of evaluation tax rate structures.
(31)
[LO4, LO5] Compare the federal income tax to sales taxes using the certainty criterion.
Certainty means that taxpayers should be able to determine when to pay the tax, where to pay the
tax, and how to determine the tax. It is relatively easy to determine when and where to pay the
federal income tax and sales taxes. For example, individual federal income tax returns and the
remaining balance of taxes owed must be filed with the Internal Revenue Service each year on or
before April 15th (or the first business day following April 15th). Likewise, sales taxes are paid
to retailers when items are purchased, and property taxes are typically paid annually to local
governments. The ease of how to determine the tax, however, varies by tax system. Sales
taxes are determined with relative ease i.e., they are based on the value of taxable purchases.
In contrast, income taxes are often criticized as being complex. What are taxable/nontaxable
forms of income? What are deductible/nondeductible expenses? When should income or
expense be reported? For many taxpayers (e.g., wage earners with few investments), the answers
to these questions are straightforward. For other taxpayers (e.g., business owners, individuals
with a lot of investments), the answers to these questions are nontrivial. Constant tax law
changes enacted by also Congress add to the difficulty in determining the proper amount of
income tax to pay. These changes can make it difficult to determine a taxpayers current tax
liability much less plan for the future.
(32) [LO5] Many years ago a famous member of Congress proposed eliminating federal
income tax withholding. What criterion for evaluating tax systems did this proposal violate?
What would likely have been the result of eliminating withholding?
Eliminating withholding would violate the convenience criterion i.e., a tax system should be
designed to facilitate the collection of tax revenues without undue hardship on the taxpayer or
the government (i.e., a tax system should make collection as easy as possible). Eliminating
withholding would most likely have slowed collection of taxes and increased taxpayer
aggressiveness (or tax evasion). Prior research suggests that taxpayers are more likely to take
more aggressive tax positions when they owe additional taxes when filing their return.
(33) [LO5] The federal income tax scores very high on the economy criterion because the
current IRS budget is relatively low compared to the costs of a typical collection agency.
Explain why this statement may be considered wrong.
This statement ignores the economy criterion from the taxpayers perspective. The income tax is
often criticized for the compliance costs