Chapter 6, Problem 6.2SC

To determine

The Federal, state and local taxes.

Conceptual Introduction:

Types of tax systems-There are three types of tax systems.

(1) Proportional- It is the system where regardless of the income all taxpayers pay the same percentage of their incomes as taxes. Here the marginal tax rate equals the average tax rate.

(2) Progressive- In this system as the income increases the rate of tax increases. The high-income individuals pay a higher percentage of income taxes while low-income people pay lower. Here the marginal rate of tax is higher than the average tax rate. This system reduces the income inequality in the market.

(3) Regressive- In this system as the income rises the rate of tax falls. The high-income group people pay less percentage of income as tax than the low-income people. Here the marginal tax rate is less than the average tax rate.

The three systems are illustrated in the graph below:

Capital gains - It is the return on the investment when the assets bought out of investment are sold at a higher price than the original price of purchase. These gains are taxed as capital gains tax.

Dividend- These are the asset paid out of the profits of the corporation to the stockholders. Dividends are not a capital gain rather an income for the tax year.

Payroll taxes- These are the employment taxes. They include the contribution to the Federal Insurance Contributions Act (FICA) and self-employment taxes. These taxes include the Social Security taxes and the Medicare taxes.

Double taxation- The incidence of tax on the same income twice; once as the corporation income tax and then as the income tax on the dividends earned by the investors.