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1. Taxes in the kingdom of Rodos Imagine that while deaning out your great-grandfather's attic, you find a rudesack containing a journal and a sheat of papers. Your great-grandfather ante entrepreneur and businessman was also an accomplished amateur explorer. The Journal, which appears to be written in your great grandfather's hand, is a diary describing a series of visits to a small uncharted and called Rodos, in the northern Maricing the late 1800. The Journal and papers contain notes made during his conversations with Valdimar, king of Rodos, when they discussed the kingdom's business and economic conditions Notes-February 1, 1878 Background on the Kingdom and Economy of Rodos Rodos is a small island Kingdom. Most Rodonitzen einmal towns or in areas King Valdimar and is oval court on the other hand, live in the country's single ogrohical centre dit ing Vamaan hendre wants to create economy that improves Rodoslans' standard of living and wality of life is concerned with being as far as he can to each otiran . The long has vast eertyd but he does allowed to own real and personal property, which can be used to generate the income to improve the standard of l and to pay the Tax rev e d to provide for the band's defense and service such as postem and the construction d a nce of does, and structures na matendimentary but five and more income than they red h e adh 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-2,400 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 12% tax rate. Neither 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 dass 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.) 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, dick on the Definitions tab. Also, don't confuse the behaviors of the average Rodosian with your own-particularly when attempting to predict future behaviors.) Term Disposable income Exche tax Definitions Description The income that remains after the deduction of taxes and other mandatory charges. This balance is available for spending or saving as desired. This tax, which is levied on the consumption of certain products, is frequently included in the price of the product A tax levied on products or services that are deemed to be unnecessary, excessive, or ronessential to a normal standard of living, Also called a proportional tax wystem, this scheme requires each taxpayer to pay the same tax rate. An example of a flat rate is a sales tax Luxury Flat tax system Progressive tax system Regressive tax wystem This tax scheme imposes lower tax rates on less aunt taxpayers and higher tax rates onwealth taxpayers This scheme requires each taxpayer to pay the same dollar amount regardless of income An example of a regressive tax is a user fee for a bridge or toll road. This taxis levied on products or services that the government perceives as vices This tax which also generates additional government revenue, is intended to discourage the consumption of these goods or services without making their use illegal Finance in Action - Taxes 1. What general observations can be made regarding tax systems in general and the Rodesian 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 flat 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 remains constant . B. In contrast, the existing system imposed on businesses is an example of a flat system. A benefit of this arrangement is that all business organizations-regardless of income or asset holdings-pay the same tax rate . 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 allows an individual Rodosian to keep more of his or her income as his or her total income increases. The requirement of a constant annual tax payment of SR2,400 means that as his or her annual income increases from SR24,000 per year to SR54,000, the proportion of his or her Income lost to taxes decreases from 10.00 to 4.44 . In general, this type of tax arrangement should be expected to encourage the average individual Rodosian to improve his or her income and quality of life. C. A second advantage of Rodos's existing personal tax arrangement is it simplicity which makes it less expensive to comply with the requirement. Everything else being equal, this characteristic tends to increase actin's disposable income D. Similarly, an advantage of the current business tax requirement is that it is identical for all business organizations. According to this arrangement a business organization will be able to retain SRO for every pre-tax odoreamed From there after tax profits w hen pay any Interest e d on its borrowed capital and any dividends 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 lows for the tax deductibility of melther business's debt oor equity financing The seat of papers accompanying the journal describes several potential revisions to the Rodosian personal and business tax code, including the site a progressive tax wom the sement of different luxury and sin taxes, and/or modifications of the provisions of the restem. Two of the specific proposals indude the following: Polly Proposal hedules place the existing system with a progressive tax system that would tax business and individuals, usine the The shear of papers accompanying the journal describes several potential revisions to the Rodosian personal and business tax code, including replacing the existing system with a progressive tax system, the assessment of different luxury and sin taxes, and/or modifications of the provisions of the current system. Two of the specific proposals indude the following: Policy Proposal 1: Replace the existing system with a progressive tax system that would tax business and individuals, using these schedules Business Tax Rates If your Table Income Is Plus This Percentage on the Excess over the You Pay This Amount on the base of the Bracket 12% 18 SR960,000 SR2 220.000 Up to SR8,000,000 SR8,000,000-5R15,000,000 SR. 15.000.000 SR31,000,000 SR31,000,000 4.500.000 Over 47,000,000 Peralates If your taxatie income is SR 60.000 30 SR10,000,000 of the Pun You Pay This Amount on the Baca Dore on the cover the Up to 8000 SR8,000-526.000 SRO SR40 SRO 2.000 SR7,20 Given these tax schedules, calculate the tax liabilities for: Nal's Clothworkers Company, which earns an income of SR35,000,000 The following three individual taxpayers: (1) Styrr, a baker earning SR24,000 per year; (2) Bera, a farmer earning SR54,000 per Year: (3) Einar, a banker earning SR96,000 per year Note: Round your average tax rate answers to two decimal places Taxpayer N's Clothworkers Tax Obligation SR Average Tax Rate Einar If you were a Rodosian taxpayer, such as Styr, Bera or Finar, would you prefer the existing tax system or the progressive tax system? Why? The existing tax system, because my tax obligation would be significantly less than that under the progressive system. This would Increase my disposable Income The progressive tax system, because my tax obligation would be significantly greater than that incurred under the existing system. This would reduce my disposable income The editing tax system, because my tax obligation would be greater than that incurred under the progressive svitam reduce my daporatle income. Policy Proposal 2: Assess a special tax on businesses that own more than 10 horses or axen. What effect will this tax have on Rodosian businesses? This is an example of a sin tax This tax on more than 10 horses or oxen has the potential to penalize businesses from growing beyond a certain level. This will reduce the Treasury's tax revenues and potentially limit the growth potential and sales of businesses that provide goods and services to the taxpayers being assessed The tax will not affect the businesses being assessed the tax of the Treasury's tax revenues. 1. Taxes in the kingdom of Rodos Imagine that while deaning out your great-grandfather's attic, you find a rudesack containing a journal and a sheat of papers. Your great-grandfather ante entrepreneur and businessman was also an accomplished amateur explorer. The Journal, which appears to be written in your great grandfather's hand, is a diary describing a series of visits to a small uncharted and called Rodos, in the northern Maricing the late 1800. The Journal and papers contain notes made during his conversations with Valdimar, king of Rodos, when they discussed the kingdom's business and economic conditions Notes-February 1, 1878 Background on the Kingdom and Economy of Rodos Rodos is a small island Kingdom. Most Rodonitzen einmal towns or in areas King Valdimar and is oval court on the other hand, live in the country's single ogrohical centre dit ing Vamaan hendre wants to create economy that improves Rodoslans' standard of living and wality of life is concerned with being as far as he can to each otiran . The long has vast eertyd but he does allowed to own real and personal property, which can be used to generate the income to improve the standard of l and to pay the Tax rev e d to provide for the band's defense and service such as postem and the construction d a nce of does, and structures na matendimentary but five and more income than they red h e adh 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-2,400 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 12% tax rate. Neither 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 dass 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.) 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, dick on the Definitions tab. Also, don't confuse the behaviors of the average Rodosian with your own-particularly when attempting to predict future behaviors.) Term Disposable income Exche tax Definitions Description The income that remains after the deduction of taxes and other mandatory charges. This balance is available for spending or saving as desired. This tax, which is levied on the consumption of certain products, is frequently included in the price of the product A tax levied on products or services that are deemed to be unnecessary, excessive, or ronessential to a normal standard of living, Also called a proportional tax wystem, this scheme requires each taxpayer to pay the same tax rate. An example of a flat rate is a sales tax Luxury Flat tax system Progressive tax system Regressive tax wystem This tax scheme imposes lower tax rates on less aunt taxpayers and higher tax rates onwealth taxpayers This scheme requires each taxpayer to pay the same dollar amount regardless of income An example of a regressive tax is a user fee for a bridge or toll road. This taxis levied on products or services that the government perceives as vices This tax which also generates additional government revenue, is intended to discourage the consumption of these goods or services without making their use illegal Finance in Action - Taxes 1. What general observations can be made regarding tax systems in general and the Rodesian 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 flat 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 remains constant . B. In contrast, the existing system imposed on businesses is an example of a flat system. A benefit of this arrangement is that all business organizations-regardless of income or asset holdings-pay the same tax rate . 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 allows an individual Rodosian to keep more of his or her income as his or her total income increases. The requirement of a constant annual tax payment of SR2,400 means that as his or her annual income increases from SR24,000 per year to SR54,000, the proportion of his or her Income lost to taxes decreases from 10.00 to 4.44 . In general, this type of tax arrangement should be expected to encourage the average individual Rodosian to improve his or her income and quality of life. C. A second advantage of Rodos's existing personal tax arrangement is it simplicity which makes it less expensive to comply with the requirement. Everything else being equal, this characteristic tends to increase actin's disposable income D. Similarly, an advantage of the current business tax requirement is that it is identical for all business organizations. According to this arrangement a business organization will be able to retain SRO for every pre-tax odoreamed From there after tax profits w hen pay any Interest e d on its borrowed capital and any dividends 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 lows for the tax deductibility of melther business's debt oor equity financing The seat of papers accompanying the journal describes several potential revisions to the Rodosian personal and business tax code, including the site a progressive tax wom the sement of different luxury and sin taxes, and/or modifications of the provisions of the restem. Two of the specific proposals indude the following: Polly Proposal hedules place the existing system with a progressive tax system that would tax business and individuals, usine the The shear of papers accompanying the journal describes several potential revisions to the Rodosian personal and business tax code, including replacing the existing system with a progressive tax system, the assessment of different luxury and sin taxes, and/or modifications of the provisions of the current system. Two of the specific proposals indude the following: Policy Proposal 1: Replace the existing system with a progressive tax system that would tax business and individuals, using these schedules Business Tax Rates If your Table Income Is Plus This Percentage on the Excess over the You Pay This Amount on the base of the Bracket 12% 18 SR960,000 SR2 220.000 Up to SR8,000,000 SR8,000,000-5R15,000,000 SR. 15.000.000 SR31,000,000 SR31,000,000 4.500.000 Over 47,000,000 Peralates If your taxatie income is SR 60.000 30 SR10,000,000 of the Pun You Pay This Amount on the Baca Dore on the cover the Up to 8000 SR8,000-526.000 SRO SR40 SRO 2.000 SR7,20 Given these tax schedules, calculate the tax liabilities for: Nal's Clothworkers Company, which earns an income of SR35,000,000 The following three individual taxpayers: (1) Styrr, a baker earning SR24,000 per year; (2) Bera, a farmer earning SR54,000 per Year: (3) Einar, a banker earning SR96,000 per year Note: Round your average tax rate answers to two decimal places Taxpayer N's Clothworkers Tax Obligation SR Average Tax Rate Einar If you were a Rodosian taxpayer, such as Styr, Bera or Finar, would you prefer the existing tax system or the progressive tax system? Why? The existing tax system, because my tax obligation would be significantly less than that under the progressive system. This would Increase my disposable Income The progressive tax system, because my tax obligation would be significantly greater than that incurred under the existing system. This would reduce my disposable income The editing tax system, because my tax obligation would be greater than that incurred under the progressive svitam reduce my daporatle income. Policy Proposal 2: Assess a special tax on businesses that own more than 10 horses or axen. What effect will this tax have on Rodosian businesses? This is an example of a sin tax This tax on more than 10 horses or oxen has the potential to penalize businesses from growing beyond a certain level. This will reduce the Treasury's tax revenues and potentially limit the growth potential and sales of businesses that provide goods and services to the taxpayers being assessed The tax will not affect the businesses being assessed the tax of the Treasury's tax revenues