The Mathematics of Money

408 Chapter 9 Taxes

Example 9.4.2 The Republic of Ithuvania charges an import duty of $1.25 per

pack plus 18% of the market value on cigarettes imported from the United States.

(The prices here are in Ithuvanian dollars.) On a business trip to Ithuvania you bring

12 packs of cigarettes, which would sell for $5 a pack there. How much of a duty will

you have to pay?

The market value of the cigarettes is 12($5)  $60. Taking 18% of this gives (18%)($60) 

$10.80. In addition, you must pay $1.25 per pack, totaling ($1.25)(12)  $15.00. Altogether,

this adds up to $15.00 
 $10.80  $25.80.

Example 9.4.3 Suppose that imports of wine are subject to an import duty of $8.00

per case. A case of wine is defi ned to be 9 liters. How much import duty would have to

be paid on a shipment of 100 bottles, each of which contains 1.5 liters?

The total amount imported is (100 bottles)(1.5 liters/bottle)  150 liters.

Since there are 9 liters per case, this is (150 liters)/(9 liters/case)  16.6667 cases.

The duty would be (16.6667 cases)($8.00/case)  $133.33.

Tourists are sometimes permitted to bring back a certain amount of an item without having

to pay any duty. In those cases, duties would only be payable only on the amount which

exceeds the exemption amount.

Example 9.4.4 Suppose that you are returning from a trip to Asia, and customs

regulations permit you to bring back up to $500 worth of electronics duty-free. Beyond

that exemption, there is an import duty of 6% of the price paid. You bring back two

digital cameras, each of which cost $325. How much duty must be paid?

The total purchase price is ($325)(2)  $650.

This exceeds the exemption by $650 – $500  $150.

The duty would then be (6%)($150)  $9.00.

Estate Taxes

When someone dies, her property passes on to her survivors as specified in her will. (If

there is no will, a court determines who is entitled to inherit the property according to state

law.) This property is referred to as the deceased person’s estate, and estate taxes may be

assessed against the value of the property in the estate. Estate taxes are levied by the federal

government, and also by some states.

Especially in recent years, estate taxes have been a hot political issue. Critics call them

“death taxes,” and many politicians and political commentators have loudly demanded they

be eliminated. Estate taxes make an easy target for outrage; it is not hard to take offense at

the notion of a tax on dying! On the other side, supporters of the estate tax note that this tax

only applies to quite large estates, and that in actuality only a very small percent of estates

wind up facing any estate tax liability at all.

Estate taxes apply only to a person’s taxable estate. Generally speaking, the taxable

estate is the fair market value of the deceased person’s property, after subtracting out:

The amount required to repay any debts

Funeral expenses

Gifts specifi ed in the will for charities (in most cases)

Amounts left to a surviving spouse (in most cases)

Fees paid to the person selected to administer the estate (the executor or executrix)

and for legal expenses of administering the estate

Death benefits from life insurance policies may or may not be considered part of the

taxable estate, depending on several particular details of how the policy was set up. The

estate tax status of special retirement accounts such as IRAs and 401(k)’s can also be a

complicated matter. Wealthy individual also sometimes take advantage of special types