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Exam 1: An Introduction to Tax

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Question 1

True/False

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The effective tax rate, in general, provides a better depiction of a taxpayer's tax burden than the average tax rate.

A) True
B) False

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Question 2

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Jackson has the choice to invest in city of Mitchell bonds or Sundial, Inc. corporate bonds that pay 10% interest. Jackson is a single taxpayer who earns $55,000 annually. Assume that the city of Mitchell bonds and the Sundial, Inc. bonds have similar risk. Assume the original facts as given except that Jackson is a head of household taxpayer and the city of Mitchell pays interest of 7.8%. How would you advise Jackson to invest his money?

A) Invest in Sundial, Inc.bonds because their explicit tax is greater than the implicit tax on city of Mitchell bonds.
B) Invest in city of Mitchell bonds because their implicit tax is greater than the explicit tax on Sundial, Inc.bonds.
C) Invest in Sundial, Inc.bonds because their explicit tax is less than the implicit tax on city of Mitchell bonds.
D) Invest in city of Mitchell bonds because their implicit tax is less than the explicit tax on Sundial, Inc.bonds.
E) None of these.

F) B) and D)
G) None of the above

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Question 3

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Which of the following is false?

A 1% charge imposed by a local government on football tickets sold is not considered a tax if all proceeds are earmarked to fund local schools.

Jonah, a single taxpayer, earns $150,000 in taxable income and $10,000 in interest from an investment in city of Denver Bonds. Using the U.S. tax rate schedule for year 2016, how much federal tax will he owe? What is his average tax rate? What is his effective tax rate? What is his current marginal tax rate? If Jonah earned an additional $40,000 of taxable income, what is his marginal tax rate on this income? (Round the tax rates to 2 decimal places, e.g., .12345 as 12.35%)

While sales taxes are quite common, currently the U.S. federal government does not impose a sales tax.

Namratha has the choice between investing in a city of Watkinsville bond at 4.5% or a Moe's, Inc. bond at 7%. Assuming that both bonds have the same non-tax characteristics and that Namratha has a 25% marginal tax rate, in which bond should she invest? What interest rate offered by Moe's, Inc. would make Namratha indifferent between investing in the two bonds?

Leonardo earns $80,000 of taxable income. He also has $15,000 in city of Tulsa bonds. His wife, Theresa, earns $50,000 of taxable income. How much money would Leonardo and Theresa save if they file jointly instead of separately for year 2016?

Mandy, the mayor of Bogart and a strong advocate of a clean downtown, is proposing an increase in the city sales tax from 7% to 50% on all packs of chewing gum purchased in Bogart. Based on the current gum sales, Mandy estimates that this tax will actually reduce the tax revenue on gum sales. What type of forecasting is Mandy using to derive her tax revenue estimates? What "effect" is her estimate based on? Does this necessarily imply that Mandy will be happy given her desire to have a clean downtown?

Although the primary purpose of a tax system is to raise revenue, Congress uses the federal tax system for other purposes as well. Describe the other ways in which Congress uses the federal tax system. Be specific.

Fred and Wilma, married taxpayers, earn $100,000 in taxable income and $20,000 in interest from an investment in city of Bedrock Bonds. Using the U.S. tax rate schedule for married filing jointly for year 2016, how much federal tax will they owe? What is their average tax rate? What is their effective tax rate? What is their current marginal tax rate? If Fred and Wilma earn an additional $40,000 of taxable income, what is their marginal tax rate on this income? (Round the tax rates to 2 decimal places, e.g., .12345 as 12.35%)

To calculate a tax, you need to know: I. the tax base II. the taxing agency III. the tax rate IV. the purpose of the tax

George recently paid $50 to renew his driver's license. The $50 payment is considered a tax.

The city of Granby, Colorado recently enacted a 1.5% surcharge on vacation cabin rentals that will help pay for the city's new elementary school. This surcharge is an example of ________.

Margaret was issued a $150 speeding ticket. This is:

A taxpayer's average tax rate is the most appropriate tax rate to use in tax planning.

Which of the following statements is true?

Earmarked taxes are:

Which of the following is true?

Bart is contemplating starting his own business. His new business would operate as a sole proprietorship and would require hiring several employees. Describe the employment-related taxes that Bart should be aware of as he starts his new business as a self-employed business owner.