to Introduction Federal Income Taxation
TAX ENVIRONMENT
Types of U.S. Taxes
Assessed on income Assessed on specific types of income -
employment taxes. Property - Real estate & personal property tax Transaction based taxes
Question 1
How is the tax formula applied to various taxes?
Tax = Base x Rate
For example, under the federal income
tax,
Base = taxable income
Rate varies according to the base (taxable income) & family status
Tax = Base x Rate
Property or Transactions In general, base = value of the property or the transaction (ad valorem), and the rate is set.
Question 2
What revenue source provides the most
revenue for the federal government?
Corporate income tax Individual income tax Social security & medicare taxes Other
RECEIPTS BY SOURCE--SUMMARY
(In millions of dollars)
Source Actual
1996 %
Estimate
1997
Individual income taxes................................................................ 656,417 0.45 672,683 0.45 Corporation income taxes............................................................... 171,824 0.12 176,199 0.12 Social insurance taxes ................................................................ 509,414 0.35 535,766 0.36 Excise taxes........................................................................... 54,014 0.04 57,247 0.04 Estate and gift taxes.................................................................. 17,189 0.01 17,588 0.01 Customs duties......................................................................... 18,670 0.01 17,328 0.01 Miscellaneous receipts................................................................. 25,534 0.02 28,614 0.02 ------------------- -----------------------------Total receipts......................................................................... 1,453,062 1.00 1,505,425 1.00
Federal Receipts (in billions)
% for 07
Major Source
Individual Income Tax
Corporate Income Tax
2005
2006
2007
927
278
1,044
354
1,163
370
0.45
0.14
Social insurance
Other
794
154
838
171
870
164
0.34
0.06
Total
2,154
2,407
2,568
1.00
Question 3
What is the US federal budget surplus or
deficit for FY 2007? http://www.cbo.gov/ftpdocs/87xx/doc8792/1 1-2007-MBR.htm
Question 4
When is `tax freedom' day in 2007? In 1950?
http://www.taxfoundation.org/taxfreedomday/
Question 5
What is the US national debt?
http://www.publicdebt.treas.gov/opd/opdpdodt.htm
Question 6
Who is subject to the federal income entities tax?
Taxable under the income tax
Individuals
US Citizens or residents are taxed on world-wide income. Nonresident aliens are taxed on US source income .
Corporations
Trusts & estates
History
16th Amendment The Revenue Act of 1913
Income earned after 3/1/13 was taxed. Later acts amended tax law. Codification
Sources of federal tax law
Statutory law Amendments to the IRC & Tax Treaties
Treasury Regulations Written by Treasury to clarify & explain. Adopted after public review and comment. Judicial interpretations
STANDARDS FOR A GOOD TAX
Sufficient Convenient Efficient Fair
Sufficient
Relates to raising sufficient revenue How can government increase revenue? It can increase the base, increase the rate, or exploit a new base. Static vs dynamic forecasting income or substitution effect
Convenient
Relates to ease of administration Cost/benefit for government
Cost of compliance for TP
Efficient
Relates to the neutrality of tax on market &
decision making
Investment Opportunity
Investment Annual cash flow expected Tax rate A B
40,000 25%
40,000 20%
Assume same initial investment for both. Which is the best opportunity? Why?
Which investment is best?
Consider What is the investor's objective?
Which investment is best?
What is the investor's objective? Consider Is it to
minimize total tax? maximize after-tax return on investment?
Investment Opportunity
Investment Annual cash flow expected Tax rate A B
40,000 25%
35,000 20%
Assume same initial investment for both. Which is the best opportunity now? Why?
Fair relates to equity
Tax should be based on ability to pay.
Horizontal equity Similarly situated taxpayers should be taxed the same. When are taxpayers similarly situated? Vertical equity Taxpayers who have the greatest ability to pay should pay the largest proportion of the tax.
Question 7
What is the share of the individual income
tax paid by each income group (by quintile)?
http://www.taxfoundation.org/news/show/85.html
Tax Rate Structures
Progressive tax rate of tax increases as the base increases.
Proportional tax rate of tax remains the same for all. Regressive tax rate of tax decreases as the base increases.
Tax Rate Terminology
Marginal tax rate: rate of tax assessed on the next $1 of income.
Average tax rate: total tax paid / taxable income Effective tax rate: total tax paid / economic income