Tax System

Glen_Week1_Problems_AC450A

1.8

The income tax system allows deduction for charitable contributions and retirement plan contributions to encourage certain behavior and discourage other behavior. The charitable contribution deduction is intended to encourage taxpayers to support the initiatives of charitable organizations, whereas deductions for retirement contributions are intended to encourage retirement savings.

1.10

What is wrong with Dontae’s reasoning is that earning additional taxable income may increase Dontae’s marginal tax rate, 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 higher tax rate on the additional income earned (not income that he already has).

1.14

Arnold and Lilly are both correct. A sales tax by definition is a proportional tax, as taxable purchases increase, the sales tax rate remains constant. For this reason, Arnold is correct. When you consider that the proportion of one’s total income spent on taxable purchase likely decreases as total income increases, the sales tax may be considered a regressive tax. For this reason, Lilly is correct.

1.57

I cannot evaluate whether the tax rate structure is horizontally equitable because I am unable to determine if taxpayers in similar situations pay the same tax. The tax rate structure would be considered vertically equitable because taxpayers with higher income pay more tax and at a higher rate. Marilyn, Kobe, and Alfonso’s average tax rates are 6%, 15%, and 20%.

References

Spilker, Brian C., and Benjamin Campbell Ayers. McGraw-Hill's Taxation of Individuals and Business Entities. New York, NY: McGraw-Hill/Irwin, 2014.

Granof, Michael H., and Saleha B. Khumawala. Government and Not-for-profit Accounting: Concepts and Practices. Hoboken: John Wiley and Sons, 2013.