Exam 1: An Introduction to Tax

Nelson has the choice between investing in a city of Fruithurst bond at 4 percent or a J.B.Ribs, Inc.bond at 6.5 percent.Assuming that both bonds have the same nontax characteristics and that Nelson has a 40 percent marginal tax rate, in which bond should he invest? What interest rate offered by J.B.Ribs, Inc.would make Nelson indifferent between investing in the two bonds?

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Question 1

Correct Answer:

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Nelson's after-tax rate of return on the tax-exempt city of Fruithurst bond is 4 percent.The J.B.Ribs, Inc.bond pays taxable interest of 6.5 percent.Nelson's after-tax rate of return on the J.B.Ribs, Inc.bond is 3.9 percent (i.e., 6.5% interest income − (6.5% × 40%)tax = 3.9%).Nelson should invest in the city of Fruithurst bond.
For Nelson to be indifferent between investing in the two bonds, the J.B. Ribs, Inc. bond should provide Nelson the same after-tax rate of return as the city of Fruithurst bond (4 percent). To solve for the required pretax rate of return we can use the following formula: After-tax return = Pretax return × (1 − Marginal Tax Rate).

J.B. Ribs, Inc. needs to offer a 6.67 percent interest rate to generate a 4 percent after-tax return and make Nelson indifferent between investing in the two bonds.

4% = Pretax return × (1 − 40%);
Pretax return = 4% / (1 − 40%) = 6.67%

A use tax is typically imposed by a state on goods purchased within the state.

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(True/False)

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Question 2

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False

The two components of the tax calculation are the tax rate and the taxpayer's status.

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(True/False)

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Question 3

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False

While sales taxes are quite common, currently the U.S.federal government does not impose a sales tax.

(True/False)

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Question 4

Margaret was issued a $150 speeding ticket.This is:

(Multiple Choice)

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Question 5

Marc, a single taxpayer, earns $60,000 in taxable income and $5,000 in interest from an investment in city of Birmingham bonds.Using the U.S.tax rate schedule for 2019, what is his average tax rate (rounded)? (Round your final answer to the nearest whole percent.)(Use tax rate schedule.)

(Multiple Choice)

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Question 6

Namratha has the choice between investing in a city of Watkinsville bond at 4.5 percent or a Moe's, Inc.bond at 7 percent.Assuming that both bonds have the same nontax characteristics and that Namratha has a 32 percent marginal tax rate, in which bond should she invest? What interest rate offered by Moe's, Inc.would make Namratha indifferent between investing in the two bonds?

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Question 7

One benefit of a sin tax (e.g., a tax on cigarettes)is that it should increase the demand for the products being taxed.

(True/False)

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Question 8

Which of the following is not one of the basic tax rate structures?

(Multiple Choice)

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Question 9

Curtis invests $250,000 in a city of Athens bond that pays 7 percent interest.Alternatively, Curtis could have invested the $250,000 in a bond recently issued by Initech, Inc.that pays 9 percent interest with similar risk as the city of Athens bond.Assume that Curtis's marginal tax rate is 24 percent. What is Curtis's after-tax rate of return on the city of Athens bond?

(Multiple Choice)

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Question 10

In a proportional (flat)tax rate system, the marginal tax rate will always equal the average tax rate.

(True/False)

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Question 11

Which of the following taxes represents the largest portion of U.S.federal tax revenues?

(Multiple Choice)

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Question 12

A 1 percent charge imposed by a local government on football tickets sold is not considered a tax if all proceeds are earmarked to fund local schools.

(True/False)

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Question 13

Implicit taxes are indirect taxes on tax-favored assets.

(True/False)

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Question 14

Jackson has the choice to invest in city of Mitchell bonds or Sundial, Inc.corporate bonds that pay 10 percent interest.Jackson is a single taxpayer who earns $55,000 annually.Assume that the city of Mitchell bonds and the Sundial, Inc.bonds have similar risk. What interest rate would the city of Mitchell have to pay in order to make Jackson indifferent between investing in the city of Mitchell and the Sundial, Inc.bonds for 2019? (Use tax rate schedule.)

(Multiple Choice)

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Question 15

Employers often withhold federal income taxes directly from workers' paychecks.This is an example of which principle in practice?

(Multiple Choice)

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Question 16

In terms of effective tax rates, the sales tax can be viewed as a regressive tax.

(True/False)

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Question 17

Manny, a single taxpayer, earns $65,000 per year in taxable income and an additional $12,000 per year in city of Boston bonds. If Manny earns an additional $35,000 in taxable income in 2019, what is his marginal tax rate (rounded)on this income? (Use tax rate schedule.)

(Multiple Choice)

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Question 18

Leonardo, who is married but files separately, earns $80,000 of taxable income.He also has $15,000 in city of Tulsa bonds.His wife, Theresa, earns $50,000 of taxable income. If Leonardo earned an additional $30,000 of taxable income this year, what would be the marginal tax rate (rounded)on the extra income for 2019? (Use tax rate schedule.)

(Multiple Choice)

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Question 19

Tax policy rarely plays an important part in presidential campaigns.

(True/False)

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Question 20

Showing 1 - 20 of 113

A use tax is typically imposed by a state on goods purchased within the state.

The two components of the tax calculation are the tax rate and the taxpayer's status.

While sales taxes are quite common, currently the U.S.federal government does not impose a sales tax.

Margaret was issued a $150 speeding ticket.This is:

Marc, a single taxpayer, earns $60,000 in taxable income and $5,000 in interest from an investment in city of Birmingham bonds.Using the U.S.tax rate schedule for 2019, what is his average tax rate (rounded)? (Round your final answer to the nearest whole percent.)(Use tax rate schedule.)

One benefit of a sin tax (e.g., a tax on cigarettes)is that it should increase the demand for the products being taxed.

Which of the following is not one of the basic tax rate structures?

In a proportional (flat)tax rate system, the marginal tax rate will always equal the average tax rate.

Which of the following taxes represents the largest portion of U.S.federal tax revenues?

A 1 percent charge imposed by a local government on football tickets sold is not considered a tax if all proceeds are earmarked to fund local schools.

Implicit taxes are indirect taxes on tax-favored assets.

Employers often withhold federal income taxes directly from workers' paychecks.This is an example of which principle in practice?

In terms of effective tax rates, the sales tax can be viewed as a regressive tax.

Manny, a single taxpayer, earns $65,000 per year in taxable income and an additional $12,000 per year in city of Boston bonds. If Manny earns an additional $35,000 in taxable income in 2019, what is his marginal tax rate (rounded)on this income? (Use tax rate schedule.)

Tax policy rarely plays an important part in presidential campaigns.

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