CHAPTER 1 SOLUTIONS

Fundamentals of Taxation, 2023 Edition, 16e Ana Cruz

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CHAPTER 1 – SOLUTIONS

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Discussion Questions

• (Introduction) Give a brief history of the income tax in the United States.

Answer:

The first federal income tax was enacted in 1861 to help finance the Civil War and was discarded soon thereafter. In 1894, another income tax was promulgated by Congress to raise additional tax revenue and to expand the sources of revenue. In 1895, the Supreme Court ruled that the federal income tax was unconstitutional. In 1913, the sixteenth Amendment to the U.S.Constitution was enacted. This amendment gave Congress the power to levy and collect taxes. In 2020, the federal government collected about $1.75 trillion in individual income taxes.

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Learning Objective: Introduction

Topic: Income tax history

Difficulty: 1 Easy

EA: No

• (Introduction) For tax year 2020, what proportion of individual income tax returns was

electronically filed? Use Table 1-1.

Answer:

In 2020, electronically filed tax returns were about 94.25% of total returns.

Feedback: Calculated from Table 1-1

Learning Objective: Introduction

Topic: Income tax data

Difficulty: 2 Medium

EA: No

• Name the three types of tax rate structures and give an example of each.

Answer:

Progressive – U.S. federal income tax Proportional – “flat-tax” usually levied on property or sales at the state or local level Regressive – Social security tax

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Learning Objective: 01-01 2 / 4

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Topic: Tax rate structure

Difficulty: 1 Easy

EA: No

• What is a progressive tax? Why do you think the government believes it is a more

equitable tax than, say, a regressive tax or proportional tax?

Answer:

A progressive rate structure is a structure where the tax rate increases as the tax base increases. The progressive rate structure is viewed as more equitable because the amount of tax paid varies with the ability to pay. For example, the government believes that as an individual makes more income, a smaller percentage of that income is needed to buy necessary living supplies and thus more income is available to pay taxes.

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Learning Objective: 01-01

Topic: Tax rate structure

Difficulty: 2 Medium

EA: No

• What type of tax is a sales tax? Explain your answer.

Answer:

The sales tax is a proportional tax. A proportional tax is a tax where the tax rate remains the same regardless of the tax base. Most county or state sales tax rates are the same regardless of the amount of sales upon which the tax is levied. With a proportional tax, the marginal tax rate and average tax rate are always the same.

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Learning Objective: 01-01

Topic: Tax rate structure

Difficulty: 1 Easy

EA: No

• What is the definition of tax base, and how does it affect the amount of tax levied?

Answer:

The tax base is the dollar amount upon which the tax rate is applied in order to determine the actual tax. Income, dollar sales, and property value are the more common tax bases in the United States.

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Learning Objective: 01-01

Topic: Tax base 3 / 4

Solutions Manual © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Difficulty: 1 Easy

EA: No

• What type of tax rate structure is the U.S. federal income tax? Explain your answer.

Answer:

The federal income tax is a progressive tax. As the tax base increases, the rate of tax increases. Tax rates range from a low of 10% to a high of 37%.

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Learning Objective: 01-01

Topic: Tax rate structure

Difficulty: 1 Easy

EA: No

• A change to a 17% flat tax could cause a considerable increase in many taxpayers’

taxes and a considerable decrease in the case of others. Explain this statement in light of the statistics in Table 1-3.

Answer:

Those with taxable income above $200,000 have average tax rates greater than 17%, those with taxable income below $200,000 have average tax rates less than 17%. Thus, on average, if a 17% flat tax were enacted, those with taxable income under $200,000 would see their tax liability go up and those with taxable income over $200,000 would have lower tax liability.

Feedback: Based on the average tax rates in Table 1-3

Learning Objective: 01-01

Topic: Tax rate structure

Difficulty: 2 Medium

EA: No

• Explain what is meant by regressive tax. Why is the social security tax considered a

regressive tax?

Answer:

A regressive tax rate is one where the tax rate decreases as the tax base gets larger. The social security tax is assessed on the first $147,000 of wages (in 2021). Thus, the social security tax rate is 6.2% (12.4% if self-employed) on the first $147,000 of wages and 0% on wages above $147,000.

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Learning Objective: 01-01

Topic: Tax rate structure

Difficulty: 1 Easy

EA: No

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