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1) Taxes can influence various personal and business decisions regarding investments, savings, employment, and consumption. Oswald needs to understand how taxes factor into economic decision making. 2) Only the local surcharge on hotel rooms and city surcharge on wages are considered taxes. Taxes are compulsory payments to government to fund services, while tolls, tickets, and surcharges are not taxes. 3) In addition to raising revenue, Congress uses the federal tax system to influence behavior, redistribute wealth, and promote social and economic goals. Version 1 5

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355 views105 pages

Student Name: - : Question Details

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Student name:__________

1) Oswald is beginning his first tax course and does not

really have a solid understanding of the role that taxes play in
various decisions. Please describe for Oswald the various
types of decisions that taxes may influence.

Bloom's : Apply
Question Details Difficulty : 3 Hard
AACSB : Reflective Thinking AICPA : FN Measurement
AICPA : BB Critical Thinking Accessibility : Screen Reader
Accessibility : Keyboard Navigation Compatible
Learning Objective : 01-01 Demonstrate how taxes influence basic Type : Static
business, investment, personal, and
Topic : Who Cares About Taxes and Why?

2) Determine if eachof the following is a tax and why or

why not.

a. $2.50 toll paid on the Florida Turnpike

b. $300 ticket for reckless driving
c. 1 percent local surcharge on hotel rooms to fund public
roadways
d. 2 percent city surcharge on wages earned in the city of
Philadelphia

Accessibility : Keyboard
Question Details Navigation
AICPA : BB Critical Thinking Learning Objective : 01-02

Version 1 1
Discuss what constitutes a tax and the general objectives of taxation. Accessibility : Screen Reader
Topic : What Qualifies as a Tax? Compatible
Bloom's : Apply Type : Static
Difficulty : 3 Hard
AICPA : FN Measurement
AACSB : Knowledge Application

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

Bloom's : Apply
Question Details Difficulty : 3 Hard
AACSB : Reflective Thinking AICPA : FN Measurement
AICPA : BB Critical Thinking Accessibility : Screen Reader
Accessibility : Keyboard Navigation Compatible
Learning Objective : 01-02 Discuss what constitutes a tax and the general Type : Static
objectives of taxation.
Topic : What Qualifies as a Tax?

4) There are several different types of tax rates that rate and how a taxpayer
taxpayers might use in different contexts. Describe each tax might use it.

Topic : How to Calculate a Tax

Question Details Accessibility : Screen Reader
AACSB : Reflective Thinking Compatible
AICPA : BB Critical Thinking Type : Static
Accessibility : Keyboard Navigation Learning Objective : 01-03
Bloom's : Apply Describe the different tax rate
Difficulty : 3 Hard structures and calculate a tax.
AICPA : FN Measurement

Version 1 2
5) Ricky and Lucy are debating several types of taxes.
Their debate has focused on the different types of tax rate
structures and whether they are "fair." Please define each tax
rate structure, provide examples of each structure, and discuss
how each structure may be viewed with respect to vertical
equity.

Topic : How to Calculate a Tax

Question Details AACSB : Knowledge
AICPA : BB Critical Thinking Application
Accessibility : Keyboard Navigation Accessibility : Screen Reader
Learning Objective : 01-05 Apply appropriate criteria to evaluate Compatible
alternative tax systems. Type : Static
Topic : Evaluating Alternative Tax Systems Learning Objective : 01-03
Bloom's : Apply Describe the different tax rate
Difficulty : 3 Hard structures and calculate a tax.
AICPA : FN Measurement

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

Difficulty : 3 Hard
Question Details AICPA : FN Measurement
AICPA : BB Critical Thinking AACSB : Knowledge
Accessibility : Keyboard Navigation Application
Learning Objective : 01-04 Identify the various federal, state, and local Accessibility : Screen Reader
taxes. Compatible
Topic : Types of Taxes Type : Static
Bloom's : Apply

Version 1 3
7) Raquel recently overheard two journalism students
discussing the merits of the federal tax system. One student
offered as an example of unfairness a well-known politician’s
spouse, who paid little income tax, as most of the spouse's
income was earned in the form of municipal bond interest.
What type of taxes is the journalism student considering in his
example? What type of taxes is he ignoring? Define each type
of tax. What role does each type of tax play in calculating
relative tax burdens? What role does each type of tax play in
evaluating fairness?

Bloom's : Apply
Question Details Difficulty : 3 Hard
AICPA : BB Critical Thinking AICPA : FN Measurement
Accessibility : Keyboard Navigation AACSB : Knowledge
Learning Objective : 01-04 Identify the various federal, state, and local Application
taxes. Accessibility : Screen Reader
Topic : Types of Taxes Compatible
Learning Objective : 01-05 Apply appropriate criteria to evaluate Type : Static
alternative tax systems.
Topic : Evaluating Alternative Tax Systems

8) Mandy, the mayor of Bogart and a strong advocate of

a clean downtown, is proposing an increase in the city sales
tax from 7 percent to 50 percent 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?

Version 1 4
Difficulty : 3 Hard
Question Details AICPA : FN Measurement
AICPA : BB Critical Thinking AACSB : Knowledge
Accessibility : Keyboard Navigation Application
Learning Objective : 01-05 Apply appropriate criteria to evaluate Accessibility : Screen Reader
alternative tax systems. Compatible
Topic : Evaluating Alternative Tax Systems Type : Static
Bloom's : Apply

9) Milton and Rocco are having a heated debate vertically inequitable tax.
regarding a national sales tax. Milton argues that a national Explain both sides of the
sales tax is a proportional, vertically equitable tax. Rocco argument.
argues that a national sales tax would be a regressive,

Topic : How to Calculate a Tax

10) Evaluate the U.S. federal tax system on the certainty

and economy criteria.

Question Details

Version 1 5
AICPA : BB Critical Thinking AICPA : FN Measurement
Accessibility : Keyboard Navigation AACSB : Knowledge
Learning Objective : 01-05 Apply appropriate criteria to evaluate Application
alternative tax systems. Accessibility : Screen Reader
Topic : Evaluating Alternative Tax Systems Compatible
Bloom's : Apply Type : Static
Difficulty : 3 Hard

11) 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 2020,
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 two decimal places, e.g., .12345 as
12.35 percent.) (Use tax rate schedule.)

Accessibility : Screen Reader

Question Details Compatible
AICPA : BB Critical Thinking Type : Static
Accessibility : Keyboard Navigation Learning Objective : 01-03
Bloom's : Apply Describe the different tax rate
Difficulty : 3 Hard structures and calculate a tax.
AICPA : FN Measurement
Topic : How to Calculate a Tax
AACSB : Knowledge Application

Version 1 6
12) Jonah, a single taxpayer, earns $153,800 in taxable (Round the tax rates to
income and $13,800 in interest from an investment in city of two decimal places, e.g., .
Denver bonds. Using the U.S. tax rate schedule for year 2020, 12345 as 12.35 percent.)
how much federal tax will he owe? What is his average tax (Use tax rate schedule.)
rate? What is his effective tax rate? What is his current
marginal tax rate? If Jonah earned an additional $43,800 of
taxable income, what is his marginal tax rate on this income?

Question Details
AICPA : BB Critical Thinking
Accessibility : Keyboard Navigation
Bloom's : Apply
Difficulty : 3 Hard
AICPA : FN Measurement
Topic : How to Calculate a Tax
AACSB : Knowledge Application
Accessibility : Screen Reader Compatible
Learning Objective : 01-03 Describe the different tax rate structures and
calculate a tax.
Type : Algo

Version 1 7
13) Heather, a single taxpayer who files as a head of
household, earns $60,000 in taxable income and $5,000 in
interest from an investment in city of Oxford bonds. Using the
U.S. tax rate schedule for year 2020, how much federal tax
will she owe? What is her average tax rate? What is her
effective tax rate? What is her current marginal tax rate? If
Heather has an additional $20,000 of tax deductions, what is
her marginal tax rate on these deductions? (Round the tax
rates to two decimal places, e.g., .12345 as 12.35 percent.)
(Use tax rate schedule.)

Accessibility : Screen Reader

14) Heather, a single taxpayer who files as a head of

household, earns $64,200 in taxable income and $9,200 in
interest from an investment in city of Oxford bonds. Using the
U.S. tax rate schedule for year 2020, how much federal tax
will she owe? What is her average tax rate? What is her
effective tax rate? What is her current marginal tax rate? If
Heather has an additional $24,200 of tax deductions, what is
her marginal tax rate on these deductions? (Round the tax
rates to two decimal places, e.g., .12345 as 12.35 percent.)
(Use tax rate schedule.)

Version 1 8
Accessibility : Screen Reader
Question Details Compatible
AICPA : BB Critical Thinking Learning Objective : 01-03
Accessibility : Keyboard Navigation Describe the different tax rate
Bloom's : Apply structures and calculate a tax.
Difficulty : 3 Hard Type : Algo
AICPA : FN Measurement
Topic : How to Calculate a Tax
AACSB : Knowledge Application

15) Fred and Wilma, married taxpayers, earn $100,000 in income, what is their
taxable income and $20,000 in interest from an investment in marginal tax rate on this
city of Bedrock bonds. Using the U.S. tax rate schedule for income? (Round the tax
married filing jointly for year 2020, how much federal tax rates to two decimal
will they owe? What is their average tax rate? What is their places, e.g., .12345 as
effective tax rate? What is their current marginal tax rate? If 12.35 percent. ) (Use
Fred and Wilma earn an additional $40,000 of taxable tax rate schedule.)

Accessibility : Screen Reader

16) Nick and Jessica

are married taxpayers that

Version 1 9
file married filing separately. Jessica earns $250,000 of rates to two decimal
taxable income per year. Nick earns $130,000 of taxable places, e.g., .12345 as
income per year. Using the appropriate U.S. tax rate schedule 12.35 percent.) (Use tax
for year 2020, how much tax does each of them pay? What rate schedule.)
are their marginal and average tax rates? How much tax
would they save, if any, if they filed jointly? (Round the tax

Accessibility : Screen Reader

17) Ariel invests $50,000 in a city of Las Vegas bond that How much implicit tax
pays 5 percent interest. Alternatively, Ariel could have does she pay on the city of
invested the $50,000 in a bond recently issued by Jittery Joe's, Las Vegas bond? How
Incorporated that pays 8 percent interest with similar non-tax much explicit tax would
characteristics as the city of Las Vegas bond (e.g., similar she have paid on the Jittery
risk). Assume that Ariel's marginal tax rate is 24 percent. Joe's, Incorporated bond?
What is her after-tax rate of return for the city of Las Vegas Which bond should she
bond? For the Jittery Joe's, Incorporated bond? How much choose?
explicit tax does Ariel pay on the city of Las Vegas bond?

Learning Objective : 01-04

Question Details Identify the various federal,
AICPA : BB Critical Thinking state, and local taxes.
Accessibility : Keyboard Navigation Topic : Types of Taxes

Version 1 10
Bloom's : Apply Accessibility : Screen Reader
Difficulty : 3 Hard Compatible
AICPA : FN Measurement Type : Static
AACSB : Knowledge Application

18) Nelson has the choice between investing in a city of interest rate offered by J.B.
Fruithurst bond at 4 percent or a J.B. Ribs, Incorporated bond Ribs, Incorporated would
at 6.5 percent. Assuming that both bonds have the same make Nelson indifferent
nontax characteristics and that Nelson has a 40 percent between investing in the
marginal tax rate, in which bond should he invest? What two bonds?

19) Nelson has the choice between investing in a city of interest rate offered by J.B.
Fruithurst bond at 5 percent or a J.B. Ribs, Incorporated bond Ribs, Incorporated would
at 6.9 percent. Assuming that both bonds have the same make Nelson indifferent
nontax characteristics and that Nelson has a 40 percent between investing in the
marginal tax rate, in which bond should he invest? What two bonds?

Topic : Types of Taxes

Question Details
AICPA : BB Critical Thinking
Accessibility : Keyboard Navigation
Learning Objective : 01-04 Identify the various federal, state, and local
taxes.

Version 1 11
Bloom's : Apply
Difficulty : 3 Hard
AICPA : FN Measurement
AACSB : Knowledge Application
Accessibility : Screen Reader Compatible
Type : Algo

Version 1 12
20) Namratha has the choice between investing in a city of interest rate offered by
Watkinsville bond at 4.5 percent or a Moe's, Incorporated Moe's, Incorporated would
bond at 7 percent. Assuming that both bonds have the same make Namratha indifferent
nontax characteristics and that Namratha has a 32 percent between investing in the
marginal tax rate, in which bond should she invest? What two bonds?

21) Given the following tax structure, what is the

minimum tax that would need to be assessed on Lizzy to
make the tax progressive with respect to average tax rates?
What is the minimum tax that would need to be assessed on
Lizzy to make the tax progressive with respect to effective tax
rates?

Taxpayer Salary Muni-Bond Total Tax

Interest
Mort 20,000 5,000 4,000
Lizzy 80,000 30,000 ???

AICPA : BB Critical Thinking

Question Details Accessibility : Keyboard

Version 1 13
Navigation
Bloom's : Apply
Difficulty : 3 Hard
AICPA : FN Measurement
Topic : How to Calculate a Tax
AACSB : Knowledge Application
Accessibility : Screen Reader Compatible
Type : Static
Learning Objective : 01-03 Describe the different tax rate structures and
calculate a tax.

Version 1 14
22) Given the following tax structure, what is the
minimum tax that would need to be assessed on Lizzy to
make the tax progressive with respect to average tax rates?
What is the minimum tax that would need to be assessed on
Lizzy to make the tax progressive with respect to effective tax
rates?

Taxpayer Salary Muni-Bond Total Tax

Interest
Mort 65,000 16,250 13,000
Lizzy 98,000 39,000 ???

Accessibility : Screen Reader

Question Details Compatible
AICPA : BB Critical Thinking Learning Objective : 01-03
Accessibility : Keyboard Navigation Describe the different tax rate
Bloom's : Apply structures and calculate a tax.
Difficulty : 3 Hard Type : Algo
AICPA : FN Measurement
Topic : How to Calculate a Tax
AACSB : Knowledge Application

23) Given the following tax structure, what is the

minimum tax that would need to be assessed on Dora to make
the tax progressive with respect to average tax rates? What is
the minimum tax that would need to be assessed on Dora to
make the tax progressive with respect to effective tax rates?

Taxpayer Salary Muni-Bond Total Tax

Interest
Diego 30,000 10,000 1,500
Dora 50,000 5,000 ???

Version 1 15
Accessibility : Screen Reader
Question Details Compatible
AICPA : BB Critical Thinking Type : Static
Accessibility : Keyboard Navigation Learning Objective : 01-03
Bloom's : Apply Describe the different tax rate
Difficulty : 3 Hard structures and calculate a tax.
AICPA : FN Measurement
Topic : How to Calculate a Tax
AACSB : Knowledge Application

24) Junior earns $80,000 taxable income as a regional

circuit stock car driver and is taxed at an average rate of 25
percent (i.e., $20,000 of tax). If Congress increases the
income tax rate such that Junior's average tax rate increases
from 25 percent to 30 percent, how much more income tax
will he pay assuming that the income effect is larger than the
substitution effect? What effect will this tax rate change have
on the tax base and tax collected? What will happen to the
government's tax revenues if Junior chooses to spend more
time pursuing his other passions besides work (e.g., earns
only $60,000 in taxable income) in response to the tax rate
change? What is the term that describes this type of reaction
to a tax rate increase? (Round your answers to two decimal
places.)

Difficulty : 3 Hard
Question Details AICPA : FN Measurement
AICPA : BB Critical Thinking AACSB : Knowledge
Accessibility : Keyboard Navigation Application
Learning Objective : 01-05 Apply appropriate criteria to evaluate Accessibility : Screen Reader
alternative tax systems. Compatible
Topic : Evaluating Alternative Tax Systems Type : Static
Bloom's : Apply

Version 1 16
25) Given the following tax structure, what amount of tax on Fantasia's tax rate? This
would need to be assessed on Carrie to make the tax would result in what type
horizontally equitable? What is the minimum tax that Simon of tax rate structure?
should pay to make the tax structure vertically equitable based

Taxpayer Salary Total Tax

Fantasia 20,000 1,500
Simon 30,000 2,000
Carrie 20,000 ???

Difficulty : 3 Hard
Question Details AICPA : FN Measurement
AICPA : BB Critical Thinking AACSB : Knowledge
Accessibility : Keyboard Navigation Application
Learning Objective : 01-05 Apply appropriate criteria to evaluate Accessibility : Screen Reader
alternative tax systems. Compatible
Topic : Evaluating Alternative Tax Systems Type : Static
Bloom's : Apply

26) Consider the following tax rate structures. Is it

horizontally equitable? Why or why not? Is it vertically
equitable? Why or why not?

Taxpayer Salary Total Tax

Lucy 40,000 $4,500
Ricky 20,000 $4,500
Ethel 40,000 $4,500

Bloom's : Apply
Question Details Difficulty : 3 Hard
AICPA : BB Critical Thinking AICPA : FN Measurement
Accessibility : Keyboard Navigation Accessibility : Screen Reader
Learning Objective : 01-05 Apply appropriate criteria to evaluate Compatible
alternative tax systems. Type : Static
Topic : Evaluating Alternative Tax Systems
AACSB : Analytical Thinking

Version 1 17
27) Consider the following tax rate structure. Is it
horizontally equitable? Why or why not? Is it vertically
equitable? Why or why not?

Taxpayer Salary Total Tax

Moe 20,000 1,500
Larry 40,000 8,500
Curly 100,000 25,500

Difficulty : 3 Hard
Question Details AICPA : FN Measurement
AICPA : BB Critical Thinking AACSB : Knowledge
Accessibility : Keyboard Navigation Application
Learning Objective : 01-05 Apply appropriate criteria to evaluate Accessibility : Screen Reader
alternative tax systems. Compatible
Topic : Evaluating Alternative Tax Systems Type : Static
Bloom's : Apply

28) Jed Clampett is expanding his family-run beer decision of where to locate
distributorship into Georgia or Tennessee. His parents began his business? What nontax
the business many years ago and now three generations of factors may influence the
Clampetts work in the family business. Jed will relocate the decision?
entire family (his parents, spouse, children, etc.) to either state
after the move. What types of taxes may influence his

Topic : Who Cares About Taxes

Question Details and Why?
AICPA : BB Critical Thinking Learning Objective : 01-05
Accessibility : Keyboard Navigation Apply appropriate criteria to
Learning Objective : 01-01 Demonstrate how taxes influence basic evaluate alternative tax systems.
business, investment, personal, and Topic : Evaluating Alternative

Version 1 18
Tax Systems Accessibility : Screen Reader
Bloom's : Apply Compatible
Difficulty : 3 Hard Type : Static
AICPA : FN Measurement
AACSB : Knowledge Application

29) Congress would like to increase tax revenues by 20

percent. Assume that the average taxpayer in the United
States earns $80,000 and pays an average tax rate of 17.5
percent. If the income effect is larger than the substitution
effect, what average tax rate will result in a 20 percent
increase in tax revenues? This is an example of what type of
forecasting?

Difficulty : 3 Hard
Question Details AICPA : FN Measurement
AICPA : BB Critical Thinking AACSB : Knowledge
Accessibility : Keyboard Navigation Application
Learning Objective : 01-05 Apply appropriate criteria to evaluate Accessibility : Screen Reader
alternative tax systems. Compatible
Topic : Evaluating Alternative Tax Systems Type : Static
Bloom's : Apply

30) Congress would like to increase tax revenues by 20

percent. Assume that the average taxpayer in the United
States earns $60,000 and pays an average tax rate of 12.5
percent. If the income effect is larger than the substitution
effect, what average tax rate will result in a 20 percent
increase in tax revenues? This is an example of what type of
forecasting?

Question Details

Version 1 19
AICPA : BB Critical Thinking AICPA : FN Measurement
Accessibility : Keyboard Navigation AACSB : Knowledge
Learning Objective : 01-05 Apply appropriate criteria to evaluate Application
alternative tax systems. Accessibility : Screen Reader
Topic : Evaluating Alternative Tax Systems Compatible
Bloom's : Apply Type : Algo
Difficulty : 3 Hard

31) Taxes influence which of the following decisions?

D) Investment
A) Business decisions decisions
B) Personal decisions E) All of the
C) Political decisions choices are correct.

Difficulty : 1 Easy
Question Details Topic : Who Cares About Taxes
AACSB : Reflective Thinking and Why?
AICPA : BB Critical Thinking Accessibility : Screen Reader
Accessibility : Keyboard Navigation Compatible
Bloom's : Remember Type : Static
Learning Objective : 01-01 Demonstrate how taxes influence basic
business, investment, personal, and

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

D) a tax because
A) a tax because payment is required by law. it is imposed by a
B) a tax because the payment is not related to any government agency.
specific benefit received from the government agency E) not a tax
collecting the ticket. because Margaret could
C) not a tax because it is considered a fine intended have avoided payment if
to punish illegal behavior. she did not speed.

Learning Objective : 01-02

Question Details Discuss what constitutes a tax
AACSB : Reflective Thinking and the general objectives of
AICPA : BB Critical Thinking taxation.
Accessibility : Keyboard Navigation Topic : What Qualifies as a

Version 1 20
Tax?
Bloom's : Analyze
Difficulty : 2 Medium
Accessibility : Screen Reader Compatible
Type : Static

Version 1 21
33) Which of the following is a tax? working within the city
limits.
I. A 1 percent special sales tax for funding local road IV. A special property
construction. assessment for installing a
II. A fee paid to the state for a license to practice as an new water system in the
attorney. taxpayer's neighborhood.
III. An income tax imposed by Philadelphia on persons

D) III and IV are

A) Only I is correct. correct.
B) Only IV is correct. E) I and III are
C) Only III is correct. correct.

Question Details
AACSB : Reflective Thinking
AICPA : BB Critical Thinking
Accessibility : Keyboard Navigation
Learning Objective : 01-02 Discuss what constitutes a tax and the general
objectives of taxation.
Topic : What Qualifies as a Tax?
Difficulty : 2 Medium
Bloom's : Understand
Accessibility : Screen Reader Compatible
Type : Static

Version 1 22
34) Which of the following is considered a tax?

public schools
A) Tolls E) Entrance fees
B) Parking meter fees paid at national parks
C) Annual licensing fees
D) A local surcharge paid on retail sales to fund

objectives of taxation.
Question Details Topic : What Qualifies as a
AACSB : Reflective Thinking Tax?
AICPA : BB Critical Thinking Accessibility : Screen Reader
Accessibility : Keyboard Navigation Compatible
Bloom's : Remember Type : Static
Difficulty : 1 Easy
Learning Objective : 01-02 Discuss what constitutes a tax and the general

35) Earmarked taxes are:

behavior.
A) taxes assessed only on certain taxpayers. E) None of the
B) taxes assessed to fund a specific purpose. choices are correct.
C) taxes assessed for only a specific time period.
D) taxes assessed to discourage less desirable

36) Sin taxes are:

B) taxes assessed
A) taxes assessed by religious organizations. on certain illegal acts.

Version 1 23
C) taxes assessed to discourage less desirable E) None of the
behavior. choices are correct.
D) taxes assessed to fund a specific purpose.

Difficulty : 2 Medium
Question Details Bloom's : Understand
AACSB : Reflective Thinking Accessibility : Screen Reader
AICPA : BB Critical Thinking Compatible
Accessibility : Keyboard Navigation Type : Static
Learning Objective : 01-02 Discuss what constitutes a tax and the general
objectives of taxation.
Topic : What Qualifies as a Tax?

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

D) Items I
A) Only I is correct. through IV are correct.
B) Only IV is correct. E) I and III are
C) Only III is correct. correct.

Accessibility : Screen Reader

Question Details Compatible
AACSB : Reflective Thinking Type : Static
AICPA : BB Critical Thinking Learning Objective : 01-03
Accessibility : Keyboard Navigation Describe the different tax rate
Bloom's : Remember structures and calculate a tax.
Difficulty : 1 Easy
Topic : How to Calculate a Tax

38) Which of the following is not an example of a

graduated tax rate structure?

D) Regressive tax
A) Progressive tax rate structure rate structure
B) Proportional tax rate structure E) None of the
C) U.S. federal income tax choices are correct

Version 1 24
Accessibility : Screen Reader
Question Details Compatible
AACSB : Reflective Thinking Type : Static
AICPA : BB Critical Thinking Learning Objective : 01-03
Accessibility : Keyboard Navigation Describe the different tax rate
Difficulty : 2 Medium structures and calculate a tax.
Topic : How to Calculate a Tax
Bloom's : Understand

39) The difficulty in calculating a tax is typically in the

determination of:

D) the due date

A) the correct tax rate. for the return.
B) where to file the tax return. E) None of the
C) the tax base. choices are correct.

Accessibility : Screen Reader

40) Which of the following is not one of the basic tax rate
structures?

D) Progressive
A) Proportional E) All of these
B) Equitable are different kinds of the
C) Regressive basic tax rate structures

Bloom's : Remember
Question Details Difficulty : 2 Medium
AACSB : Reflective Thinking Topic : How to Calculate a Tax
AICPA : BB Critical Thinking Accessibility : Screen Reader
Accessibility : Keyboard Navigation Compatible

Version 1 25
Type : Static calculate a tax.
Learning Objective : 01-03 Describe the different tax rate structures and

41) Marc, a single taxpayer, earns $60,000 in taxable answer to the nearest
income and $5,000 in interest from an investment in city of whole dollar.) (Use tax
Birmingham bonds. Using the U.S. tax rate schedule for 2020, rate schedule.)
how much federal tax will he owe? (Round your final

D) $6,805
A) $13,200 E) None of the
B) $8,990 choices are correct
C) $7,548

Accessibility : Screen Reader

Question Details Compatible
AICPA : BB Critical Thinking Type : Static
Accessibility : Keyboard Navigation Learning Objective : 01-03
Difficulty : 2 Medium Describe the different tax rate
Bloom's : Apply structures and calculate a tax.
Topic : How to Calculate a Tax
AACSB : Knowledge Application

42) Marc, a single taxpayer, earns $64,200 in taxable answer to the nearest
income and $5,420 in interest from an investment in city of whole dollar.) (Use tax
Birmingham bonds. Using the U.S. tax rate schedule for 2020, rate schedule.)
how much federal tax will he owe? (Round your final

D) $7,729
A) $14,250 E) None of the
B) $9,914 choices are correct
C) $7,968

Accessibility : Screen Reader

Question Details Compatible
AICPA : BB Critical Thinking Learning Objective : 01-03
Accessibility : Keyboard Navigation Describe the different tax rate
Difficulty : 2 Medium structures and calculate a tax.
Bloom's : Apply Type : Algo
Topic : How to Calculate a Tax
AACSB : Knowledge Application

Version 1 26
43) Marc, a single taxpayer, earns $60,000 in taxable two decimal places.) (Use
income and $5,000 in interest from an investment in city of tax rate schedule.)
Birmingham bonds. Using the U.S. tax rate schedule for 2020,
what is his average tax rate? (Round your final answer to

D) 22.00 percent
A) 14.98 percent E) None of the
B) 13.83 percent choices are correct
C) 11.34 percent

Accessibility : Screen Reader

44) Marc, a single taxpayer, earns $60,600 in taxable two decimal places.) (Use
income and $5,060 in interest from an investment in city of tax rate schedule.)
Birmingham bonds. Using the U.S. tax rate schedule for 2020,
what is his average tax rate? (Round your final answer to

D) 22.07 percent
A) 15.05 percent E) None of the
B) 13.90 percent choices are correct
C) 11.41 percent

Accessibility : Screen Reader

Version 1 27
45) Marc, a single taxpayer, earns $60,000 in taxable answer to two decimal
income and $5,000 in interest from an investment in city of places.) (Use tax rate
Birmingham bonds. Using the U.S. tax rate schedule for year schedule.)
2020, what is his effective tax rate? (Round your final

D) 10.47 percent
A) 20.30 percent E) None of the
B) 13.83 percent choices are correct
C) 14.98 percent

Accessibility : Screen Reader

46) Marc, a single taxpayer, earns $61,400 in taxable answer to two decimal
income and $5,140 in interest from an investment in city of places.) (Use Tax rate
Birmingham Bonds. Using the U.S. tax rate schedule for year schedule.)
2020, what is his effective tax rate? (Round your final

D) 10.61 percent
A) 20.44 percent E) None of the
B) 13.97 percent choices are correct
C) 15.14 percent

Accessibility : Screen Reader

47) Marc, a single

taxpayer, earns $60,000 in

Version 1 28
taxable income and $5,000 in interest from an investment in for year 2020, what is his
city of Birmingham bonds. Using the U.S. tax rate schedule current marginal tax rate?
(Use tax rate schedule.)

D) 32.00 percent
A) 12.00 percent E) None of the
B) 22.00 percent choices are correct
C) 24.00 percent

Accessibility : Screen Reader

Question Details Compatible
AICPA : BB Critical Thinking Type : Static
Accessibility : Keyboard Navigation Learning Objective : 01-03
Bloom's : Remember Describe the different tax rate
Difficulty : 1 Easy structures and calculate a tax.
Topic : How to Calculate a Tax
AACSB : Knowledge Application

48) Marc, a single taxpayer, earns $248,500 in taxable

income and $7,650 in interest from an investment in city of
Birmingham bonds. Using the U.S. tax rate schedule for year
2020, what is his current marginal tax rate?(Use tax rate
schedule.)

D) 45.00 percent
A) 25.00 percent E) None of the
B) 35.00 percent choices are correct
C) 37.00 percent

Accessibility : Screen Reader

Question Details Compatible
AICPA : BB Critical Thinking Learning Objective : 01-03
Accessibility : Keyboard Navigation Describe the different tax rate
Bloom's : Remember structures and calculate a tax.
Difficulty : 1 Easy Type : Algo
Topic : How to Calculate a Tax
AACSB : Knowledge Application

49) The city of Granby,

Colorado, recently enacted

Version 1 29
a 1.5 percent surcharge on vacation cabin rentals that will
fund the city's new elementary school. This surcharge is an
example of _____.

an earmarked tax
A) a sin tax to discourage undesirable behavior E) None of the
B) a government fine choices are correct
C) an earmarked tax
D) a sin tax to discourage undesirable behavior and

Bloom's : Apply
Question Details AACSB : Knowledge
AICPA : BB Critical Thinking Application
Accessibility : Keyboard Navigation Accessibility : Screen Reader
Learning Objective : 01-02 Discuss what constitutes a tax and the general Compatible
objectives of taxation. Type : Static
Topic : What Qualifies as a Tax?
Difficulty : 2 Medium

50) The state of Georgia recently increased its tax on a

carton of cigarettes by $2.00. What type of tax is this?

D) A sin tax and

A) A sin tax an excise tax are correct
B) An excise tax E) None of the
C) It is not a tax; it is a fine choices are correct

Learning Objective : 01-04

Question Details Identify the various federal,
AACSB : Reflective Thinking state, and local taxes.
AICPA : BB Critical Thinking Topic : Types of Taxes
Accessibility : Keyboard Navigation Bloom's : Apply
Learning Objective : 01-02 Discuss what constitutes a tax and the general Accessibility : Screen Reader
objectives of taxation. Compatible
Topic : What Qualifies as a Tax? Type : Static
Difficulty : 2 Medium

51) Which of the

following is false?

Version 1 30
gasoline.
A) A proportional tax rate structure imposes a D) An example of
constant tax rate while a progressive tax rate structure a progressive tax is the
imposes an increasing marginal rate related to the tax base. federal tax on gifts.
B) The average tax rate changes under a E) None of the
proportional tax rate structure, but it is static for a progressive choices are correct.
tax rate system.
C) An example of a proportional tax is the tax on

Accessibility : Screen Reader

52) Which of the following is true?

D) In terms of
A) A regressive tax rate structure imposes an effective tax rates, a sales
increasing marginal tax rate as the tax base increases. tax can be viewed as a
B) Regressive tax structures are the most common regressive tax.
tax rate structure. E) None of the
C) An example of a regressive tax is an excise tax. choices are correct.

Accessibility : Screen Reader

53) The ultimate

economic burden of a tax
is best captured by:

Version 1 31
D) the
A) the marginal tax rate. proportional tax rate.
B) the effective tax rate. E) None of the
C) the average tax rate. choices are correct.

Accessibility : Screen Reader

Question Details Compatible
AACSB : Reflective Thinking Type : Static
AICPA : BB Critical Thinking Learning Objective : 01-03
Accessibility : Keyboard Navigation Describe the different tax rate
Bloom's : Analyze structures and calculate a tax.
Difficulty : 2 Medium
Topic : How to Calculate a Tax

54) Which of the following taxes represents the largest

portion of U.S. federal tax revenues?

D) Estate and gift

A) Employment taxes taxes
B) Corporate income taxes E) None of the
C) Individual income taxes choices are correct

taxes.
Question Details Topic : Types of Taxes
AACSB : Reflective Thinking Bloom's : Understand
AICPA : BB Critical Thinking Accessibility : Screen Reader
Accessibility : Keyboard Navigation Compatible
Difficulty : 2 Medium Type : Static
Learning Objective : 01-04 Identify the various federal, state, and local

55) Which of the following represents the largest

percentage of average state tax revenue?

D) Property tax
A) Sales tax E) None of the
B) Individual income tax choices are correct
C) Other

Question Details

Version 1 32
AACSB : Reflective Thinking Topic : Types of Taxes
AICPA : BB Critical Thinking Bloom's : Understand
Accessibility : Keyboard Navigation Accessibility : Screen Reader
Difficulty : 2 Medium Compatible
Learning Objective : 01-04 Identify the various federal, state, and local Type : Static
taxes.

56) Which of the following is true regarding use taxes?

D) A use tax is
A) A use tax is relatively easy to enforce compared generally a progressive tax.
to a sales tax. E) None of the
B) Use taxes attempt to eliminate any tax advantage choices are correct.
of purchasing goods out of state.
C) Use taxes encourage taxpayers to buy goods out
of state to avoid paying sales tax in their home state.

Question Details
AACSB : Reflective Thinking
AICPA : BB Critical Thinking
Accessibility : Keyboard Navigation
Bloom's : Analyze
Difficulty : 2 Medium
Learning Objective : 01-04 Identify the various federal, state, and local
taxes.
Topic : Types of Taxes
Accessibility : Screen Reader Compatible
Type : Static

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57) Which of the following is true regarding real property
taxes and personal property taxes?

D) Real property
A) Personal property taxes are assessed on taxes are generally easier
permanent structures and land. to administer than personal
B) Real property taxes are assessed on cars and property taxes.
boats. E) None of the
C) All U.S. states currently impose personal choices are correct.
property taxes.

taxes.
Question Details Topic : Types of Taxes
AACSB : Reflective Thinking Accessibility : Screen Reader
AICPA : BB Critical Thinking Compatible
Accessibility : Keyboard Navigation Type : Static
Bloom's : Analyze
Difficulty : 2 Medium
Learning Objective : 01-04 Identify the various federal, state, and local

58) Which of the following statements is true?

D) All of these
A) Municipal bond interest is subject to explicit statements are true.
federal tax. E) None of these
B) Municipal bond interest is subject to implicit tax. statements are true.
C) Municipal bonds typically pay a higher interest
rate than corporate bonds with similar risk.

Version 1 34
59) The concept of tax sufficiency:

D) All of the
A) suggests the need for tax forecasting. choices are correct.
B) suggests that a government should estimate how E) None of the
taxpayers will respond to changes in the current tax structure. choices are correct.
C) suggests that a government should consider the
income and substitution effects when changing tax rates.

Topic : Evaluating Alternative

Question Details Tax Systems
AACSB : Reflective Thinking Difficulty : 3 Hard
AICPA : BB Critical Thinking Accessibility : Screen Reader
Accessibility : Keyboard Navigation Compatible
Bloom's : Analyze Type : Static
Learning Objective : 01-05 Apply appropriate criteria to evaluate
alternative tax systems.

60) The substitution effect:

D) is typically
A) predicts that taxpayers will work harder to pay more descriptive for
for consumer products when tax rates increase. taxpayers with lower
B) is one of the effects considered in static disposable income.
forecasting. E) None of the
C) results in the government collecting more choices are correct.
aggregate tax revenue than under the income effect.
alternative tax systems.
Question Details Topic : Evaluating Alternative
AACSB : Reflective Thinking Tax Systems
AICPA : BB Critical Thinking Accessibility : Screen Reader
Accessibility : Keyboard Navigation Compatible
Bloom's : Analyze Type : Static
Difficulty : 2 Medium
Learning Objective : 01-05 Apply appropriate criteria to evaluate

Version 1 35
federal projects but not
A) Only issue treasury bonds. increase federal spending.
B) Only cut funding to various federal projects. E) None of the
C) Only increase federal spending. choices are correct.
D) Issue treasury bonds and cut funding to various

alternative tax systems.

Question Details Topic : Evaluating Alternative
AACSB : Reflective Thinking Tax Systems
AICPA : BB Critical Thinking Accessibility : Screen Reader
Accessibility : Keyboard Navigation Compatible
Bloom's : Analyze Type : Static
Difficulty : 2 Medium
Learning Objective : 01-05 Apply appropriate criteria to evaluate

62) Geronimo files his tax return as a head of household answer to two decimal
for year 2020. If his taxable income is $72,000, what is his places.)
average tax rate? (Use tax rate schedule.) (Round your final

D) 22.00 percent
A) 14.15 percent E) None of the
B) 16.15 percent choices are correct
C) 11.45 percent

Accessibility : Screen Reader

63) Geronimo files his tax return as a head of household answer to two decimal
for year 2020. If his taxable income is $75,200, what is his places.)
average tax rate? (Use tax rate schedule.) (Round your final

B) 16.48 percent
A) 14.48 percent C) 11.78 percent

Version 1 36
D) 22.00 percent
E) None of the choices are correct

Accessibility : Screen Reader

64) Al believes that SUVs have negative social and collected under his
environmental effects because of their increased carbon reformed system. Which of
monoxide emissions. He proposes eliminating sales taxes on the following concepts
smaller automobiles in favor of higher sales taxes levied on explains why Al's idea
SUVs. Al performs some calculations and comes to the may not work?
conclusion that based on the current number of SUVs owned
in the U.S., exactly the same amount of total sales tax will be

D) Vertical
A) The ability to pay principle equity
B) Horizontal equity E) None of the
C) Substitution effect choices are correct

Bloom's : Apply
Question Details AACSB : Knowledge
AICPA : BB Critical Thinking Application
Accessibility : Keyboard Navigation Accessibility : Screen Reader
Difficulty : 2 Medium Compatible
Learning Objective : 01-05 Apply appropriate criteria to evaluate Type : Static
alternative tax systems.
Topic : Evaluating Alternative Tax Systems

65) Which of the following would not be a failure of the

horizontal equity concept?

different amounts of tax

A) Two taxpayers with identical income pay because one taxpayer's

Version 1 37
income includes tax-exempt interest. D) All of the
B) Two taxpayers pay different property tax choices are correct.
amounts on similar plots of land (i.e., same value) because E) None of the
one plot of land is used to raise crops. choices are correct.
C) Two taxpayers pay different amounts of estate
tax because one taxpayer's estate is worth significantly more.

66) Which of the following is true regarding tax-

advantaged assets?

they are not typically

A) They are typically subject to excise taxes to subject to excise taxes to
account for their low explicit taxes. account for their low
B) A corporate bond is typically considered a tax- explicit taxes.
advantaged asset. E) None of the
C) They are often subject to implicit taxes. choices are correct.
D) A corporate bond is typically considered a tax-
advantaged asset. They are often subject to implicit taxes but

67) Congress recently approved a new, smaller budget for

the IRS. What taxation concept evaluates the cost of
administering our tax law?

Version 1 38
D) Equity
A) Convenience E) None of the
B) Economy choices are correct
C) Certainty

Topic : Evaluating Alternative

Question Details Tax Systems
AACSB : Reflective Thinking Bloom's : Understand
AICPA : BB Critical Thinking Accessibility : Screen Reader
Accessibility : Keyboard Navigation Compatible
Difficulty : 2 Medium Type : Static
Learning Objective : 01-05 Apply appropriate criteria to evaluate
alternative tax systems.

68) Employers often withhold federal income taxes which principle in

directly from workers' paychecks. This is an example of practice?

D) Equity
A) Convenience E) None of the
B) Certainty choices are correct
C) Economy

Topic : Evaluating Alternative

69) Which of the following principles encourages a

vertically equitable tax system?

D) Ability to pay
A) Pay-as-you-go principle
B) Economy E) None of the
C) Income effects choices are correct

Question Details

Version 1 39
AACSB : Reflective Thinking
AICPA : BB Critical Thinking
Accessibility : Keyboard Navigation
Difficulty : 2 Medium
Learning Objective : 01-05 Apply appropriate criteria to evaluate
alternative tax systems.
Topic : Evaluating Alternative Tax Systems
Bloom's : Understand
Accessibility : Screen Reader Compatible
Type : Static

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70) Manny, a single taxpayer, earns $65,000 per year in 2020? (Use tax rate
taxable income and an additional $12,000 per year in city of schedule.)
Boston bonds. What is Manny's current marginal tax rate for

D) 15.52 percent
A) 11.39 percent E) None of the
B) 12.00 percent choices are correct.
C) 13.10 percent

Accessibility : Screen Reader

71) Manny, a single taxpayer, earns $69,400 per year in 2020? (Use tax rate
taxable income and an additional $12,440 per year in city of schedule.)
Boston bonds. What is Manny's current marginal tax rate for

C) 12.22 percent
A) 10.29 percent D) 14.46 percent
B) 12.00 percent E) 32 percent

Accessibility : Screen Reader

72) Manny, a single

taxpayer, earns $65,000

Version 1 41
per year in taxable income and an additional $12,000 per year rate schedule.) (Round
in city of Boston bonds. your final answer to two
decimal places.)
If Manny earns an additional $35,000 in taxable income in
2020, what is his marginal tax rate on this income? (Use tax

D) 24.00 percent
A) 17.64 percent E) None of the
B) 22.00 percent choices are correct
C) 22.83 percent

Accessibility : Screen Reader

Question Details Compatible
AICPA : BB Critical Thinking Type : Static
Accessibility : Keyboard Navigation Learning Objective : 01-03
Bloom's : Apply Describe the different tax rate
Difficulty : 3 Hard structures and calculate a tax.
Topic : How to Calculate a Tax
AACSB : Knowledge Application

73) Manny, a single taxpayer, earns $68,400 per year in 2020, what is his marginal
taxable income and an additional $12,340 per year in city of tax rate on this income?
Boston bonds. (Use tax rate schedule.)
(Round your final answer
If Manny earns an additional $38,600 in taxable income in to two decimal places.)

D) 24.00 percent
A) 17.92 percent E) None of the
B) 22.00 percent choices are correct
C) 23.11 percent

Accessibility : Screen Reader

Question Details Compatible
AICPA : BB Critical Thinking Learning Objective : 01-03
Accessibility : Keyboard Navigation Describe the different tax rate
Bloom's : Apply structures and calculate a tax.
Difficulty : 3 Hard Type : Algo
Topic : How to Calculate a Tax
AACSB : Knowledge Application

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74) Leonardo, who is married but files separately, earns this year, what would be
$80,000 of taxable income. He also has $15,000 in city of the marginal tax rate on the
Tulsa bonds. His wife, Theresa, earns $50,000 of taxable extra income for 2020?
income. (Use tax rate schedule.)
(Round your final answer
If Leonardo earned an additional $30,000 of taxable income to two decimal places.)

D) 23.62 percent
A) 22.00 percent E) None of the
B) 18.81 percent choices are correct
C) 24.00 percent

Accessibility : Screen Reader

75) Leonardo, who is married but files separately, earns extra income for 2020?
$83,600 of taxable income. He also has $18,600 in city of (Use tax rate schedule.)
Tulsa bonds. His wife, Theresa, earns $53,600 of taxable (Round your final answer
income.If Leonardo earned an additional $33,600 of taxable to two decimal places.)
income this year, what would be the marginal tax rate on the

D) 23.89 percent
A) 22.26 percent E) None of the
B) 19.07 percent choices are correct
C) 24.26 percent

Accessibility : Screen Reader

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76) Leonardo, who is married but files separately, earns for 2020, his marginal tax
$80,000 of taxable income. He also has $15,000 in city of rate on the deductions
Tulsa bonds. His wife, Theresa, earns $50,000 of taxable would be: (Use tax rate
income. schedule.) (Round your
final answer to two
If Leonardo instead had $30,000 of additional tax deductions decimal places.)

D) 24.00 percent
A) 12.00 percent E) None of the
B) 23.62 percent choices are correct
C) 22.00 percent

Accessibility : Screen Reader

Question Details Compatible
AICPA : BB Critical Thinking Type : Static
Accessibility : Keyboard Navigation Learning Objective : 01-03
Bloom's : Apply Describe the different tax rate
Difficulty : 3 Hard structures and calculate a tax.
Topic : How to Calculate a Tax
AACSB : Knowledge Application

77) Leonardo, who is married but files separately, earns for 2020, his marginal tax
$65,500 of taxable income. He also has $17,400 in city of rate on the deductions
Tulsa bonds. His wife, Theresa, earns $52,400 of taxable would be: (Use tax rate
income. schedule.) (Round your
final answer to two
If Leonardo instead had $32,400 of additional tax deductions decimal places.)

D) 21.83 percent
A) 9.83 percent E) None of the
B) 21.45 percent choices are correct
C) 19.83 percent

Accessibility : Screen Reader

Question Details Compatible
AICPA : BB Critical Thinking Learning Objective : 01-03
Accessibility : Keyboard Navigation Describe the different tax rate
Bloom's : Apply structures and calculate a tax.
Difficulty : 3 Hard Type : Algo
Topic : How to Calculate a Tax
AACSB : Knowledge Application

Version 1 44
78) Leonardo,who is married but files separately, earns what would be their
$80,000 of taxable income. He also has $15,000 in city of average tax rate? (Use tax
Tulsa bonds. His wife, Theresa, earns $50,000 of taxable rate schedule.) (Round
income. your final answer to two
decimal places.)
If Leonardo and his wife file married filing jointly in 2020,

D) 22.57 percent
A) 12.00 percent E) None of the
B) 22.00 percent choices are correct
C) 15.52 percent

Accessibility : Screen Reader

79) Leonardo, who is married but files separately, earns what would be their
$63,000 of taxable income. He also has $16,400 in city of average tax rate?(Use tax
Tulsa bonds. His wife, Theresa, earns $51,400 of taxable rate schedule.) (Round
income. your final answer to two
If Leonardo and his wife file married filing jointly in 2020, decimal places.)

D) 21.69 percent
A) 12.00 percent E) None of the
B) 22.00 percent choices are correct
C) 14.64 percent

Accessibility : Screen Reader

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80) Leonardo, who is married but files separately, earns what is Leonardo and
$80,000 of taxable income. He also has $15,000 in city of Theresa's effective tax rate
Tulsa bonds. His wife, Theresa, earns $50,000 of taxable for 2020? (Use tax rate
income. schedule.) (Round your
final answer to two
If Leonardo and his wife are married filing jointly in 2020, decimal places.)

D) 22.00 percent
A) 12.00 percent E) None of the
B) 15.63 percent choices are correct
C) 20.23 percent

Accessibility : Screen Reader

81) Leonardo, who is married but files separately, earns what is Leonardo and
$61,500 of taxable income. He also has $15,800 in city of Theresa's effective tax rate
Tulsa bonds. His wife, Theresa, earns $50,800 of taxable for 2020? (Use tax rate
income. schedule.) (Round your
final answer to two
If Leonardo and his wife are married filing jointly in 2020, decimal places.)

D) 22.00 percent
A) 12.00 percent E) None of the
B) 14.42 percent choices are correct.
C) 19.02 percent

AACSB : Knowledge
Question Details
AICPA : BB Critical Thinking
Accessibility : Keyboard Navigation
Difficulty : 2 Medium
Bloom's : Apply
Topic : How to Calculate a Tax

Version 1 46
Application
Accessibility : Screen Reader Compatible
Learning Objective : 01-03 Describe the different tax rate structures and
calculate a tax.
Type : Algo

Version 1 47
82) Leonardo, who is married but files separately, 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 2020? (Use tax rate
schedule.)

D) $13,580
A) Nothing E) None of the
B) $103.50 choices are correct.
C) $309.75

Accessibility : Screen Reader

Question Details Compatible
AICPA : BB Critical Thinking Type : Static
Accessibility : Keyboard Navigation Learning Objective : 01-03
Bloom's : Apply Describe the different tax rate
Difficulty : 3 Hard structures and calculate a tax.
Topic : How to Calculate a Tax
AACSB : Knowledge Application

83) Leonardo, who is married but files separately, earns How much money would
$64,500 of taxable income. He also has $17,000 in city of Leonardo and Theresa save
Tulsa bonds. His wife, Theresa, earns $52,000 of taxable if they file jointly instead
income. of separately for 2020?
(Use tax rate schedule.)

D) $10,610.00
A) Nothing E) None of the
B) $160.50 choices are correct
C) $480.75

Difficulty : 3 Hard
Question Details Topic : How to Calculate a Tax
AICPA : BB Critical Thinking AACSB : Knowledge
Accessibility : Keyboard Navigation Application
Bloom's : Apply Accessibility : Screen Reader

Version 1 48
Compatible Type : Algo
Learning Objective : 01-03 Describe the different tax rate structures and
calculate a tax.

84) If Susie earns $750,000 in taxable income, how much

tax will she pay as a single taxpayer for 2020? (Use tax rate
schedule.)

D) $156,235
A) $214,649 E) None of the
B) $277,500 choices are correct
C) $241,927
Accessibility : Screen Reader
Question Details Compatible
AICPA : BB Critical Thinking Type : Static
Accessibility : Keyboard Navigation Learning Objective : 01-03
Difficulty : 2 Medium Describe the different tax rate
Bloom's : Apply structures and calculate a tax.
Topic : How to Calculate a Tax
AACSB : Knowledge Application

85) If Susie earns $756,000 in taxable income, how much

tax will she pay as a single taxpayer for 2020? (Use tax rate
schedule.)

D) $156,235
A) $216,869 E) None of the
B) $279,720 choices are correct
C) $244,147

Accessibility : Screen Reader

Version 1 49
86) If Susie earns $750,000 in taxable income and files as
head of household for year 2020, what is Susie's average tax
rate? (Use tax rate schedule.) (Round your final answer to
two decimal places.)

D) 37.00 percent
A) 32.07 percent E) None of the
B) 32.26 percent choices are correct
C) 35.00 percent

Accessibility : Screen Reader

87) If Susie earns $762,000 in taxable income and files as

head of household for year 2020, what is Susie's average tax
rate? (Use tax rate schedule.) (Round your final answer to
two decimal places.)

D) 37.00 percent
A) 32.14 percent E) None of the
B) 32.34 percent choices are correct
C) 35.08 percent

Accessibility : Screen Reader

Version 1 50
88) Eliminating the current system of withholding income
taxes directly from employee paychecks would:

D) All of the
A) violate the convenience criterion of federal choices are correct.
taxation. E) None of the
B) increase the rate of compliance. choices are correct.
C) make collection of federal income taxes easier.

alternative tax systems.

89) Curtis invests $250,000 in a city of Athens bond that rate is 24 percent.
pays 7 percent interest. Alternatively, Curtis could have
invested the $250,000 in a bond recently issued by Initech, What is Curtis's after-tax
Incorporated that pays 9percent interest with similar risk as rate of return on the city of
the city of Athens bond. Assume that Curtis's marginal tax Athens bond?

D) 9.00 percent
A) 5.32 percent E) None of the
B) 6.84 percent choices are correct
C) 7.00 percent

Question Details
AICPA : BB Critical Thinking
Accessibility : Keyboard Navigation
Difficulty : 1 Easy
Learning Objective : 01-04 Identify the various federal, state, and local
taxes.
Topic : Types of Taxes
Bloom's : Apply
AACSB : Knowledge Application
Accessibility : Screen Reader Compatible
Type : Static

Version 1 51
90) Curtis invests $475,000 in a city of Athens bond that
pays 6.75 percent interest. Alternatively, Curtis could have
invested the $475,000 in a bond recently issued by Initech,
Incorporated that pays 8.25 percent interest with similar risk
as the city of Athens bond. Assume that Curtis's marginal tax
rate is 24 percent.
What is Curtis's after-tax rate of return on the city of Athens
bond?

D) 8.75 percent
A) 5.07 percent E) None of the
B) 6.59 percent choices are correct
C) 6.75 percent

Version 1 52
91) Curtis invests $250,000 in a city of Athens bond that rate is 24 percent.
pays 7 percent interest. Alternatively, Curtis could have
invested the $250,000 in a bond recently issued by Initech, How much implicit tax
Incorporated that pays 9 percent interest with similar risk as would Curtis pay on the
the city of Athens bond. Assume that Curtis's marginal tax city of Athens bond?

D) $5,000
A) $17,500 E) None of the
B) $1,400 choices are correct
C) $1,300

Bloom's : Apply
Question Details AACSB : Knowledge
AICPA : BB Critical Thinking Application
Accessibility : Keyboard Navigation Accessibility : Screen Reader
Difficulty : 2 Medium Compatible
Learning Objective : 01-04 Identify the various federal, state, and local Type : Static
taxes.
Topic : Types of Taxes

92) Curtis invests $550,000 in a city of Athens bond that rate is 24 percent.
pays 7.50 percent interest. Alternatively, Curtis could have
invested the $550,000 in a bond recently issued by Initech, How much implicit tax
Incorporated that pays 10.00 percent interest with similar risk would Curtis pay on the
as the city of Athens bond. Assume that Curtis's marginal tax city of Athens bond?

D) $13,750.00
A) $41,250.00 E) None of the
B) $3,609.00 choices are correct
C) $3,509.00

Bloom's : Apply
Question Details AACSB : Knowledge
AICPA : BB Critical Thinking Application
Accessibility : Keyboard Navigation Accessibility : Screen Reader
Difficulty : 2 Medium Compatible
Learning Objective : 01-04 Identify the various federal, state, and local Type : Algo
taxes.
Topic : Types of Taxes

Version 1 53
93) Curtis invests $250,000 in a city of Athens bond that
pays 7 percent interest. Alternatively, Curtis could have If Curtis invested in the
invested the $250,000 in a bond recently issued by Initech, Initech, Incorporated
Incorporated that pays 9 percent interest with similar risk as bonds, what would be his
the city of Athens bond. Assume that Curtis's marginal tax after-tax rate of return
rate is 24 percent. from this investment?

D) 2.52 percent
A) 5.32 percent E) None of the
B) 7.00 percent choices are correct
C) 6.84 percent

Bloom's : Apply
Question Details AACSB : Knowledge
AICPA : BB Critical Thinking Application
Accessibility : Keyboard Navigation Accessibility : Screen Reader
Difficulty : 2 Medium Compatible
Learning Objective : 01-04 Identify the various federal, state, and local Type : Static
taxes.
Topic : Types of Taxes

94) Curtis invests $625,000 in a city of Athens bond that would be his after-tax rate
pays 8.50 percent interest. Alternatively, Curtis could have of return from this
invested the $625,000 in a bond recently issued by Initech, investment?
Incorporated that pays 9.50 percent interest with similar risk
as the city of Athens bond. Assume that Curtis's marginal tax
rate is 24 percent.

If Curtis invested in the Initech, Incorporated bonds, what

D) 3.90 percent
A) 5.70 percent E) None of the
B) 8.50 percent choices are correct
C) 7.22 percent

Accessibility : Keyboard
Question Details Navigation
AICPA : BB Critical Thinking Difficulty : 2 Medium

Version 1 54
Learning Objective : 01-04 Identify the various federal, state, and local Accessibility : Screen Reader
taxes. Compatible
Topic : Types of Taxes Type : Algo
Bloom's : Apply
AACSB : Knowledge Application

95) Curtis invests $250,000 in a city of Athens bond that

pays 7 percent interest. Alternatively, Curtis could have How much explicit tax
invested the $250,000 in a bond recently issued by Initech, would Curtis incur on
Incorporated that pays 9 percent interest with similar risk as interest earned on the
the city of Athens bond. Assume that Curtis's marginal tax Initech, Incorporated
rate is 24 percent. bond?

D) $12,600
A) $17,500 E) None of the
B) $5,400 choices are correct.
C) $4,200

Bloom's : Apply
Question Details AACSB : Knowledge
AICPA : BB Critical Thinking Application
Accessibility : Keyboard Navigation Accessibility : Screen Reader
Difficulty : 2 Medium Compatible
Learning Objective : 01-04 Identify the various federal, state, and local Type : Static
taxes.
Topic : Types of Taxes

96) Curtis invests $650,000 in a city of Athens bond that

pays 8.75 percent interest. Alternatively, Curtis could have How much explicit tax
invested the $650,000 in a bond recently issued by Initech, would Curtis incur on
Incorporated that pays 10.00 percent interest with similar risk interest earned on the
as the city of Athens bond. Assume that Curtis's marginal tax Initech, Incorporated
rate is 24 percent. bond?

D) $42,525.00
A) $49,800.00 E) None of the
B) $15,600.00 choices are correct
C) $13,650.00

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Bloom's : Apply
Question Details AACSB : Knowledge
AICPA : BB Critical Thinking Application
Accessibility : Keyboard Navigation Accessibility : Screen Reader
Difficulty : 2 Medium Compatible
Learning Objective : 01-04 Identify the various federal, state, and local Type : Algo
taxes.
Topic : Types of Taxes

97) Jackson has the choice to invest in city of Mitchell order to make Jackson
bonds or Sundial, Incorporated corporate bonds that pay 10 indifferent between
percent interest. Jackson is a single taxpayer who earns investing in the city of
$55,000 annually. Assume that the city of Mitchell bonds and Mitchell and the Sundial,
the Sundial, Incorporated bonds have similar risk. Incorporated bonds for
2020? (Use tax rate
What interest rate would the city of Mitchell have to pay in schedule.)

D) 7.20 percent
A) 7.80 percent E) None of the
B) 10.00 percent choices are correct
C) 8.00 percent

Bloom's : Apply
Question Details AACSB : Knowledge
AICPA : BB Critical Thinking Application
Accessibility : Keyboard Navigation Accessibility : Screen Reader
Difficulty : 2 Medium Compatible
Learning Objective : 01-04 Identify the various federal, state, and local Type : Static
taxes.
Topic : Types of Taxes

98) Jackson has the

choice to invest in city of
Mitchell bonds or Sundial,
Incorporated corporate
bonds that pay 5.2 percent
interest. Jackson is a single
taxpayer who earns
$42,500 annually. Assume

Version 1 56
that the city of Mitchell bonds and the Sundial, Incorporated city of Mitchell and the
bonds have similar risk. Sundial, Incorporated
bonds for 2020? (Use tax
What interest rate would the city of Mitchell have to pay in rate schedule.)
order to make Jackson indifferent between investing in the

D) 3.46 percent
A) 4.06 percent E) None of the
B) 5.20 percent choices are correct
C) 4.26 percent

Bloom's : Apply
Question Details AACSB : Knowledge
AICPA : BB Critical Thinking Application
Accessibility : Keyboard Navigation Accessibility : Screen Reader
Difficulty : 2 Medium Compatible
Learning Objective : 01-04 Identify the various federal, state, and local Type : Algo
taxes.
Topic : Types of Taxes

99) Jackson has the choice to invest in city of Mitchell

bonds or Sundial, Incorporated corporate bonds that pay 10
percent interest. Jackson is a single taxpayer who earns
$55,000 annually. Assume that the city of Mitchell bonds and
the Sundial, Incorporated 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 8 percent. How would you advise Jackson to invest
his money?

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

Version 1 57
choices are correct.

Version 1 58
Difficulty : 3 Hard
Question Details AACSB : Knowledge
AICPA : BB Critical Thinking Application
Accessibility : Keyboard Navigation Accessibility : Screen Reader
Learning Objective : 01-04 Identify the various federal, state, and local Compatible
taxes. Type : Static
Topic : Types of Taxes
Bloom's : Apply

100) Taxes influence many types of business decisions but

generally do not influence personal decisions.

⊚ true
⊚ false

101) Taxes influence business decisions such as where a

business should locate or how a business should be structured.

⊚ true
⊚ false

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102) Tax policy rarely plays an important part in
presidential campaigns.

⊚ true
⊚ false

103) Margaret recently received a parking ticket. This is a

common example of a local tax.

⊚ true
⊚ false

104) George recently paid $50 to renew his driver's license.

The $50 payment is considered a tax.

⊚ true
⊚ false

Question Details

Version 1 60
AACSB : Reflective Thinking
AICPA : BB Critical Thinking
Accessibility : Keyboard Navigation
Bloom's : Remember
Difficulty : 1 Easy
Learning Objective : 01-02 Discuss what constitutes a tax and the general
objectives of taxation.
Topic : What Qualifies as a Tax?
Accessibility : Screen Reader Compatible
Type : Static

Version 1 61
105) A 1 percent charge imposed by a local government on earmarked to fund local
football tickets sold is not considered a tax if all proceeds are schools.

⊚ true
⊚ false

106) One key characteristic of a tax is that it is a required

payment to a governmental agency.

⊚ true
⊚ false

Bloom's : Analyze
Question Details Difficulty : 2 Medium
AACSB : Reflective Thinking Accessibility : Screen Reader
AICPA : BB Critical Thinking Compatible
Accessibility : Keyboard Navigation Type : Static
Learning Objective : 01-02 Discuss what constitutes a tax and the general
objectives of taxation.
Topic : What Qualifies as a Tax?

107) Common examples of sin taxes include the taxes

imposed on airline tickets and gasoline.

⊚ true ⊚ false

Question Details

Version 1 62
AACSB : Reflective Thinking Bloom's : Analyze
AICPA : BB Critical Thinking Difficulty : 2 Medium
Accessibility : Keyboard Navigation Accessibility : Screen Reader
Learning Objective : 01-02 Discuss what constitutes a tax and the general Compatible
objectives of taxation. Type : Static
Topic : What Qualifies as a Tax?

108) One benefit of a sin tax (e.g., a tax on cigarettes) is

that it should increase the demand for the products being
taxed.

⊚ true
⊚ false

Question Details
AACSB : Reflective Thinking
AICPA : BB Critical Thinking
Accessibility : Keyboard Navigation
Learning Objective : 01-02 Discuss what constitutes a tax and the general
objectives of taxation.
Topic : What Qualifies as a Tax?
Bloom's : Analyze
Difficulty : 2 Medium
Accessibility : Screen Reader Compatible
Type : Static

Version 1 63
109) In addition to raising revenues, specific U.S. taxes
may have other objectives (e.g., economic or social
objectives).

⊚ true
⊚ false

110) The two components of the tax calculation are the tax
rate and the taxpayer's status.

⊚ true
⊚ false

Accessibility : Screen Reader

Question Details Compatible
AACSB : Reflective Thinking Type : Static
AICPA : BB Critical Thinking Learning Objective : 01-03
Accessibility : Keyboard Navigation Describe the different tax rate
Bloom's : Analyze structures and calculate a tax.
Difficulty : 2 Medium
Topic : How to Calculate a Tax

111) The tax base for the federal income tax is taxable
income.

⊚ true ⊚ false

Version 1 64
Accessibility : Screen Reader
Question Details Compatible
AACSB : Reflective Thinking Type : Static
AICPA : BB Critical Thinking Learning Objective : 01-03
Accessibility : Keyboard Navigation Describe the different tax rate
Difficulty : 1 Easy structures and calculate a tax.
Bloom's : Analyze
Topic : How to Calculate a Tax

112) A flat tax is an example of a graduated tax system.

⊚ true
⊚ false

Question Details
AACSB : Reflective Thinking
AICPA : BB Critical Thinking
Accessibility : Keyboard Navigation
Difficulty : 1 Easy
Bloom's : Analyze
Topic : How to Calculate a Tax
Accessibility : Screen Reader Compatible
Type : Static
Learning Objective : 01-03 Describe the different tax rate structures and
calculate a tax.

Version 1 65
113) The main difficulty in calculating an income tax is
determining the correct amount of the tax base.

⊚ true
⊚ false

Accessibility : Screen Reader

114) A taxpayer's average tax rate is the most appropriate

tax rate to use in tax planning.

⊚ true
⊚ false

Accessibility : Screen Reader

115) The effective tax rate, in general, provides a better

depiction of a taxpayer's tax burden than the average tax rate.

⊚ true ⊚ false

Question Details

Version 1 66
AACSB : Reflective Thinking
AICPA : BB Critical Thinking
Accessibility : Keyboard Navigation
Bloom's : Remember
Difficulty : 2 Medium
Topic : How to Calculate a Tax
Accessibility : Screen Reader Compatible
Type : Static
Learning Objective : 01-03 Describe the different tax rate structures and
calculate a tax.

Version 1 67
116) The effective tax rate expresses the taxpayer's total tax
as a percentage of the taxpayer's taxable and nontaxable
income.

⊚ true
⊚ false

Accessibility : Screen Reader

117) In a proportional (flat) tax rate system, the marginal

tax rate will always equal the average tax rate.

⊚ true
⊚ false

Accessibility : Screen Reader

Question Details Compatible
AACSB : Reflective Thinking Type : Static
AICPA : BB Critical Thinking Learning Objective : 01-03
Accessibility : Keyboard Navigation Describe the different tax rate
Bloom's : Analyze structures and calculate a tax.
Difficulty : 2 Medium
Topic : How to Calculate a Tax

118) In a regressive tax rate system, the marginal tax rate

will often be greater than the average tax rate.

⊚ true ⊚ false

Version 1 68
Accessibility : Screen Reader
Question Details Compatible
AACSB : Reflective Thinking Type : Static
AICPA : BB Critical Thinking Learning Objective : 01-03
Accessibility : Keyboard Navigation Describe the different tax rate
Bloom's : Analyze structures and calculate a tax.
Difficulty : 2 Medium
Topic : How to Calculate a Tax

119) A sales tax is a common example of a progressive tax

rate structure.

⊚ true
⊚ false

Question Details
AACSB : Reflective Thinking
AICPA : BB Critical Thinking
Accessibility : Keyboard Navigation
Bloom's : Analyze
Difficulty : 2 Medium
Topic : How to Calculate a Tax
Accessibility : Screen Reader Compatible
Type : Static
Learning Objective : 01-03 Describe the different tax rate structures and
calculate a tax.

Version 1 69
120) In terms of effective tax rates, the sales tax can be
viewed as a regressive tax.

⊚ true
⊚ false

Accessibility : Screen Reader

Question Details Compatible
AACSB : Reflective Thinking Type : Static
AICPA : BB Critical Thinking Learning Objective : 01-03
Accessibility : Keyboard Navigation Describe the different tax rate
Bloom's : Analyze structures and calculate a tax.
Difficulty : 2 Medium
Topic : How to Calculate a Tax

121) While sales taxes are quite common, currently the

U.S. federal government does not impose a sales tax.

⊚ true
⊚ false

122) The largest federal tax, in terms of revenue collected,

is the Social Security tax.

⊚ true ⊚ false

Question Details

Version 1 70
AACSB : Reflective Thinking Topic : Types of Taxes
AICPA : BB Critical Thinking Bloom's : Understand
Accessibility : Keyboard Navigation Accessibility : Screen Reader
Difficulty : 2 Medium Compatible
Learning Objective : 01-04 Identify the various federal, state, and local Type : Static
taxes.

123) The 9 th Amendment to the U.S. Constitution removed

all doubt that a federal income tax was allowed under the U.S.
Constitution.

⊚ true
⊚ false

124) A common example of an employment-related tax is

the Medicare tax.

⊚ true
⊚ false

Version 1 71
125) Self-employment taxes are charged on self-
employment income in addition to any federal income tax.

⊚ true
⊚ false

126) Excise taxes are typically levied on the value of a

good purchased.

⊚ true
⊚ false

127) The estate tax is assessed based on the fair market

values of transfers made during a taxpayer's life.

⊚ true
⊚ false

Version 1 72
taxes.
Question Details Topic : Types of Taxes
AACSB : Reflective Thinking Accessibility : Screen Reader
AICPA : BB Critical Thinking Compatible
Accessibility : Keyboard Navigation Type : Static
Bloom's : Analyze
Difficulty : 2 Medium
Learning Objective : 01-04 Identify the various federal, state, and local

128) A use tax is typically imposed by a state on goods

purchased within the state.

⊚ true
⊚ false

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129) Property taxes may be imposed on both real and
personal property.

⊚ true
⊚ false

130) Relative to explicit taxes, implicit taxes are much

easier to estimate.

⊚ true
⊚ false

131) Implicit taxes are indirect taxes on tax-favored assets.

⊚ true
⊚ false

Question Details

Version 1 74
AACSB : Reflective Thinking taxes.
AICPA : BB Critical Thinking Topic : Types of Taxes
Accessibility : Keyboard Navigation Accessibility : Screen Reader
Bloom's : Analyze Compatible
Difficulty : 2 Medium Type : Static
Learning Objective : 01-04 Identify the various federal, state, and local

132) Dynamic forecasting does not take into consideration

taxpayers' responses to a tax change when estimating tax
revenues.

⊚ true
⊚ false

alternative tax systems.

133) The income and substitution effects are two opposing

effects that one could consider in static forecasting.

⊚ true
⊚ false

alternative tax systems.

Version 1 75
134) Horizontal equity is defined in terms of taxpayers in of taxpayers in different
similar situations whereas vertical equity is defined in terms situations.

⊚ true
⊚ false

alternative tax systems.

Question Details Topic : Evaluating Alternative
AACSB : Reflective Thinking Tax Systems
AICPA : BB Critical Thinking Accessibility : Screen Reader
Accessibility : Keyboard Navigation Compatible
Bloom's : Remember Type : Static
Difficulty : 1 Easy
Learning Objective : 01-05 Apply appropriate criteria to evaluate

135) Regressive tax rate structures are typically considered

to be vertically equitable.

⊚ true
⊚ false

alternative tax systems.

136) Estimated tax payments are one way the federal

income tax system addresses the "certainty" criterion in
evaluating tax systems.

⊚ true
⊚ false

Question Details

Version 1 76
AACSB : Reflective Thinking
AICPA : BB Critical Thinking
Accessibility : Keyboard Navigation
Bloom's : Analyze
Difficulty : 2 Medium
Learning Objective : 01-05 Apply appropriate criteria to evaluate
alternative tax systems.
Topic : Evaluating Alternative Tax Systems
Accessibility : Screen Reader Compatible
Type : Static

Version 1 77
137) One must considerthe "economy" criterion in
evaluating tax systems from both the taxpayer's and the
government's perspective.

⊚ true
⊚ false

Topic : Evaluating Alternative

Version 1 78
Answer Key

Test name: Chapter 01

1) Taxes are a part of everyday life and have a the financial
financial effect on many of the major personal decision-making
decisions that individuals face (e.g., process.
investment decisions, evaluating alternative Taxes also play a
job offers, saving for education expenses, gift major part in the
or estate planning, etc.). Taxes play an equally political process.
important role in fundamental business U.S. presidential
decisions such as the following: candidates often
distinguish
• What organizational form should a business themselves from
use? Where should the business locate? their opponents
• How should business acquisitions be based upon their tax
structured? rhetoric. Indeed, the
• How should employees be compensated? major political
What is the appropriate mix of debt and equity parties generally
for the business? have very diverse
• Should the business rent or own equipment views of the
and property? appropriate way to
• How should the business distribute profits to tax the public.
its owners? Voters must have a
Savvy business decisions require basic understanding
consideration of all costs and benefits in order of taxes to evaluate
to evaluate the merits of a transaction. the merits of
Although taxes do not necessarily dominate alternative tax
these decisions, they do represent large proposals.
transaction costs that should be factored into

Version 1 79
2) a. Not a tax because receiving a specific payment imposed
benefit for amount paid.<br> b. Not a tax, by local
penalties/fines are not taxes by definition.<br> government, no
c. A tax, required payment imposed by local specific benefit
government, tax not tied to specific benefit received by payer.
received by payer.<br> d. A tax, required
3) In addition to the general objective of are also used to
raising revenue, Congress uses the federal tax discourage certain
system to encourage certain behavior and less desirable
discourage other behavior. The charitable taxpayer behavior.
contribution deduction is intended to For example, "sin
encourage taxpayers to support the initiatives taxes" impose
of charitable organizations (social objective) relatively high
whereas deductions for retirement surcharges on
contributions are intended to encourage alcohol and tobacco
retirement savings (social objective). Taxes products to
are also often used to encourage investment discourage their use.
and stimulate the economy. Likewise, taxes
4) Jonah will owe $30,079.50 in federal increases in income
income tax this year computed as follows: and deductions is 24
$30,079.50 = $14,605.50 + (24% × ($150,000 percent.If Jonah
− $85,525)).Jonah's average tax rate is 20.05 earns an additional
percent.Average Tax Rate = Total Tax / $40,000 of taxable
Taxable Income = $30,079.50 / $150,000 = income, his
20.05%Jonah's effective tax rate is 18.80 marginal tax rate on
percent.Effective Tax Rate = Total Tax / Total the income is 29.34
Income = $30,079.50 / ($150,000 + $10,000) percent.Marginal
= 18.80%Jonah is currently in the 24 percent Tax Rate = Change
tax rate bracket. His marginal tax rate on small in Tax / Change in

Version 1 80
Taxable Income = ($41,815.50 − 29.34%
$30,079.50) / ($190,000 − $150,000) =
5) A proportional (flat) tax rate structure income increases,
imposes a constant tax rate throughout the tax the sales tax may be
base. Common examples of proportional taxes considered a
include sales taxes and excise taxes (i.e., taxes regressive tax.
based on quantity, such as gallons of gas
purchased). One can view
vertical equity in
A progressive tax rate structure imposes an terms of tax dollars
increasing marginal tax rate as the tax base paid or in terms of
increases. Common examples of progressive tax rates.
tax rate structures include federal and state Proponents of
income taxes and federal estate and gift taxes. proportional tax rate
structures are more
A regressive tax rate structure imposes a likely to argue that
decreasing marginal tax rate as the tax base vertical equity is
increases. Regressive tax rate structures are achieved when
not common. In the United States, the Social taxpayers with a
Security tax and federal and state greater ability to
unemployment taxes employ a regressive tax pay tax simply pay
rate structure. However, there are other more in tax dollars.
regressive taxes when the tax is viewed in Thus, from this
terms of effective tax rates. For example, a view, a proportional
sales tax by definition is a proportional tax— tax rate achieves
i.e., as taxable purchases increase, the sales vertical equity.
tax rate (i.e., the marginal tax rate) remains
constant. Nonetheless, when you consider that Proponents of a
the proportion of one's total income spent on progressive tax
taxable purchases likely decreases as total system are more

Version 1 81
likely to argue that taxpayers with a greater (unless one is a
ability to pay should be subject to a higher tax strong advocate of
rate. This view is based upon the argument the belief that those
that the relative burden of a flat tax rate with a greater
decreases as a taxpayer's income increases. ability to pay do so
Thus, vertical equity is achieved only when simply by paying
taxpayers with a greater ability to pay are more tax dollars,
subject to a higher tax rate. albeit at a lower tax
rate).
Regressive tax rate structures are generally
considered not to satisfy vertical equity
6) Employment taxes consist of the Old Age, basically the same
Survivors, and Disability Insurance (OASDI) as the employer's
tax, commonly called Social Security tax, and and employee's
the Medical Health Insurance (MHI) tax, share of the Social
known as the Medicare tax. The Social Security and
Security tax pays the monthly retirement, Medicare taxes. The
survivor, and disability benefits for qualifying tax rates for these
individuals, whereas the Medicare tax pays for taxes are 12.4
medical insurance for individuals who are percent and 2.9
elderly or disabled. The tax base for the Social percent,
Security and Medicare taxes is wages or respectively, and the
salary, and the rates are 12.4 percent and 2.9 tax base is net self-
percent, respectively. Employers and employment
employees split this tax equally. Thus, Bart income. The self-
will have to pay the employer's portion of employment tax is
these taxes for his employees. in addition to any
federal income tax
As a self-employed individual, Bart must also owed by the
pay the self-employment tax, which is individual.

Version 1 82
without cause. The
In addition to the Social Security and tax base for the
Medicare taxes, employers are also required to unemployment
pay federal and state unemployment taxes, taxes is also wages
which fund temporary unemployment benefits or salary.
for individuals terminated from their jobs
7) The student is considering explicit taxes these calculations,
and ignoring implicit taxes. An explicit tax is taxpayers may
a tax that is directly imposed by a government conclude that
unit and easily quantified. Implicit taxes are groups of taxpayers
the reduced rates of pretax return that a tax- investing in tax-
favored asset produces (e.g., the lower pretax advantaged assets
rate of return earned by tax exempt municipal (subject to implicit
bonds). Although implicit taxes are real and tax) do not pay their
equally important in understanding our tax fair share of tax as
system, they are difficult to quantify.<br> represented by a
<br> Because implicit taxes are difficult to low effective tax
quantify, they are not generally considered rate.
when calculating average and effective tax
rates (i.e., when assessing relative tax
burdens). Since implicit taxes are ignored in
8) Mandy's forecast is based on dynamic purchase gum) for
forecasting (i.e., she is considering how taxable purchases.
taxpayers may alter their activities in response The decreased tax
to the tax law change). Given that Mandy is revenue from gum
projecting a decrease in tax revenues, her sales does not
estimates must be based on the substitution necessarily imply
effect—i.e., taxpayers are likely to substitute that Mandy will
nontaxable activities (e.g., simply not achieve a cleaner

Version 1 83
city, as taxpayers may simply buy their gum that do not impose
outside the city. This will depend on how the high gum tax.
close the city is to other towns/neighborhoods
9) A sales tax by definition is a proportional to pay tax pay more
tax—i.e., as taxable purchases increase, the in tax dollars.
sales tax rate (i.e., the marginal tax rate) Opponents of a
remains constant. For this reason, Milton is national sales tax
correct. Nonetheless, when you consider that (e.g., Rocco) are
the proportion of one's total income spent on more likely to argue
taxable purchases likely decreases as total that taxpayers with
income increases, the sales tax may be a greater ability to
considered a regressive tax. For this reason, pay should be
Rocco is correct. subject to a higher
tax rate. This view
Vertical equity is achieved when taxpayers is based upon the
with greater ability to pay tax pay more tax argument that the
relative to taxpayers with a lesser ability to relative burden of a
pay tax. One can view vertical equity in terms sales tax decreases
of tax dollars paid or in terms of tax rates. as a taxpayer's
Proponents of a sales tax (e.g., Milton) are income (e.g.,
more likely to argue that vertical equity is disposable income)
achieved when taxpayers with a greater ability increases.

10) Certainty means that taxpayers should be be filed with the

able to determine when to pay the tax, where Internal Revenue
to pay the tax, and how to determine the tax. It Service each year
is relatively easy to determine when and on or before April
where to pay the federal income tax. For 15th (or the first
example, individual federal income tax returns business day
and the remaining balance of taxes owed must following April

Version 1 84
15th). Thus, from this perspective, the federal budget represents
income tax scores high. approximately ½ of
a percent of every
However, the federal income tax is often tax dollar collected.
criticized as being complex. What are Compared to the
taxable/nontaxable forms of income? What are typical costs of a
deductible/nondeductible expenses? When collection agency,
should income or expense be reported? For this is quite a low
many taxpayers (e.g., wage earners with few percentage cost.
investments), the answers to these questions
are straightforward. For other taxpayers (e.g., From the taxpayer's
business owners, individuals with a lot of perspective of
investments), the answers to these questions economy, the
are nontrivial. Constant tax law changes federal income tax
enacted by Congress also add to the difficulty does not fare so
in determining the proper amount of income well. The income
tax to pay. These changes can make it difficult tax is often
to determine a taxpayer's current tax liability, criticized for the
much less plan for the future. From this compliance costs
perspective of "certainty," the federal income imposed on the
tax system does not fare so well. taxpayer. Indeed,
for certain
Economy requires that a good tax system taxpayers, record-
should minimize the compliance and keeping costs,
administration costs associated with the tax accountant fees,
system. Economy can be viewed from both attorney fees, etc.,
the taxpayers' and government's perspectives. can be quite
From the government's perspective, the substantial.
federal tax system fares well with respect to
economy. For example, the current IRS

Version 1 85
11) Jonah will owe $30,079.50 in federal of taxable income,
income tax this year computed as follows: his marginal tax rate
$30,079.50 = $14,605.50 + (24% × ($150,000 on the income is
− $85,525)).Jonah's average tax rate is 20.05 29.34
percent.Average Tax Rate = Total Tax / percent.Marginal
Taxable Income = $30,079.50 / $150,000 = Tax Rate = Change
20.05%Jonah's effective tax rate is 18.80 in Tax / Change in
percent.Effective Tax Rate = Total Tax / Total Taxable Income =
Income = $30,079.50 / ($150,000 + $10,000) ($41,815.50 −
= 18.80%Jonah is currently in the 24 percent $30,079.50) /
tax rate bracket. His marginal tax rate on small ($190,000 −
increases in income and deductions is 24 $150,000) = 29.34%
percent.If Jonah earns an additional $40,000
12) Jonah will owe ${{[a(7)]:#,###.##}} in {{[a(5)]:#,###}}
federal income tax this year computed as percent.
follows:${{[a(7)]:#,###.##}} = $
{{[a(4)]:#,###.00}} + ({{[a(5)]:#,###.##}}% If Jonah earns an
× (${{[a(1)]:#,###.##}} − $ additional $
{{[a(6)]:#,###.##}})).Jonah's average tax rate {{[a(3)]:#,###}} of
is {{[a(8)]:#,###.##}} percent.Average Tax taxable income, his
Rate = Total Tax / Taxable Income = $ marginal tax rate on
{{[a(7)]:#,###.##}} / ${{[a(1)]:#,###.##}} = the income is
{{[a(8)]:#,###.##}}%Jonah's effective tax rate {{[a(15)]:#,###.##}
is {{[a(9)]:#,###.##}} percent.Effective Tax } percent.Marginal
Rate = Total Tax / Total Income = $ Tax Rate = Change
{{[a(7)]:#,###.##}} / (${{[a(1)]:#,###.##}} + in Tax / Change in
${{[a(2)]:#,###.##}}) = {{[a(9)]:#,###.##}} Taxable Income =
%Jonah is currently in the {{[a(5)]:#,###}} ($
percent tax rate bracket. His marginal tax rate {{[a(14)]:#,###.##}
on small increases in income and deductions is } −$

Version 1 86
{{[a(7)]:#,###.##}}) / (${{[a(10)]:#,###.##}}
− ${{[a(1)]:#,###.##}}) =
{{[a(15)]:#,###.##}}%.

Version 1 87
13) Heather will owe $7,548 in federal income percent.
tax this year, computed as follows:
$7,548 = $6,162 + (22% × ($60,000 − If Heather has an
$53,700)). additional $20,000
Heather's average tax rate is 12.58 of tax deductions,
percent.Average Tax Rate = Total Tax / her marginal tax
Taxable Income = $7,548 / $60,000 = 12.58% rate on the
deductions is 15.15
Heather's effective tax rate is 11.61 percent.Marginal
percent.Effective Tax rate = Total Tax / Total Tax Rate = Change
Income = $7,548 / ($60,000 + $5,000) = in Tax / Change in
11.61% Taxable Income =
($4,518 − $7,548) /
Heather is currently in the 22 percent tax rate ($40,000 − $60,000)
bracket. Her marginal tax rate on small = 15.15%
increases in income and deductions is 22
14) Heather will owe ${{[a(7)]:#,###.00}} in $
federal income tax this year, computed as {{[a(2)]:#,###.##}}
follows: )=
${{[a(7)]:#,###.00}} = ${{[a(4)]:#,###.00}} {{[a(9)]:#,###.##}}
+ ({{[a(5)]:#,###.##}}% × ($ %Heather is
{{[a(1)]:#,###.##}} − $ currently in the
{{[a(6)]:#,###.##}})).Heather's average tax {{[a(5)]:#,###}}
rate is {{[a(8)]:#,###.##}} percent.Average percent tax rate
Tax Rate = Total Tax / Taxable Income = $ bracket. Her
{{[a(7)]:#,###.##}} / ${{[a(1)]:#,###.##}} = marginal tax rate on
{{[a(8)]:#,###.##}}%Heather's effective tax small increases in
rate is {{[a(9)]:#,###.##}} percent.Effective income and
Tax rate = Total Tax / Total Income = $ deductions is
{{[a(7)]:#,###.##}} / (${{[a(1)]:#,###.##}} + {{[a(5)]:#,###}}

Version 1 88
percent. −$
{{[a(1)]:#,###.##}}
If Heather has an additional ${{[a(3)]:#,###}} )=
of tax deductions, her marginal tax rate on the {{[a(15)]:#,###.##}
income is {{[a(15)]:#,###.##}} }%.
percent.Marginal Tax Rate = Change in Tax /
Change in Taxable Income = ($
{{[a(14)]:#,###.##}} − $
{{[a(7)]:#,###.##}}) / (${{[a(10)]:#,###.##}}
15) Fred and Wilma will owe $13,580 in deductions is 22
federal income tax this year, computed as percent.
follows:
$13,580 = $9,235 + (22% × ($100,000 − If Fred and Wilma
$80,250)). earn an additional
$40,000 of taxable
Fred and Wilma's average tax rate is 13.58 income, their
percent. marginal tax rate on
Average Tax Rate = Total Tax/Taxable the income is 22.00
Income = $13,580 / $100,000 = 13.58% percent..
Fred and Wilma's effective tax rate is 11.32
percent. Marginal Tax Rate
Effective Tax Rate = Total Tax/Total Income = Change in
= $13,580 / ($100,000 + $20,000) = 11.32% Tax/Change in
Taxable Income =
Fred and Wilma are currently in the 22 ($22,380 − $13,580)
percent tax rate bracket. Their marginal tax / ($140,000 −
rate on small increases in income and $100,000) = 22.00%

16) Nick would owe $25,279.50 and Jessica ($130,000 −

would owe $62,295, computed as follows: $85,525)).
Nick: $25,279.50 = $14,605.50 + (24% × Jessica: $62,295 =

Version 1 89
$47,367.5 + (35% × ($250,000 − $207,350)).
If Nick and Jessica
Nick's average tax rate is 19.45 percent. filed jointly, they
Average Tax Rate = Total Tax/Taxable would owe $83,631
Income = $25,279.50 / $130,000 = 19.45% in tax.
$83,631 = $66,543
Jessica's average tax rate is 24.92 percent. + (32% × ($380,000
Average Tax Rate = Total Tax/Taxable − $326,600)).
Income = $62,295 / $250,000 = 24.92% Thus, filing jointly
would save them
Nick is in the 24 percent tax rate bracket, and $3,943.50
Jessica is in the 35 percent tax rate bracket. (($25,279.50 +
Thus, their marginal tax rates are 24 percent $62,295.00) −
and 35 percent, respectively, on small $83,631.00).
increases in income and deductions.
17) Since the city of Las Vegas bond is a tax- similarly priced
exempt bond, Ariel's after-tax rate of return on taxable bond (i.e.,
the bond is equal to its pretax rate of return (5 the Jittery Joe's,
percent). Ariel pays no explicit tax on the Incorporated bond)
interest earned from the city of Las Vegas would pay $4,000
bond. The Jittery Joe's bond would pay $4,000 of taxable interest
of interest (i.e., 8% × $50,000). Since Ariel's (i.e., 8% ×
marginal tax rate is 24 percent, she would $50,000). Ariel pays
have paid $960 of explicit tax (i.e., 25% × $1,500 of implicit
$4,000) on the interest earned from the Jittery tax on the city of
Joe's, Incorporated bond, and her after-tax rate Las Vegas bond
of return would be 6.08 percent (($4,000 (i.e., the difference
interest − $960 tax) / $50,000 investment). between the pretax
Ariel earns $2,500 of interest on the city of interest earned from
Las Vegas bond (i.e., 5% × $50,000). A a similar taxable

Version 1 90
bond ($4,000) and the pretax interest earned $960 tax)/$50,000
from the city of Las Vegas bond ($2,500)). investment) =
Ariel should choose the Jittery Joe's, 6.08%) than the city
Incorporated bond because it earns a higher of Las Vegas bond
after-tax rate of return ((($4,000 interest − (5%).

18) Nelson's after-tax rate of return on the tax- Pretax return = 4% /

exempt city of Fruithurst bond is 4 percent. (1 − 40%) = 6.67%
The J.B. Ribs, Incorporated bond pays taxable
interest of 6.5 percent. Nelson's after-tax rate
of return on the J.B. Ribs, Incorporated bond
is 3.9 percent (i.e., 6.5% interest income −
(6.5% × 40%) tax = 3.9%). Nelson should
invest in the city of Fruithurst bond.

For Nelson to be indifferent between investing

in the two bonds, the J.B. Ribs, Incorporated
bond should provide Nelson the same after-tax
rate of return as the city of Fruithurst bond (4
percent). To solve for the required pretax rate
of return we can use the following formula:
After-tax return = Pretax return × (1 −
Marginal Tax Rate).

J.B. Ribs, Incorporated needs to offer a 6.67

percent interest rate to generate a 4 percent
after-tax return and make Nelson indifferent
between investing in the two bonds.

4% = Pretax return × (1 − 40%);

Version 1 91
19) Nelson's after-tax rate of return on the tax-
exempt city of Fruithurst bond is
{{[a(1)]:#.##}} percent. The J.B. Ribs,
Incorporated bond pays taxable interest of
{{[a(2)]:#.##}} percent. Nelson's after-tax rate
of return on the J.B. Ribs, Incorporated bond
is {{[a(4)]:#.##}} percent (i.e.,
{{[a(2)]:#.##}}% interest income −
({{[a(2)]:#.##}}% × {{[a(3)]:#.##}}%) tax =
{{[a(4)]:#.##}}%). Nelson should invest in
the city of Fruithurst bond.

For Nelson to be indifferent between investing

in the two bonds, the J.B. Ribs, Incorporated
bond should provide Nelson the same after-tax
rate of return as the city of Fruithurst bond
({{[a(1)]:#.##}} percent). To solve for the
required pretax rate of return we can use the
following formula: After-tax return = Pretax
return × (1 − Marginal Tax Rate).

J.B. Ribs, Incorporated needs to offer a

{{[a(5)]:#.##}} percent interest rate to
generate a {{[a(1)]:#.##}} percent after-tax
return and make Nelson indifferent between
investing in the two bonds.

{{[a(1)]:#.##}}% = Pretax return × (1 −

{{[a(3)]:#.##}}%);
Pretax return = {{[a(1)]:#.##}}%/ (1 −
{{[a(3)]:#.##}}%) = {{[a(5)]:#.##}}%

Version 1 92
20) Namratha's after-tax rate of return on the
tax-exempt city of Watkinsville bond is 4.5 Moe's, Incorporated
percent. The Moe's, Incorporated bond pays needs to offer a 6.62
taxable interest of 7 percent. Namratha's after- percent interest rate
tax rate of return on the Moe's, Incorporated to generate a 4.5
bond is 4.76 percent (i.e., 7% interest income percent after-tax
− (7% × 32%) tax = 4.76%). Namratha should return and make
invest in the Moe's, Inc. bond. Namratha
indifferent between
For Namratha to be indifferent between investing in the two
investing in the two bonds, the Moe's, bonds.
Incorporated bond should provide Namratha
the same after-tax rate of return as the city of 4.5% = Pretax
Watkinsville bond (4.5 percent). To solve for return × (1 − 32%);
the required pretax rate of return we can use Pretax return =
the following formula: After-tax return = 4.5%/(1 − 32%) =
Pretax return × (1 − Marginal Tax Rate). 6.62%

21) Mort's average tax rate is 20 A 16 percent

percent.Average Tax Rate = Total Tax / Total
Income = $4,000 / $20,000 = 20%
A 20 percent average tax rate on Lizzy's
$80,000 total income would result in $16,000
of tax (i.e., 20% × $80,000 = $16,000). Thus,
Lizzy must pay more than $16,000 in tax for
the tax structure to be progressive with respect
to average tax rates.

Mort's effective tax rate is 16

percent.Effective tax rate = Total Tax / Total
Income = $4,000 / ($20,000 + $5,000) = 16%

Version 1 93
effective tax rate on Lizzy's $110,000 total
income would result in $17,600 of tax (i.e.,
16% × $110,000 = $17,600). Thus, Lizzy
must pay more than $17,600 in tax for the tax
structure to be progressive with respect to
effective tax rates.

Version 1 94
22) Mort's average tax rate is {{[a(6)]:#,###}} {{[a(9)]:#,###}}
percent.Average Tax Rate = Total Tax / Total total income would
Income = ${{[a(3)]:#,###.##}} / $ result in $
{{[a(1)]:#,###.##}} = {{[a(6)]:#,###.##}}%A {{[a(10)]:#,###}}
{{[a(6)]:#,###}} percent average tax rate on of tax (i.e.,
Lizzy's ${{[a(4)]:#,###}} total income would {{[a(8)]:#,###}}%
result in ${{[a(7)]:#,###}} of tax (i.e., × ${{[a(9)]:#,###}}
{{[a(6)]:#,###}}% × ${{[a(4)]:#,###}} = $ =$
{{[a(7)]:#,###}}). Thus, Lizzy must pay more {{[a(10)]:#,###}}).
than ${{[a(7)]:#,###}} in tax for the tax Thus, Lizzy must
structure to be progressive with respect to pay more than $
average tax rates. {{[a(10)]:#,###}} in
Mort's effective tax rate is {{[a(8)]:#,###}} tax for the tax
%.Effective tax rate = Total Tax / Total structure to be
Income = ${{[a(3)]:#,###.##}} / ($ progressive with
{{[a(1)]:#,###.##}} + ${{[a(2)]:#,###.##}}) = respect to effective
{{[a(8)]:#,###.##}}%A {{[a(8)]:#,###}} tax rates.
percent effective tax rate on Lizzy's $
23) Diego's average tax rate is 5 Income = $1,500 /
percent.Average Tax Rate = Total Tax / Total ($30,000 + $10,000)
Income = $1,500 / $30,000 = 5% = 3.75%
A 5 percent average tax rate on Dora's A 3.75 percent
$50,000 total income would result in $2,500 effective tax rate on
of tax (i.e., 5% × $50,000 = $2,500). Thus, Dora's $55,000 total
Dora must pay more than $2,500 in tax for the income would result
tax structure to be progressive with respect to in $2,062.50 of tax
average tax rates. (i.e., 3.75% ×
$55,000 =
Diego's effective tax rate is 3.75 $2,062.50). Thus,
percent.Effective tax rate = Total Tax / Total Dora must pay more

Version 1 95
than $2,062.50 in tax for the tax structure to rates.
be progressive with respect to effective tax
24) Under the current income tax, Junior has Thus, the
$60,000 of income after tax. If the income government's tax
effect is descriptive and Congress increases revenues would
tax rates so that Junior's average tax rate is 30 decrease by $2,000
percent, Junior will need to earn $85,714.29 to (i.e., $18,000 −
continue to have $60,000 of income after tax. $20,000). This is an
After-tax income = Pretax income (1 − tax example of the
rate) substitution effect,
$60,000 = Pretax income (1 − 0.30) which may be
Pretax income = $60,000/0.70 descriptive for
Pretax income = $85,714.29 taxpayers with more
Junior will pay $25,714.29 in tax ($85,714.29 disposable income
× 0.30). Accordingly, if the income effect is who can afford to
descriptive, the tax base and the tax collected earn less and
will increase. maintain a style of
If Junior only earns $60,000 of taxable living.
income, he would pay $18,000 of tax under
the new tax structure (i.e., $60,000 × 0.30).
25) Horizontal equity means that two To be vertically
taxpayers in similar situations pay the same equitable with
tax. Thus, to make the tax structure respect to tax rates,
horizontally equitable, Carrie should pay Simon should pay a
$1,500 in tax. tax rate higher than
7.5 percent. A 7.5
Fantasia's average tax rate is 7.5 percent. percent tax rate on
Average Tax Rate = Total Tax / Taxable Simon's $20,000
Income = $1,500 / $20,000 = 7.5% taxable income

Version 1 96
would result in $2,250 of tax (i.e., 7.5% × in a progressive tax
$20,000 = $2,250). Thus, Simon must pay rate structure.
more than $2,250 in tax for the tax structure to
be vertically equitable (i.e., to generate a tax
rate more than 7.5 percent). This would result
26) The tax rate schedule is horizontally pay (Lucy and
equitable because those taxpayers in the same Ethel) do not pay
situation (Lucy and Ethel) pay the same tax more tax, nor do
($4,500). The tax is not vertically equitable they pay a higher
because the taxpayers with a greater ability to tax rate than Ricky.

27) We cannot evaluate whether the tax rate and at a higher rate.
structure is horizontally equitable because we Specifically, Moe's,
are unable to determine if taxpayers in similar Larry's, and Curly's
situations pay the same tax (i.e., the problem average tax rates are
does not give data for two taxpayers with the 7.5 percent, 21.25
same income). The tax rate structure would be percent, and 25.5
considered vertically equitable because percent,
taxpayers with higher income pay more tax respectively.

28) Taxes will affect several aspects of Jed's differences in beer

decision. Jed should consider differences in consumption across
Georgia and Tennessee for (1) business taxes states, factors that
(e.g., corporate taxes), (2) individual income might influence
taxes, (3) excise taxes on beer, (4) real estate long-term growth in
taxes (business and personal), (5) estate taxes the business,
(e.g., for wealth transfers from his parents), differences in costs
and (6) sales taxes.<br>Some nontax factors associated with
to be considered would include relative operating the
competition from other distributors, business (licenses,

Version 1 97
relative wages, utilities, etc.), quality of life
factors such as the quality of education, crime,
recreational opportunities, etc.

Version 1 98
29) Based on the information above, the We can use the
average taxpayer pays $14,000 of tax (i.e., above formula to
$80,000 × 17.5%), leaving $66,000 of income solve for the new
after tax. A 20 percent increase in revenues tax rate.
would mean that the average taxpayer pays After-tax income =
$16,800 in tax ($14,000 × 1.20). With this Pretax income × (1
new tax amount, we can solve for the tax rate − tax rate)
that would generate this tax amount. $66,000 = $82,800
After-tax income = Pretax income × (1 − tax × (1 − tax rate)
rate) Tax rate =
After-tax income = Pretax income − (Pretax $16,800/$82,800 =
income × tax rate) 20.29%
After-tax income = Pretax income − Tax This is an example
Substituting information from the problem of dynamic
results in: forecasting.
$66,000 = Pretax income − $16,800
Pre-tax income = $82,800
30) Based on the information above, the TaxSubstituting
average taxpayer pays ${{[a(4)]:#,###}} of information from
tax (i.e., ${{[a(2)]:#,###}} × {{[a(3)]:#.##}} the problem results
%), leaving ${{[a(5)]:#,###}} of income after in:$
tax. A [a(1)] percent increase in revenues {{[a(5)]:#,###}} =
would mean that the average taxpayer pays $ Pretax income − $
{{[a(7)]:#,###}} in tax (${{[a(4)]:#,###}} × {{[a(7)]:#,###}}Pre
{{[a(6)]:#.##}}). With this new tax amount, -tax income = $
we can solve for the tax rate that would {{[a(8)]:#,###}}We
generate this tax amount.After-tax income = can use the above
Pretax income × (1 − tax rate)After-tax formula to solve for
income = Pretax income − (Pretax income × the new tax
tax rate)After-tax income = Pretax income − rate.After-tax

Version 1 99
income = Pretax income × (1 − tax rate)$ example of dynamic
{{[a(5)]:#,###}} = ${{[a(8)]:#,###}} × (1 − forecasting.
tax rate)Tax rate = ${{[a(7)]:#,###}}/$
{{[a(8)]:#,###}} = {{[a(9)]:#.##}}%This is an
31) E
32) C
33) E
34) D
35) B
36) C
37) E
38) B
39) C
40) B
41) B
42) B
43) A
44) A
45) B
46) B
47) B
48) B

Version 1 100
49) C
50) D
51) B
52) D
53) B
54) C
55) A
56) B
57) D
58) B
59) D
60) E
61) D
62) A
63) A
64) C
65) C
66) C
67) B
68) A
69) D

Version 1 101
70) E
71) E
72) C
73) C
74) D
75) D
76) C
77) C
78) C
79) C
80) E
81) E
82) A
83) A
84) C
85) C
86) A
87) A
88) A
89) C
90) C

Version 1 102
91) D
92) D
93) C
94) C
95) B
96) B
97) A
98) A
99) D
100) FALSE
101) TRUE
102) FALSE
103) FALSE
104) FALSE
105) FALSE
106) TRUE
107) FALSE
108) FALSE
109) TRUE
110) FALSE
111) TRUE

Version 1 103
112) FALSE
113) TRUE
114) FALSE
115) TRUE
116) TRUE
117) TRUE
118) FALSE
119) FALSE
120) TRUE
121) TRUE
122) FALSE
123) FALSE
124) TRUE
125) TRUE
126) FALSE
127) FALSE
128) FALSE
129) TRUE
130) FALSE
131) TRUE
132) FALSE

Version 1 104
133) FALSE
134) TRUE
135) FALSE
136) FALSE
137) TRUE

Version 1 105

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