FEDERAL TAX OUTLINE
Chapter One: Introduction
A. The Importance of Income Taxes
The main source of federal tax collection is income tax
-Value Added Tax:
Consumption tax. Tax what you spend, don't tax
-Wealth Tax: earnings per year irrelevant, would look at the assets you
have. I.e. property tax: imposed on value of real property
-Flat/Head Tax: everyone pays the same
How to evaluate a tax base:
(3) Economic Effects: people's behavior in response to the tax system
Arguments for Consumption tax rather than Income:
Income tax encourages consumption rather than savings, disincentive for
savings, need savings for good economy.
Income Tax favored on Fairness grounds:
Consumption tax hurts those who have to spend a high percentage
of their income in consumption, and protects those with the
ability to save.
Ability to pay, to bear the burden of funding gov't operations,
higher income = higher ability to bear burden.
If we went to consumption tax, wouldn't have progressivity that we have under
income tax: As income rises, the tax rate rises.
C. Theory and Policy
1. Why "Income"?
2. The "Definition" of Income
3. The Tax Expenditure Budget
6. Income versus Consumption
D. The Rate Structure, Progression, and Marginal Rates
Progressive Tax Rate Structure: as taxable income increases, the tax rate increases
Example: $0- $100,000 - Tax rate = 10%
$100,000 - $200,000 - Tax Rate = 20%
Someone earns $100,000: pays $10,000 in tax.
Someone earns $200,000: pays $10,000 on first 100,000; and pays
$20,000 on second 100,000; Total tax = $30,000.
401K plans: deduct amounts from salary put into savings, reduces taxable income.
Raises notions of tax expenditure budget
Example: $10,000 to a 401K- reduces income from 100,000 to 90,000, only pay
9,000 in tax rather than 10,000.
Not an ideal income tax. Really the government spent $1000, equivalent of the