McGraw Hill’s Taxation of Individuals 2022 Edition 13th Edition by Brian Spilker Solution manual
Implicit taxes are very difficult to quantify and thus, are generally not considered when calculating average and effective tax rates. Since implicit taxes are ignored in these calculations, taxpayers may conclude that groups of taxpayers investing in tax advantaged assets (subject to implicit tax) do not pay their fair share of tax as represented by a low effective tax rate.
Benjamin will have to pay state sales tax in Alabama for the truck purchased. Assuming the vehicle will be registered in Georgia, Benjamin will have to pay use tax on the purchase at a rate representing any difference in the Alabama sales tax rate and the Georgia use tax rate. Benjamin will also have to pay personal property tax annually on the truck. Finally, since the vehicle is used in Benjamin’s business, he will be able to depreciate the truck for federal income tax purposes.
- [LO 5] Kobe strongly dislikes SUVs and is appalled that so many are on the road. He proposes to eliminate the federal income tax and replace it with a $50,000 annual tax per SUV. Based on the number of SUVs currently owned in the United States, he estimates the tax will generate exactly the amount of tax revenue currently collected from the income tax. What is wrong with Kobe’s proposal? What type of forecasting is Kobe likely using?
Kobe’s forecast is based on static forecasting (i.e., he is ignoring how taxpayers may alter their activities in response to the tax law change). Given that taxpayers are likely to substitute purchases of other vehicles for SUVs (i.e., the substitution effect), Kobe’s proposal is likely to result in a large discrepancy in projected and actual tax revenues.
- [LO 5] What is the difference between the income and substitution effects? For which types of taxpayers is the income effect more likely descriptive? For which types of taxpayers is the substitution effect more likely descriptive?
The income effect predicts that when taxpayers are taxed more (e.g., tax rate increases from 22 to 24 percent), they will work harder to generate the same after-tax dollars. The substitution effect predicts that when taxpayers are taxed more, they will substitute nontaxable activities (e.g., leisure activities) for taxable activities because the marginal value of taxable activities has decreased. The income effect is likely to be more descriptive for taxpayers with insufficient income to meet their necessities, etc. for their desired standard of living. The substitution effect is likely to be more descriptive for taxpayers with sufficient income to meet their necessities and to sustain their desired standard of living.
- [LO 5] What is the difference between horizontal and vertical equity? How do tax preferences affect people’s view of horizontal equity?
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 relative to taxpayers with a lesser ability to pay tax. One can view vertical equity in terms of tax dollars paid or in terms of tax rates.
Governmental units provide tax preferences for a variety of reasons – e.g., encourage investment, social objectives, etc. Whether one views these tax preferences as appropriate or not, greatly influences whether one considers a tax system to be fair in general and specifically, horizontally equitable. Specifically, if one views a tax preference as being inappropriate, this would adversely affect one’s view of horizontal equity.
- [LO 3, LO 5] Montel argues that a flat income tax rate system is vertically equitable. Oprah argues that a progressive tax rate structure is vertically equitable. How do their arguments differ? Who is correct?
Vertical equity is achieved when taxpayers with greater ability to pay tax, pay more tax relative to taxpayers with a lesser ability to pay tax. One can view vertical equity in terms of tax dollars paid or in terms of tax rates. Proponents of a flat income tax or sales tax (i.e., proportional tax rate structures) are more likely to argue that vertical equity is achieved when taxpayers with a greater ability to pay tax, pay more in tax dollars. Proponents of a progressive tax system are more likely to argue that taxpayers with a greater ability to pay should be subject to a higher tax rate. This view is based upon the argument that the relative burden of a flat tax rate decreases as a taxpayer’s income (e.g., disposable income) increases. Which is the correct answer? There is no correct answer. Nonetheless, many feel very strongly regarding one view or the other.