Tax Homework

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Homework #2 1. Suppose an asset that was bought for 100 was worth the following amounts at the end of each of its five years of life. End of Year Value 1 80 2 65 3 40 4 15 5 0 Which of the following depreciation schedules, if any, would definitely be worse than economic depreciation from the taxpayer’s perspective? (Economic depreciation reduces basis by the amount that the value of the asset decreases during the year.) Economic Year Depreciation A B C D E 1 20 25 20 30 35 15 2 15 15 20 15 5 15 3 25 15 20 10 5 30 4 25 20 20 20 20 25 5 15 25 20 25 35 15 Please explain why you think some might be better and some might not. 2. Please explain what a “carried interest” is. What is the argument for taxing income from carried interests as ordinary (wage) income? What is the argument for taxing income from carried interests at the lower capital gain rates? Which way of taxing carried interests do you think is fairer? Please explain. 3.

1. Which of the following is a tax expenditure? Explain your answers.

a. A rule that allows nurses to deduct from income in calculating their taxes the amount they repay on their student loans in a year when they work in a hospital serving a low-income population.

b. A rule that lowers the lowest tax rate from 15% to 10%? c. A rule that allows nurses in their first year after leaving school to reduce their tax bills

by 5% (that is, if their tax bill would otherwise be $200, they would have to pay 5% less than that, $190)?

A. Assume that all of the above proposals were adopted, and assume you conclude that one or two of the above is a tax expenditure. If a nurse in the first year after leaving school worked in a hospital serving a low-income population and had $10,000 of taxable income before taking into account $2,000 repaid on a student loan, how much of a tax expenditure would there be in connection with this taxpayer’s tax return?

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(Assume that the student’s taxable income is all taxed at a 15% rate.) (If you concluded either that all three were tax expenditures, or that none were tax expenditures, change your conclusion on one item to answer the question.)

4. Under current law, interest on state and local bonds is not included in Federal taxable income. Suppose Congress decided to change the rule and require taxpayers to include the interest on state and local bonds in taxable income. For each of the following three items, explain whether it is taken into account under a purely static revenue estimate or under a dynamic revenue estimate. In the case of an item that is taken into account under a dynamic revenue estimate, would the Joint Committee have been permitted to take it into account in prior years and might it be permitted to take it into account under current rules? If not, why not?

a. Calculate how much additional tax would be collected by determining how much interest was received on state and local bonds last year and what were the tax brackets of the recipients.

b. Reduce the estimate in “a” above by estimating to what extent holders of state and local bonds would sell them to investors in lower tax brackets.

c. Reduce the estimate in “a” above by estimating to what extent economic activity in the country will be reduced by the fact that state and local governments spend less money on capital projects.

5. Answer A or B:

A. The ACA (Obamacare) has more and stronger rules than the PCA (the Republican alternative). This reflects a difference in approach to the role of government in connection with health care. Nevertheless, each plan makes concessions (in some cases, only partial concessions) to the other party’s approach in order to achieve a result that is more likely to be politically acceptable than a purely partisan approach. Describe four instances in which the ACA or the PCA makes a concession to the other party’s preferences.

B. Douglas Holtz-Eakin and Sabrina Corlette make a number of arguments regarding the

success of the ACA based on what has actually happened over the past four years. Give two of these arguments for each of them. For each of those four arguments, give a reason why it may not prove his or her point.