Intermediate Managerial and Tax Accounting ACCTG 325, Fall 2024 Exercise 2 Chapter 2, Policy Standards for a Good Tax

Intermediate Managerial and Tax

Accounting ACCTG 3

2

5, Fall 2024

Exercise 2

Chapter 2, Policy Standards for a Good Tax

1

Name

_______________________________

__

RedID#

_______________________________

1. Jurisdiction W has decided to enact a personal income tax on its residents. Policymakers are considering 3 alternatives. Identify the rate structure of each of the following alternatives:

a. No tax on income up to $35,000, and a 15 percent tax on all income in excess of $35,000.

_____________________________________________________________________________________

b. A 10 percent tax on all income.

_____________________________________________________________________________________

c. A 15 percent tax on all income up to $80,000, and no tax on any income in excess of $80,000.

_____________________________________________________________________________________

2. Ms. P is considering investing $20,000 in a new business. She projects that this investment should generate an additional $3,000 of income each year. In estimating her tax on this future income stream, should Ms. P use her marginal tax rate or her average tax rate?

___________________________________________________________________________________________

3. Country M levies a 10 percent excise tax on the retail price of any automobile purchased in the country. This year, the aggregate purchase price subject to tax was $8 million, so current year revenue was $800,000. Country M plans to increase the tax rate next year to 11 percent.

Compute next year’s excise tax revenue assuming:

a. Next year’s tax base equals the current tax base.

_____________________________________________________________________________________

b. Next year’s tax base equals increases to $9.3 million.

_____________________________________________________________________________________

c. Next year’s tax base equals decreases to $7 million.

_____________________________________________________________________________________

4. Mrs. K, a single taxpayer, earns a $42,000 annual salary and pays 15 percent in state and federal income tax. If tax

rates increase so that Mrs. K’s annual tax rate is 20 percent, how much additional income must she earn to maintain her after-tax disposable income? (Show your

5. Jurisdiction B levies a flat 7 percent tax on the first $5 million of annual corporate income.

a. Jersey Inc. generated $3.9 million of income this year. Compute Jersey’s income tax and determine its

average and marginal tax rate on total income.

b. Leray Inc. generated $9.6 million of income this year. Compute Leray’s income tax and determine its

average and marginal tax rate on total income.Intermediate Managerial and TaxAccounting ACCTG 325, Fall 2024Exercise 2Chapter 2, Policy Standards for a Good Tax2

6. Jurisdiction B’s tax system consists of a 6.5 percent general sales tax on retail goods and selected services. Over The past decade, the average annual volume of sales subject to this tax was $500 million. The jurisdiction needs to increase its tax revenues by approximately $5 million each year to finance its spending programs. The taxing authorities are considering two alternatives: a 1 percent increase in the sales tax rate or a new 2 percent tax on the

net income of corporations doing business in the jurisdiction. Based on recent economic data, the annual net income subject to the new tax would be $275 million. However, the jurisdiction would have to create a new agency responsible for enforcing and collecting the income tax. The estimated annual cost of the agency is $500,000. Jurisdiction B borders on four other taxing jurisdictions, all of which have a general sales tax and two of which have a corporate income tax.

Based on a static forecast, how much incremental revenue would Jurisdiction B raise under each alternative?

7. Using the same facts in question 6, assume that the taxing authorities in Jurisdiction B want a dynamic

forecast of the incremental revenues under each alternative. What additional facts would be important to consider in developing such a forecast and why? (Name at least 2 facts and reasons.)