Test Bank for Pearsons Federal Taxation 2023 Individuals,

Test Bank for Pearson’s Federal Taxation 2023 Individuals, 36e Timothy Rupert, Kenneth Anderson, David Hulse

Chapter I1: An Introduction to Taxation

LO1: History of Taxation in the United States

1) The federal income tax is the dominant form of taxation by the federal government.

Answer: TRUE

Explanation: The federal income tax provides more revenues than any other tax.

Page Ref.: I:1-2

Objective: 1

2) The Sixteenth Amendment to the U.S. Constitution permits the passage of a federal income tax law.

Answer: TRUE

Explanation: The Sixteenth Amendment amended the Constitution to permit the imposition of an income tax.Page Ref.: I:1-2

Objective: 1

3) When a change in the tax law is deemed necessary by Congress, the entire Internal Revenue Code must be revised.

Answer: FALSE

Explanation: The federal income tax law is changed on an incremental basis.

Page Ref.: I:1-3

Objective: 1

4) The largest source of federal revenues is the corporate income tax.

Answer: FALSE

Explanation: The largest source is the individual income tax.

Page Ref.: I:1-3

Objective: 1

5) Until about 100 years ago, attempts to impose a federal income tax were ruled unconstitutional. The amendment to the U.S. Constitution allowing the imposition of a federal income tax is the

• Second Amendment.
• Thirteenth Amendment.
• Sixteenth Amendment.
• Nineteenth Amendment.

Answer: C

Explanation: The Sixteenth Amendment, ratified in 1913, gave Congress the power to impose a federal income tax.Page Ref.: I:1-2

Objective: 1

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6) The largest source of revenues for the federal government comes from

• individual income taxes.
• corporate income taxes.
• Social Security and Medicare taxes (FICA).
• estate and gift taxes.

Answer: A

Explanation: The individual income tax has provided the largest source of revenues for many years.Page Ref.: I:1-3

Objective: 1

LO2: Types of Tax Rate Structures

1) A progressive tax rate structure is one where the rate of tax increases as the tax base increases.

Answer: TRUE

Explanation: Under a progressive tax system, the rate increases as the tax base increases.Page Ref.: I:1-4

Objective: 2

2) The terms "progressive tax" and "flat tax" are synonymous.

Answer: FALSE

Explanation: A proportional, not progressive, tax and flat tax are synonymous.

Page Ref.: I:1-4

Objective: 2

3) A proportional tax rate is one where the rate of the tax is the same for all taxpayers, regardless of income levels.

Answer: TRUE

Explanation: A proportional tax is essentially a flat tax.

Page Ref.: I:1-4

Objective: 2

4) Regressive tax rates decrease as the tax base increases.

Answer: TRUE

Explanation: Regressive rates increase as the base decreases.

Page Ref.: I:1-5

Objective: 2

5) The marginal tax rate is useful in tax planning because it measures the tax effect of a proposed transaction.

Answer: TRUE

Explanation: The marginal rate applies to the planned addition to income or reduction to income.Page Ref.: I:1-5

Objective: 2

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6) A taxpayer's average tax rate is the tax rate applied to an incremental amount of taxable income that is added to the tax base.

Answer: FALSE

Explanation: The marginal tax rate is the tax rate applied to an incremental amount of taxable income.Page Ref.: I:1-5

Objective: 2

7) If a taxpayer's total tax liability is $30,000, taxable income is $100,000, and economic income is $120,000, the average tax rate is 30 percent.

Answer: TRUE

Explanation: The average rate equals the tax liability divided by the taxable income.Page Ref.: I:1-5

Objective: 2

8) If a taxpayer's total tax liability is $4,000, taxable income is $20,000, and total economic income is $40,000, then the effective tax rate is 20 percent.

Answer: FALSE

Explanation: The effective rate would be $4,000/$40,000 = 10 percent.

Page Ref.: I:1-6

Objective: 2

9) Arthur pays tax of $5,000 on taxable income of $50,000 while taxpayer Barbara pays tax of $12,000 on $120,000. The tax is a

• progressive tax.
• proportional tax.
• regressive tax.
• None of the above.

Answer: B

Explanation: The tax rate is proportional because the 10% tax rate applies to both taxpayers regardless of their income level.Page Ref.: I:1-4; Example I:1-3

Objective: 2

10) Which of the following taxes is progressive?

• sales tax
• excise tax
• property tax
• federal income tax

Answer: D

Explanation: Federal income tax rates increase as a taxpayer's taxable income rises.Page Ref.: I:1-4; Topic Review I:1-1

Objective: 2

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11) Which of the following taxes is proportional?

• gift tax
• income tax
• sales tax
• Federal Insurance Contributions Act (FICA)

Answer: C

Explanation: A sales tax is assessed at a fixed rate of the purchase amount, based on state and local law.Page Ref.: I:1-4; Topic Review I:1-1

Objective: 2

12) Which of the following taxes is regressive?

• Federal Insurance Contributions Act (FICA)
• excise tax
• property tax
• gift tax

Answer: A

Explanation: For upper income wage earners, the Social Security tax ceases at a maximum wage base.For 2022, wages over $147,000 are not subject to the Social Security tax.Page Ref.: I:1-5; Topic Review I:1-1

Objective: 2

13) The corporate tax rate is

• progressive.
• regressive.
• proportional.
• none of the above.

Answer: C

Explanation: The corporate tax rate is a flat 21 percent.

Page Ref.: I:1-5

Objective: 2

14) Sarah contributes $25,000 to a church. Sarah's marginal tax rate is 35% while her average tax rate is 25%. After considering her tax savings, Sarah's contribution costs

A) $6,250.

B) $8,750.

C) $16,250.

D) $18,750.

Answer: C

Explanation: [$25,000 × (100% - 35%)] = $16,250

Page Ref.: I:1-5; Example I:1-4

Objective: 2

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