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1. Taxes in the kingdom of Rodos a Aa magine that while cleaning out your great-grandfather's attic, you find a rucksack containing a journal and a sheaf of papers. Your great-grandfather, a noted entrepreneur and businessman, was alsc an accomplished amateur explorer. The journal, which appears to be written in your great-grandfathers hand, is a diary describing a series of visits to a small uncharted island called Rodos, in the northern Atlntic during the late 180Us. 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 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 Rodos ans' standard of living and quality of life. He is also concemed with being as fair as he can to each citizen. The king has vast property holdings, but he dces 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. Answer Choices 1. Disposable Income, Excise Tax, Luxury Tax, Flat Tax System, Progressive Tax System, Regressive Tax System, Sin Tax 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. 2. Regressive, Flat, Progressive .Financial markets are rudimentary but effective. Citizens and businesses with more income than they require may deposit 3. Remains Constant, Increases, Decreases their funds into banks, who in tum may lend these funds to qualified borowers. Rodos's equity markets are more constrained, owners are not allowed to sell more than 40% ownership of their company So, though equity markets exist, there aren't many companles nor large numbers of shares bought and sold 4. Regressive, Flat, Progressive 5. Tax Rate, Tax Obligation 6. A Revenue, An Expense 7. Increase, Decrease 8. Less, More 9, 10.00%, 90.00%, 96.57% 10, 3.43%, 90.00%, 96.57% Selected Provisions of the Rodosian Tax Code .King Valdimars current tax regime, both personal and corpcrate, is intended to be fair to everyone. The personal tax assesses the same tax-1.200 sodors (SR) per year-on each person, regardless of circumstance (rich or poor) or station (member of court, businessman, craftsman, or fisheman). * The taxable income of all businesses-regardless of form proprietorship, partnership, or corporation)-is subject to a 10% 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 class tamorrow to enhance the dass 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, dont confuse the behaviors of the average Rodosian with your own-particularly when attempting to predict future behaviors.) 11. Encourage, Discourage 12. Complexity, Simplicity 13. More, Less 14. Increase, Decrease 15. SRO. 90, SRO. 10, SR1. 00, SR1. 10 16. Interest, Dividends, Capital Gains 17. Dividends, Interest, Capital Gains Definitions 1. 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 is an example of 2. system. One benefit of the existing system is that it increases the kingdom's tax base 3 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 praportion of his or her income or wealth spent an taxes B. In contrast, the existing system imposed on businesses is an example of a4 organizations-regard less of income or asset holdings-pay the same 18. Does Not Encourage, Encourages 19. Only a Businesses Debt, Both a Businesses Debt and Equity, Only a Businesses Equity Neither a Businesses Debt or Equity 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 B. An advantage of the existing personal tax requirement is that it allows an individual Rodosian to keep . ofhs or her income as his or her total income increases. The requirement of a constant annual tax payment of SR1,200 means that as his or her annual income increases from SR12,000 per year to SR35,000, the proportion of his or her income lost to taxes decreases from9 to 10. .In general, this type of tax arrangement should be expected to 11 the average individual Rodoslan to improve his or her income and quality of life C. A second advantage of Rodos's existing personal tax arrangement is its requirement. Everything else being equal, this characteristic tends to 14. a citizen's disposable income. D. Similarly, an advantage of the current business tax requirement is that it is identical for all business organizations. However, in this case, it is the tax rate, rather than the tax liability, that is the same for all taxpayers. According to this arrangement, a business organization will be able to retain 15. for every pre-tax sodor earned. From these after-tax profits, it will then pay any16 shareholders. Given these provisions, the current system because the arrangement allows for the tax deductibility of 6. and 7. both an individual's disposable income and a business's after-tax profits. 12. ,which makes it 13. expensive to comply with the owed on its borrowed capital and any 17, to its 18 the use of one form of financing (debt versus equity) over the other. This is 19 financing

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