Questions: 8.

(LO 1-2) If the general objective of our tax system is to raise revenue, why does the income tax allow deductions for charitable contributions and retirement plan contributions? By allowing tax deductions for charitable contributions, the government hopes to inspire taxpayers giving spirit. If there wasnt a tax incentive for these contributions, there would likely be a significant decrease in charity donations. The motive behind allowing retirement plan contributions is to motivate saving on behalf of the taxpayer. Its likely that the government would like to see a decrease in less charitable spending, such as cigarette and alcohol purchases, thus the reason for the high taxation of these items.

10. (LO 1-3) Dontae stated that he didn't want to earn any more money because it would put him in a higher tax bracket. What is wrong with Dontae's reasoning? Dontae doesnt understand the federal governments progressive tax structure. The marginal tax rate increases as the tax base increases, but he only pays more taxes on the extra amount of money earned and the other income up to that point stays at its current tax rate.

14. (LO 1-3) Arnold and Lilly have recently had a heated discussion about whether a sales tax is a proportional tax or a regressive tax. Arnold argues that a sales tax is regressive. Lilly counters that the sales tax is a flat tax. Who is correct? They are both correct. Arnold is correct in stating that sales tax is regressive because as a person has a higher income, less of their actual income would go to sales tax. Lilly is correct in her opinion that sales tax is a flat tax as it remains constant and has nothing to do with the annual

income of the person purchasing the goods. If forced to choose one, Lilly is more correct because sales tax is constant.

Problems 37. (LO 1-3) Campbell, a single taxpayer, earns $400,000 in taxable income and $2,000 in interest from an investment in State of New York bonds. Using the U.S. tax rate schedule, how much federal tax will she owe? What is her average tax rate? What is her effective tax rate? What is her current marginal tax rate? a. $115,586.25 is the amount of federal tax she will owe based on the chart supplied. b. Total tax/taxable income = Average tax rate $116,163.75/$400,000 = 29.04% c. Total tax/ total income = Effective tax rate $116,163.75/402,000 = 28.9% d. Marginal tax rate = 35%

45. (LO 1-3, LO 1-4) Hugh has the choice between investing in a City of Heflin bond at 6 percent or a Surething bond at 9 percent. Assuming that both bonds have the same nontax characteristics and that Hugh has a 40 percent marginal tax rate, in which bond should he invest? Hugh should invest in the City of Heflin bond because the bond is tax exempt at a 6% rate of return. The Surething bond has a 9% rate of return but taxable interest is due on the bond. 9% x 40% = 3. 6%. 9% - 3.6% = 5.4%. Hugh would get an after tax rate of return of 5.4% with the Surething bond, less than with the tax exempt City of Heflin bond.

57. (LO 1-5) Consider the following tax rate structure. Is it horizontally equitable? Why or why
not? Is it vertically equitable? Why or why not? Taxpayer Marilyn Kobe Alfonso Salary $10,000 $20,000 $30,000 Total Tax $ 600 $3,000 $6,000

Marilyn pays a 6% tax rate ($600/$10,000), Kobes tax rate is 15% ($3,000/$20,000), and Alfonso has a tax rate of 20% ($6,000/$30,000). The equality of the tax structure vertically is equitable because the higher the salary, the higher the tax paid. However, horizontally, there isnt another taxpayer in the same brackets as those listed to determine is their tax rate is the same as the taxpayers listed.