In a <List A> personal tax system, an individual's marginal tax rate is normally <List B> the average tax rate.
Answer(s): A
The marginal tax rate is the tax applicable to the last unit of income, whereas the average tax rate is the total tax paid divided by taxable income. In a progressive tax system, higher incomes attract higher tax rates, so the marginal tax rate paid on the last unit of income exceeds the average tax rate.
On what basis is value-added tax collected?
A value-added tax VAT) is collected on the basis of the value created by the entity. This tax is measured by the difference between the value of the entity's sales and the value of its purchases. A VAT is in effect a retail sales tax. Because a consumer can avoid the tax by not purchasing, a VAT encourages saving and discourages consumption.
To index a progressive tax system to inflation, the government must:
Answer(s): C
If tax brackets are not adjusted for inflation, increases in nominal but not real income may push taxpayers into tax brackets with higher progressive) rates. Additionally, deductions and exemptions must be indexed so that the real incidence of taxation is not increased by inflation. Increases in nominal but not real income will result in higher real taxable income if deductions and exemptions have not been adjusted for inflation.
An entity purchases US $150,000 of inputs from other entities and incurs US $500,000 of labor costs in manufacturing its products. It also incurs US $100,000 of interest expense. The entity sells all of its output for US $2.5 million. Rather than paying income tax, the entity must pay a 25%value-added tax. How much tax will be due for this year's activities?
The value added is the difference between the value of the output and the value of the purchased inputs. Value-added tax payable equals the value-added tax rate times value added, or US $587,500 [($2,500,000 $150,000) x .25].
Which of the following designations refers to taxes that will not necessarily take a larger absolute amount of income as income rises?
Regressive taxes are those for which the average tax rate falls as income rises. They take a smaller percentage of income as income rises, so they will not necessarily take a larger absolute amount of income as income rises.
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