income tax: Imposed on individuals, corporations, estates, and trusts. The largest federal tax.
iv) Graduated taxes ii) Employment taxes: Employment taxes consist of the OASDI tax (Social Security tax) and the
v) Brackets MHI tax (Medicare tax). The tax base for these taxes is wages or salary and employers and
b) Different ways to measure tax rates employees split these taxes equally. Self-employed individuals must pay these taxes in their
i) Marginal tax rate entirety.
(1) Definition—tax rate that applies to the next additional increment of a taxpayer’s taxable iii) Unemployment taxes: Employers are also required to pay federal and state unemployment
income (or deductions) 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.
1-5 1-6
, Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al. Instructor’s Manual – McGraw-Hill’s Taxation, by Spilker et al.
v) Transfer taxes: The estate tax and gift taxes are based on the fair market values of wealth d) Compare the income tax and sales tax using the equity, certainty, convenience, and economy
transfers upon death or by gift, respectively. criteria.
b) State and local taxes e) Evaluating tax systems—the trade-off
i) Income tax: Most states impose an income tax. The calculation varies by state. i) Much of the debate regarding alternative tax systems reduces to a choice between simplicity
ii) Sales and use taxes: The tax base for a sales tax is the retail sales of goods and some services. and fairness.
Retailers collect and remit this tax. The tax base for the use tax is the retail price of goods ii) Those taxes that generally are simpler and easier to administer are typically viewed as less
owned, possessed, or consumed within a state that were not purchased within the state. The fair. Those taxes that may be viewed as more fair are often more complex to administer.
purpose of a use tax is to discourage taxpayers from buying goods out of state in order to
avoid or minimize the sales tax in their home state.
iii) Property taxes: Assessed on the fair market value of real property and personal property. Class Activities
These are ad valorem taxes.
iv) Excise taxes 1. Suggested class activities
c) Implicit taxes
i) Indirect taxes that result from a tax advantage the government grants to certain transactions. o Designing a tax system: Tell students that the class has just seceded from the United States and
ii) Defined as the reduced before-tax return that a tax-favored asset produces because of its tax- needs to develop a tax system sufficient to generate $XX, XXX from the class members. Have
advantaged status. the students break into groups of three to five to design a tax system. As part of this task, they are
iii) Difficult to quantify but important to understand in evaluating the relative tax burdens of tax- to evaluate the advantages and disadvantages of their tax. The group judged by the class to have
advantaged investments. the most advantageous tax system receives bonus participation points for the day.
iv) Walk through examples of implicit taxes in text. o What is fair? Put two different tax systems in front of the class—one a proportional tax rate, one
5) Evaluating Alternative Tax Systems a progressive tax system. Poll the class by show of hands to determine which tax system each
a) Sufficiency person views as being fairer. Either in groups or as a class, have the students discuss why they
i) Involves assessing the aggregate size of the tax revenues that must be generated and view a specific system as being fairer. After the discussion, poll the class by show of hands to
making sure that the tax system provides these revenues. determine if anyone has changed their view of which tax is fairer. Then discuss with the class that
ii) Static forecasting: Forecasting revenue ignores how taxpayers might alter their there is no right answer as to which system is fairer. Instead, the answer depends on a person’s
activities in response to a tax law change and to base projected tax revenues on the individual views on fairness.
existing state of transactions. o One versus the class: Have one student volunteer as the “one” with the other class members
being the “group.” Use the key facts boxes in the text to develop multiple-choice questions (A, B,
iii) Dynamic forecasting: Forecasting that tries to predict possible responses by taxpayers C answers) and then quiz the volunteer and the class on the questions. The volunteer and each
to new tax laws. class member will need to write the letters A, B, and C on separate sheets of paper and then hold
iv) Income effect: As tax rates go up, people will work harder to maintain same after-tax up their appropriate response to the question. Once a student (either the “one” or a member of the
income. “group”) misses a question, he or she is eliminated from the competition. After six (or some other
v) Substitution effect: As tax rates go up, people will substitute nontaxable activities number) of questions, those students left standing receive bonus participation points for the day.
because the marginal value of taxable ones has decreased. o Discuss current tax policy topics: Find a few recent articles discussing tax reform, the current
vi) Equity: A tax system is considered fair or equitable if the tax is based on the income distribution, or the millionaire surtax. Post the articles so that students can read before
taxpayer’s ability to pay. class and ask a few questions to begin the class discussion.
vii) Horizontal equity: Two taxpayers in similar situations pay the same tax.
viii) Vertical equity: Taxpayers with greater ability to pay tax pay more tax relative to 2. Research activities
taxpayers with a lesser ability to pay tax. Vertical equity can be viewed in terms of o Show the class the IRS website and some of the materials included in the website—e.g.,
tax dollars paid or tax rates. Vertical equity may also be evaluated using effective tax publications, IRS forms, etc.
rates instead of simply considering the tax rate structure. o Have students research the presidential candidates’ tax platforms and compare and contrast the
ix) Certainty: Taxpayers should be able to determine when to pay the tax, where to pay likely changes to the Internal Revenue Code.
the tax, and how to determine the tax.
b) Convenience
i) A tax system should be designed to be collected without undue hardship to the taxpayer.
c) Economy
i) A tax system should minimize the compliance and administration costs associated with the
tax system.
ii) Can be viewed from the taxpayer’s and government’s perspective.
© 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.
1-7 1-8
