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Unformatted text preview: _____________________________________________________________________________ CHAPTER 1 FEDERAL INCOME TAXATION - AN OVERVIEW _____________________________________________________________________________ DISCUSSION QUESTIONS 1. Briefly state Adam Smith's four requirements for a good tax system. a. Equality - A tax should be imposed based on the taxpayer's ability to pay. b. Certainty - The taxpayer should be able to determine the amount of tax and how to make the required payment. c. Convenience - The tax should be levied as close as possible to the time the taxpayer receives the amount subject to tax. d. Economy - The cost of taxpayer compliance and administering the tax system should be small in relation to the revenue generated. 4. Based solely on the definitions in the chapter, is the sales tax a proportional, regressive, or progressive tax? Explain and state how the tax might be viewed differently. Strictly speaking, the sales tax is a proportional tax because it is applied at a constant rate to all levels of the tax base. Using the tax base, goods and services purchased, the marginal tax rate is always equal to the average tax rate, which is indicative of a proportional tax. When another base is used to calculate marginal and average tax rates, the tax appears to be regressive. For example, if total economic income is used as the base, lower income taxpayers will spend a higher percentage of their income on items subject to the sales tax when compared to higher income taxpayers. Thus, the marginal tax rate will be less than the average tax rate, which is indicative of a regressive tax. 10. The gift tax is supposed to tax the transfer of wealth from one taxpayer to another. However, the payment of gift tax on a transfer of property is relatively rare. Why is gift tax not paid on most gifts? Gift tax payments are rare due to the exclusions from the tax. The basic exclusion is $12,000 per donee per year. This would allow a married couple to make tax-free gifts of up to $24,000 per donee per year. Gifts in excess of the annual exclusion can be tax-free if the donor elects to use part of the unified gift and estate tax credit. Under this credit, the equivalent of $2,000,000 of property transfers may be excluded from gift and/or estate taxes. 12. What is the basis for valuing assets transferred by gift and at death? 1-9 1-10 Chapter 1: Federal Income Taxation An Overview Gift and estate taxes are based on the fair market value of the property at the date of the gift or at the date of death of the taxpayer. 18. How is a deferral different from an exclusion? An exclusion is income that is never subject to tax. A deferral is income that is not taxed in the current period, but will be taxed in a future period. The future period tax may result from inclusion of the income through either lower depreciation/amortization deductions and/or by the inclusion of a larger gain than would have occurred without the deferral....
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This note was uploaded on 11/08/2011 for the course ACC ACC 331 taught by Professor Kenny during the Spring '11 term at St. Leo.
- Spring '11