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1. This question is designed to lead to a class discussion of the various tax policy issues
introduced in Chapter 2.
2. Historically, the federal income tax system has not generated enough revenue to fund the
government’s spending programs. Consequently, the federal government has borrowed money
to make up its deficits (excess of spending over revenues) and in doing so has amassed an $11
trillion national debt. The federal government operated at a deficit in every year from 1970
through 1998. In 1999 and 2000, it operated at a small surplus (excess of revenues over
spending), but reverted to massive deficit spending in 2001 and subsequent years.
3. Governments can impose a new tax (by identifying and taxing a new base), increase the rate of
an existing tax, or expand the base of an existing tax.
4. Governments that fail to control the growth of their money supply run the risk of devaluing the
currency and triggering a crippling rate of inflation. Therefore, simply printing more money to
fund an operating deficit is not a viable, long-term solution to an insufficient tax system.
5. a. Mrs. E could enter the work force. Her after-tax earnings could offset the decrease in the
couple’s disposable income attributable to the tax rate increase. If Mr. E works for an hourly
wage, he could possibly work more hours for his employer. If he doesn’t have this option, he
could take a second job or even start a new business.
b. As a self-employed individual, Mrs. F may have the flexibility to increase the number of
hours devoted to her business. Her additional after-tax earnings could offset the decrease in
the couple’s disposable income attributable to the tax rate increase. Mr. F has the same
options as Mr. E.
c. In this case, Mr. and Mrs. G have the same options as Mr. E and Mr. F. Because they are
both full-time employees, their ability to increase their before-tax income may be limited.
6. a. Mr. H may not have any realistic way to decrease the time spent at work and increase his
leisure time, even if the after-tax value of his labor decreases because of a tax rate increase.
Mrs. H’s behavior should not change because of a tax rate increase.
b. Mrs. J could quit her job and leave the work force if the couple decides that her leisure time
is worth more than the after-tax value of her labor.
c. As a self-employed individual, Ms. K has the flexibility to decrease the number of hours
devoted to her business, thereby substituting additional leisure time for labor.
7. An increase in the income tax rate decreases the after-tax value of the bond investment but
does not affect the value of the luxury auto. (Her personal use and enjoyment of the auto are
nontaxable benefits to Ms. V.) Consequently, she may decide to consume the $40,000 (i.e., buy
the auto) rather than to save it.
8. People derive many psychological benefits from working: a sense of self-worth and self-reliance,
prestige and status, intellectual challenge, a social network, and a belief that their work makes
the world a better place. These forms of psychic income may be as important (or even more
important) than monetary incentives.
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9. A national sales tax might reduce the aggregate level of consumer demand for taxable goods
and services. In this case, the tax base would decrease and state and local sales tax revenues
would decline.
10. Arguably, the estate tax is more convenient for two reasons. First, individuals with accumulated
wealth can’t avoid the tax indefinitely. Second, a person’s death is a matter of public record so
that the IRS can easily determine when a potentially taxable event (the transfer of wealth at
death) has occurred.
11. Market economies (and the firms operating in those economies) adapt to the various taxes
imposed on business transactions. The longer a tax (or a specific tax rule) has been in effect,
the better the business community understands it. When governments change the tax system,
the business community must spend time and money studying and reacting to the change. Firm
managers must reassess, or even modify, their tax strategies. Thus, any change in the tax
environment is both costly and unsettling, even if the purpose of the change is to improve the
environment.
12. Clearly, the system in which employers must withhold and remit income tax from their
employees’ paychecks is more convenient for the government because the collection process is
greatly concentrated. The withholding system is more convenient for individual employees who
are not required to compute their monthly tax bills or mail tax payments to the government.
Instead, their employers perform these tasks on the individuals’ behalf. The withholding system
shifts much of the cost of compliance to employers and is, therefore, more inconvenient from the
employers’ perspective.
13. a. This provision clearly is intended to encourage and reward a certain economic behavior (the
purchase and use of snow removal equipment by private firms) and, therefore, meets the
definition of a tax preference.
b. Jurisdiction E is assuming that it can reduce its snow removal costs by $550,000 because
more firms will own the equipment to perform this function for themselves.
14. For the income tax system to be equitable, the tax base (taxable income) should be defined as
precisely as possible to reflect each individual’s economic ability to pay. However, the greater
the number of personal and financial circumstances taken into account in defining taxable
income, the greater the complexity of the law.
15. a. This is a progressive rate structure with a -0- rate on income up to $35,000 and a 15 percent
rate on income in excess of $35,000.
c. This is a regressive rate structure with a 15 percent rate on income up to $80,000 and a -0-
percent rate on income in excess of $80,000.
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Education.
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Chapter 02 - Policy Standards for a Good Tax
A tax based on net profit before charitable contributions. In this case, Corporation R’s tax
base would be $800,000, and Corporation T’s tax base would be $930,000. Corporation T
might argue that its generous charitable contributions reduced its economic ability to pay
and should be taken into account. Corporation R could refute by arguing that discretionary
charitable contributions are irrelevant to the measurement of ability to pay tax on business
earnings.
A tax based on net profit after charitable contributions. In this case, Corporation R would pay
more tax than Corporation T and could argue that allowing Corporation T to deduct
charitable contributions violates the concept of horizontal equity.
17. Ms. P should consider her marginal rate: the rate at which the incremental income from the
investment will be taxed. For tax planning purposes, the average tax rate that she pays on her
entire income is irrelevant.
Application Problems
3. Before the tax increase, Mrs. K’s disposable income is $35,700 ($42,000 $6,300 tax). If the tax
rate increases from 15 percent to 20 percent, she must earn an additional $2,625 to maintain
this income. This number is derived from the following formula.
($42,000 + additional income) 20% ($42,000 + additional income) = $35,700
If Mrs. K can earn an extra $2,625, her disposable income will not be affected by the rate
increase.
Taxable income $44,625
Tax rate .20
Tax $8,925
After-tax income ($44,625 – 8,925) = $35,700
4. a. $125,000 tax base (Mr. and Mrs. J’s taxable income) 8% rate increase = $10,000
additional tax collected from Mr. and Mrs. J.
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SEC. II.—LEGISLATURE.
SEC. III.—PRIVILEGE.
SEC. IV.—ELECTIONS.
SEC. V.—QUALIFICATIONS.
[The Senate of the United States shall be composed of two
Senators from each State, chosen by the Legislature thereof for six
years, and each Senator shall have one vote.]
[Immediately after they shall be assembled in consequence of the
first election, they shall be divided as equally as may be into three
classes. The seats of the Senators of the first class shall be vacated at
the end of the second year; of the second class at the expiration of the
fourth year; and of the third class at the expiration of the sixth year;
so that one-third may be chosen every second year; and if vacancies
happen, by resignation or otherwise, during the recess of the
Legislature of any State, the executive thereof may make temporary
appointments until the next meeting of the Legislature, which shall
then fill such vacancies. Const., I, 3.]
[No person shall be a Senator who shall not have attained to the
age of thirty years, and been nine years a citizen of the United States,
and who shall not, when elected, be an inhabitant of that State for
which he shall be chosen. Const. I, 3.]
[The House of Representatives shall be composed of members
chosen every second year by the people of the several States; and the
electors in each State shall have the qualifications requisite for
electors of the most numerous branch of the State Legislature.
Const., I, 2.]
[No person shall be a Representative who shall not have attained
to the age of twenty-five years and been seven years a citizen of the
United States, and who shall not, when elected, be an inhabitant of
that State in which he shall be chosen. Const., I, 2.]
[Representatives and direct taxes shall be apportioned among the
several States which maybe included within this Union, according to
their respective numbers; which shall be determined by adding to the
whole number of free persons, including those bound to service for a
term of years, and excluding Indians not taxed, three-fifths of all
other persons. The actual enumeration shall be made within three
years after the first meeting of the Congress of the United States, and
within every subsequent term of ten years, in such manner as they
shall by law direct. The number of Representatives shall not exceed
one for every thirty thousand, but each State shall have at least one
Representative. Const., I, 2]
[When vacancies happen in the representation from any State, the
executive authority thereof shall issue writs of election to fill such
vacancies. Const., I, 2.]
[No Senator or Representative shall, during the time for which he
was elected, be appointed to any civil office under the authority of
the United States which shall have been created, or the emoluments
whereof shall have been increased, during such time; and no person
holding any office under the United States shall be a member of
either House during his continuance in office. Const., I, 6.]
SEC. VI.—QUORUM.
SEC. VIII.—ABSENCE.
[No member shall absent himself from the service of the Senate
without leave of the Senate first obtained. And in case a less number
than a quorum of the Senate shall convene, they are hereby
authorized to send the Sergeant-at-Arms, or any other person or
persons by them authorized, for any or all absent members, as the
majority of such members present shall agree, at the expense of such
absent members, respectively, unless such excuse for non-attendance
shall be made as the Senate, when a quorum is convened, shall judge
sufficient: and in that case the expense shall be paid out of the
contingent fund. And this rule shall apply as well to the first
convention of the Senate, at the legal time of meeting, as to each day
of the session, after the hour is arrived to which the Senate stood
adjourned. Rule 8.]
SEC. IX.—SPEAKER.
SEC. X.—ADDRESS.
SEC. XI.—COMMITTEES.
SEC. XV.—ORDER.
Of right, the door of the House ought not to be shut, but to be kept
by porters, or Sergeants-at-Arms, assigned for that purpose. Mod.
ten. Parl., 23.
[By the rules of the Senate, on motion made and seconded to shut
the doors of the Senate on the discussion of any business which may,
in the opinion of a member, require secrecy, the President shall
direct the gallery to be cleared; and during the discussion of such
motion the doors shall remain shut. Rule 64.]
[No motion shall be deemed in order to admit any person or
persons whatsoever within the doors of the Senate chamber to
present any petition, memorial, or address, or to hear any such read.
Rule 19.]
The only case where a member has a right to insist on anything, is
where he calls for the execution of a subsisting order of the House.
Here, there having been already a resolution, any person has a right
to insist that the Speaker, or any other whose duty it is, shall carry it
into execution; and no debate or delay can be had on it. Thus any
member has a right to have the House or gallery cleared of strangers,
an order existing for that purpose; or to have the House told when
there is not a quorum present. 2 Hats., 87, 129. How far an order of
the House is binding, see Hakew., 392.
But where an order is made that any particular matter be taken up
on a particular day, there a question is to be put, when it is called for,
whether the House will now proceed to that matter? Where orders of
the day are on important or interesting matter, they ought not to be
proceeded on till an hour at which the House is usually full, [which
in Senate is at noon.]
Orders of the day may be discharged at any time, and a new one
made for a different day. 3 Grey, 48, 313.
When a session is drawing to a close, and the important bills are
all brought in, the House, in order to prevent interruption by further
unimportant bills, sometimes comes to a resolution that no new bill
be brought in, except it be sent from the other House. 3 Grey, 156.
All orders of the House determine with the session; and one taken
under such an order may, after the session is ended, be discharged
on a habeas corpus. Raym., 120; Jacob’s L. D. by Ruffhead;
Parliament, 1 Lev., 165, Pritchard’s case.
[Where the Constitution authorizes each House to determine the
rules of its proceedings, it must mean in those cases (legislative,
executive, or judiciary) submitted to them by the Constitution, or in
something relating to these, and necessary toward their execution.
But orders and resolutions are sometimes entered in the journals
having no relation to these, such as acceptances of invitations to
attend orations, take part in processions, &c. These must be
understood to be merely conventional among those who are willing
to participate in the ceremony, and are therefore, perhaps,
improperly placed among the records of the House.]
SEC. XIX.—PETITION.
SEC. XX.—MOTIONS.
SEC. XXI.—RESOLUTIONS.
SEC. XXII.—BILLS.
When a bill is first presented, the Clerk reads it at the table, and
hands it to the Speaker, who, rising, states to the House the title of
the bill; that this is the first time of reading it; and the question will
be, whether it shall be read a second time? then sitting down to give
an opening for objections. If none be made, he rises again, and puts
the question, whether it shall be read a second time? Hakew, 137,
141. A bill cannot be amended on the first reading, 6 Grey, 286; nor
is it usual for it to be opposed then, but it may be done, and rejected.
D’Ewes, 335, col. 1; 3 Hats., 198.