Answers Chapter 1 Homework-Introduction

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CHAPTER 1: EXPLORING THE TAX ENVIRONMENT

DISCUSSION PROBLEMS

1) CUSTER COUNTRY IS CONSIDERING RAISING REVENUES BY IMPOSING A $25 FEE ON COUPLES WHO OBTAIN A MARRIAGE LICENSE WITHIN THE JURISDICTION. DOES THIS FEE MEET THE DEFINITION OF A TRANSACTION-BASED TAX?

NO, IT MORE CLOSELY RESEMBLES A FEE FOR A GOVERNMENT SERVICE. THE PAYMENT ENTITLES THE PAYER TO A SPECIFIC BENEFIT (THE RIGHT TO MARRY UNDER THE LAW).

2) A LOCAL GOVERNMENT RECENTLY IMPOSED A NEW 2 PERCENT TAX ON THE GROSS RECEIPTS OF BUSINESSES OPERATING WITHIN ITS JURISDICTION. THE XYZ COMPANY, WHICH MANUFACTURES SOAP AND OTHER TOILETRIES, RESPONDED TO THE TAX BY REDUCING THE SIZE OF ITS BARS OF SOAP AND PURCHASING A CHEAPER GRADE OF INGREDIENTS. BY MAKING THESE CHANGES, XYZ MAINTAINED ITS BEFORE-TAX LEVEL OF PROFITS. WHO BEARS THE INCIDENCE OF THE NEW GROSS RECEIPTS TAX?

THE CONSUMERS WHO PAY THE SAME PRICE FOR A SMALLER BAR OF SOAP OF LESSER QUALITY BEAR THE INCIDENCE OF THE NEW GROSS RECEIPTS TAX.

3) WHY IS THE REAL PROPERTY A BETTER TAX BASE THAN PERSONAL PROPERTY?

REAL PROPERTY CANNOT BE HIDDEN OR MOVED, AND ITS OWNERSHIP (LEGAL TITLE) IS A MATTER OF PUBLIC RECORD. IN CONTRAST, PERSONAL PROPERTY IS MOBILE AND MAY BE EASILY CONCEALED.

4) UNIVERSITY K IS LOCATED IN A SMALL TOWN THAT DEPENDS HEAVILY ON REAL PROPERTY TAXES AS A SOURCE OF REVENUE. OVER THE PAST DECADE, UNIVERSITY K HAS EXPANDED BY PURCHASING A NUMBER OF COMMERCIAL BUILDINGS AND PERSONAL RESIDENCES AND CONVERTING THEM TO CLASSROOMS AND DORMITORIES. IN WHAT WAY COULD THIS EXPANSION RESULT IN A DECLINE IN THE TOWN’S TAX REVENUES?

NORMALLY, UNIVERSITY-OWNED BUILDINGS WOULD BE EXEMPT FROM PROPERTY TAX. THIS WOULD CONVERT OTHERWISE TAXABLE BUILDINGS INTO TAX-EXEMPT BUILDINGS.

5) THE INTERNAL REVENUE CODE AND TREASURY REGULATIONS ARE TWO MAJOR SOURCES OF FEDERAL TAX LAW. DIFFERENTIATE BETWEEN THE CODE AND THE REGULATIONS IN TERMS OF THEIR RELATIVE WEIGHT OF AUTHORITY.

THE INTERNAL REVENUE CODE IS FEDERAL STATUTORY LAW, ENACTED BY CONGRESS AND SIGNED BY THE PRESIDENT. TECHNICALLY, REGULATIONS ONLY INTERPRET AND EXPLAIN THE STATUTE, AND ARE NOT LAWS IN THEIR OWN RIGHT. THUS, REGULATIONS ARE LESS AUTHORITATIVE THAN THE CODE ITSELF. NEVERTHELESS, THE REGULATIONS CARRY CONSIDERABLE AUTHORITATIVE WEIGHT.

6) BOTH THE FEDERAL GOVERNMENT AND MANY STATES IMPOSE SO-CALLED SIN TAXES: EXCISE TAXES LEVIED ON THE RETAIL SALE OF LIQUOR AND CIGARETTES. DISCUSS THE REASONS WHY SALES OF THESE PARTICULAR ITEMS MAKE A GOOD TAX BASE?

THEY MAKE A GOOD TAX BASE BECAUSE ANY DECLINE IN CONSUMPTION IS SOCIALLY DESIRABLE AND THE DEMAND FOR LIQUOR AND CIGARETTES IS RELATIVELY PRICE INELASTIC (CONSUMPTION STAYS RELATIVELY CONSTANT REGARDLESS OF THE PRICE).

7) DOES THE FEDERAL INCOME TAX OR THE FEDERAL PAYROLL TAX HAVE THE BROADER TAX BASE?

THE FEDERAL INCOME TAX HAS THE BROADER BASE. THE FEDERAL PAYROLL TAX IS IMPOSED ON WAGES, SALARIES, AND OTHER FORMS OF COMPENSATION EARNED BY EMPLOYEES. THE FEDERAL INCOME TAX IS IMPOSED ON ALL TYPES OF COMPENSATION.

APPLICATION PROBLEMS

1) FIRM L, WHICH OPERATES A MAIL-ORDER CLOTHING BUSINESS, IS LOCATED IN STATE L. THIS YEAR, THE FIRM SHIPPED $18 MILLION OF MERCHANDISE TO CUSTOMERS LIVING IN STATE R. STATE R IMPOSES A SIX PERCENT SALES AND USE TAX ON THE PURCHASE AND CONSUMPTION OF RETAIL GOODS WITHIN THE STATE.

A) DO STATE R RESIDENTS WHO PURCHASED FIRM L MERCHANDISE OWE USE TAX ON THEIR PURCHASES?

STATE R RESIDENTS WHO PURCHASE PROPERTY OUT-OF-STATE (I.E., THROUGH THE MAIL) BUT USE AND CONSUME THE PROPERTY IN STATE R ARE LIABLE FOR THE 6 PERCENT USE TAX.

B) IF STATE R COULD LEGALLY REQUIRE FIRM L TO COLLECT A 6 PERCENT TAX ON MAIL-ORDER SALES MADE TO RESIDENTS OF THE STATE, HOW MUCH ADDITIONAL REVENUE WOULD THE STATE COLLECT?

THE FACT THAT FIRM L MUST COLLECT THE STATE R USE TAX DOES NOT AFFECT THE LEGAL LIABILITY OF STATE R...
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