McGraw Hill’s Taxation of Individuals 2022 Edition 13th Edition by Brian Spilker Solution manual
- [LO 2] One common argument for imposing so-called sin taxes is the social goal of reducing demand for such products. Using cigarettes as an example, is there a segment of the population that might be sensitive to price and for whom high taxes might discourage purchases?
The most obvious segment sensitive to price may be teenagers and younger adults, although price sensitivity will vary by taxpayer.
- [LO 3] Dontae stated that he didn’t want to earn any more money because it would “put him in a higher tax bracket.” What is wrong with Dontae’s reasoning?
Although earning additional taxable income may increase Dontae’s marginal tax rate (i.e., put him in a higher tax bracket), the additional income earned does not affect the taxes that Dontae will pay on his existing income. Moving to a higher tax bracket simply means that Dontae will pay a higher tax rate on the additional income earned (not income that he already has).
- [LO 3] Describe the three different tax rates discussed in the chapter and how taxpayers might use them.
The marginal tax rate is the tax rate that applies to the taxpayer’s additional taxable income or deductions that the taxpayer is evaluating in a decision. Specifically,
Marginal Tax Rate =
The marginal tax rate is particularly useful in tax planning because it represents the rate of taxation or savings that would apply to additional taxable income or tax deductions.
The average tax rate represents the taxpayer’s average level of taxation on each dollar of taxable income. Specifically,
Average Tax Rate =
The average tax rate is often used in budgeting tax expense as a portion of income (i.e., what percent of taxable income earned is paid in tax).
The effective tax rate represents the taxpayer’s average rate of taxation on each dollar of total income (i.e., taxable and nontaxable income). Specifically,
Effective Tax Rate =
The effective tax rate provides a depiction of a taxpayer’s tax burden because it depicts the taxpayer’s total tax paid as a ratio of the sum of both taxable and nontaxable income earned.
- [LO 3] Which is a more appropriate tax rate to use to compare taxpayers’ tax burdens – the average or the effective tax rate? Why?
Relative to the average tax rate, the effective tax rate provides a better depiction of a taxpayer’s tax burden because it depicts the taxpayer’s total tax paid as a ratio of the sum of both taxable and nontaxable income earned.
- [LO 3] Describe the differences between a proportional, progressive, and regressive tax rate structure.
A proportional (flat) tax rate structure imposes a constant tax rate throughout the tax base. In other words, as the tax base increases, the taxes paid increases, but the marginal tax rate remains constant. Because the marginal tax rate is constant across all levels of the tax base, the average tax rate remains constant across the tax base and always equals the marginal tax rate. Common examples of proportional taxes include sales taxes and excise taxes (i.e., taxes based on quantity such as gallons of gas purchased).
A progressive tax rate structure imposes an increasing marginal tax rate as the tax base increases. In other words, as the tax base increases, both the marginal tax rate and the taxes paid increase. Common examples of progressive tax rate structures include federal and most state income taxes and federal estate and gift taxes.
A regressive tax rate structure imposes a decreasing marginal tax rate as the tax base increases. In other words, as the tax base increases, the taxes paid increases, but the marginal tax rate decreases. Regressive tax rate structures are not common. In the United States, the Social Security tax and the federal employment tax employ a regressive tax rate structure. However, there are other regressive taxes when the tax is viewed in terms of effective tax rates. For example, a sales tax by definition is a proportional tax – i.e., as taxable purchases increase, the sales tax rate (i.e., the marginal tax rate) remains constant.