Taxes are pervasive (widespread & come in may variety) and
dynamic (change frequently) Terminologies
Tax: Compulsory payment to support the cost of government. o Not
intended to deter unacceptable behavior like fines/penalty.
Taxpayer: Any person/organization required to pay tax
(individuals/corps). Incidence: Ultimate economic burden of
tax.
o May not fall on the tax payer (e.g. tax property higher rent
& & monopoly fall on customers because they will pay higher
prices)
Jurisdiction: The right of government to levy tax Tax base: An
item, occurrence, transaction, or activity on which a tax is levied
(in
monetary terms e.g. value of property) Revenue: Total tax
collected by the government.
Tax formula Tax = Rate * Base Rate can be:
Flat: single percentage Graduated: multiple percentages that
apply to portions brackets of tax base
Two ways to characterize tax: 1- Frequency
Event/transaction based o Sales, excise, estate, gift taxes
Activity based o Income tax result of ongoing activities
2- Link to government expenditures Earmarked to finance
designated projects Federal payroll taxes Social security &
Medicare Environmental excise taxes Environmental protections
agency Local Taxes Property taxes (ad valorem) make up more than
70% of local government tax revenue
Real property (Realty: land and whatever affixed to it) taxes o
Levied annually based on market value assessed by tax assessors or
local gov o Tax rate is determined annually based on need for
revenue o Abatement (temporary tax exemptions) to entice new
business
Personal property (Personalty) taxes o Three classes: Household
tangibles, business tangibles, and intangibles
(securities). o Individuals/organizations assess the value of
their taxable personalty and
report to the tax assessor. State Taxes Sales and income taxes
make up about 90% of total state tax revenue
Sales/use tax o Business tax on seller OR consumption tax
purchaser (Seller collect tax) o Use tax apply if states sales tax
wasnt paid when the goods were purchased
Excise tax o Imposed on the sale of specific goods
Cigarette and gasoline
Hotel/ motel accommodations Income tax
o Personal / corporate Federal taxes The major source of revenue
is income tax
Income taxes o First income tax was enacted to pay for civil war
(1861-1871) o First permanent income tax passed 1894 but it was
unconstitutional o 16th amendment 1913. Internal Revenue code
1939
Employment & unemployment taxes o Social Security &
Medicare funded by the federal employment tax o Unemployment
insurance system unemployment taxes
Transfer taxes (wealth transferred by gift / death) Excise taxes
(tobacco, luxury automobile, firearms)
Foreign Taxes Value added tax (VAT)
Similar to sales tax. A tax on the incremental value added by a
business at each stage of the production process
Jurisdictional Competition Government that fail to be assertive
when taxing may lose revenue to other taxing authorities, but being
too aggressive can cause taxpayers to flee the tax jurisdiction.
Tax law is dynamic in nature - Taxes and Each time taxpayers find
new method to reduce tax, the government respond with new rule -
Tax base changes
Legalized gambling Sales tax expansion
Taxing services (utilities, cable, parking) Mail-order &
internet companies arent required to collect taxes where they
dont have physical presence Sources of federal tax law
Statutory authority o The Internal Revenue Code
Numerically ordered sections Administrative authority
o The Department of the Treasury writes Treasury regulations o
IRS (subdivision of the treasury) provides:
Revenue ruling: explains how IRS applies the tax law to set of
facts Revenue procedure: advises taxpayers how to comply with IRS
Published weekly in Internal Revenue Bulletins (IRBs), and
semiannually in Cumulative Bulletins (CBs) Judicial
authority
o Supreme court verdict is equivalent of law o Appellate courts
o Trial courts
Property tax vs Transfer
