Notes-February 1, 1878 Background on the Kingdom and Economy of Rodos . Rodos is a small agrarian island kingdom. Most Rodosian citizens live in small towns or in rural areas. King Valdimar and his royal court, on the other hand, live in the country's single, geographically centralized city . King Valdimar, an enlightened ruler, wants to create an economy that improves Rodosians' standard of living and quality of life. He is also concerned with being as fair as he can to each citizen. . The king has vast property holdings, but he does allow his citizens to own real and personal property, which can be used to generate the income to improve their standard of living and to pay their taxes . Tax revenues are used to provide for the island's defense and general services, such as a postal system and the construction and maintenance of roads, bridges, and similar structures Financial markets are rudimentary but effective. Citizens and businesses with more income than they require may deposit their funds into banks, who in turn may lend these funds to qualified borrowers. Rodos's equity markets are more constrained; owners are not allowed to sell more than 33% ownership of their company So, though equity markets exist, there aren't many companies nor large numbers of shares bought and sold Selected Provisions of the Rodosian Tax Code King Valdimar's current tax regime, both personal and corporate, is intended to be fair to everyone. The personal tax assesses the same tax-1,500 sodors (SR) per year-on each person, regardless of circumstance (rich or poor) or station (member of court, businessman, craftsman, or fisherman). The taxable income of all businesses-regardless of form (proprietorship, partnership, or corporation)-is subject to a 15% tax rate . interest on borrowed funds nor dividends on outstanding shares are allowed to be paid using pre-tax income Normal operating expenses, however, are tax-deductible As you read through the journal notes, you decide to take the rucksack to your finance class tomorrow to enhance the class discussion of the effect of taxes on decision making. However, to ensure that you are ready for this discussion, you've prepared and answered the following outline of topics and questions to be addressed. (Hint: For a brief reminder of relevant terms, click on the Definitions tab. Also, don't confuse the behaviors of the average Rodosian with your own-particularly when attempting to predict future behaviors.) Definitions I. What general observations can be made regarding tax systems in general and the Rodosian tax code? A. In general, there are three different types of tax systems: progressive, regressive, and flat tax systems. The existing Rodosian system imposed on individual (personal) taxpayers is an example of a regressive system. One benefit of the existing system is that it increases the kingdom's tax base because every citizen pays taxes; as a result, every taxpayer should care about how King Valdimar spends his tax revenue. However, as the wealth or income of an individual taxpayer decreases, the proportion of his or her income or wealth spent on taxes B. In contrast, the existing system imposed on businesses is an example of a organizations-regardless of income or asset holdings-pay the same tax rate increases flat system. A benefit of this arrangement is that all business II. How does the current tax system affect the decisions, behaviors, and condition of an individual Rodosian citizen and/or business? A. In general, taxes are classified as an expense and decrease both an individual's disposable income and a business's after-tax profits. B. An advantage of the existing personal tax requirement is that it allows an individual Rodosian to keep more of his or her income as his or her to income increases. The requirement of a constant annual tax payment of SR1,500 means that-ss his or he to SR50,000, the proportion of his or her income lost to taxes decreases f be expected to encourage the average individual Rodosian to improve C. A second advantage of Rodos's existing personal tax arrangement is s simplicitywhich makes t expensive to comply with the requirement. Everything else being equal, this characteristic tends to ncrease a citizen's disposa D. Similarly, an advantage of the current business tax requirement is that it is identical for all business organizations. However, in this case, it s the tax rte, rather than the tax liability, that is the same for all taxpayers. According to this arrangement, a business organization will be able to fetain every pre-tax sodor earned. From these after-tax profits, it will then pay any trest owed on its borrowed capital and any ividends to its shareholders. Given these provisions, the current system_does not encourage the use of one form of financing (debt versus equity) over the other. This is because the arrangement allows for the tax deductibility of neither a business's debt nor equity finacing income increases from SR30,000 per year general, this type of tax arrangement should to her income and g