Problem Set #1

Problem Set #1 - Daniel Paterson 905289915 ACIS 3314...

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Daniel Paterson 905289915 ACIS 3314 Problem Set #1 1/27/2011 Chapter 1 8. Income tax allows deductions for charitable contributions and retirement plan contributions as an extra incentive for people to make donations to non-profit organizations and to plan for retirement. 13. A proportional tax rate structure imposes a constant tax rate throughout the tax base. A progressive tax rate structure imposes an increasing marginal tax rate as the tax base increases. A regressive tax rate imposes a decreasing marginal tax rate as the tax base increases. 14. Sales tax is technically considered to be a flat tax because it is imposed at a constant rate; however, in terms of effective tax rate it can also be a regressive tax because the proportion of your total income spent on taxable purchases probably decreases as your total income increases. Therefore, both have valid arguments. 23. An explicit tax is a tax directly imposed by the government and is easily quantified while an implicit tax is an indirect tax that is not paid directly to the government and is a result from a tax advantage granted by the government. 24. Implicit taxes are used in the calculation of average and effective rates because the deductions/tax credits are used when calculating the total tax that an individual will pay. Taxpayers may not perceive this as being far as it gives the wealthier an opportunity to pay less taxes based off their various write offs. 27. The substitution effect states that at a higher tax rate, people will have a disincentive to work and therefore “substitute” leisure for work. The income effect states that higher tax rates results in less income so individuals will be forced to find more ways to make money. Income effect is more descriptive of lower income individuals while the substitution effect is more descriptive of wealthier individuals. 28. Horizontal equity means that two taxpayers in similar situations pay the same tax. Vertical equity is achieved when taxpayers with greater ability to pay tax, pay more tax than taxpayers with less ability to pay. Tax preferences provide a skewed perception of horizontal equity as they allow for two individuals with the same amount of taxable income to pay different amounts of taxes depending on how their money was made or spent. However, these tax preferences can be used to encourage investment and to further various social objectives.
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31. Sales tax has a much higher level of certainty than income taxes do.
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Problem Set #1 - Daniel Paterson 905289915 ACIS 3314...

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