Final answer:
In tax planning activities, a decision maker must conduct a cost/benefit analysis comparing after-tax benefits to pre-tax costs, utilizing tools like the present discounted value to assess the value of future benefits against current costs, and consider taxation principles.
Step-by-step explanation:
When analyzing tax planning activities, a decision maker must carefully evaluate the trade-offs involved by comparing the after-tax benefits to the pre-tax costs. This involves conducting a cost/benefit analysis, which encompasses weighing marginal costs, the additional costs associated with one more unit, against marginal benefits, the additional benefits derived from one more unit. A T-shaped chart is commonly used in cost benefit analysis to list costs on one side and the corresponding benefits on the other, aiding in visualizing this comparison.
Furthermore, the concept of present discounted value is essential when considering investments or policy proposals, like adding safety features to a highway, where costs are incurred now and benefits are realized in the future. This analytical tool helps to ascertain the current value of expected future benefits, accounting for the time value of money.
Decision-making also involves understanding taxation principles, such as the benefit principle taxation, where taxes paid are proportional to the benefits received, and the ability to pay principle, suggesting that those with a greater capacity to bear taxes should contribute more. In summary, tax planning is rooted in economic principles such as cost/benefit analysis, present discounted value, and fundamental taxation concepts.