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EnglerF00- federal income taxation

EnglerF00- federal income taxation - www.swapnotes.com...

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1 FEDERAL TAX OUTLINE Chapter One: Introduction A. The Importance of Income Taxes The main source of federal tax collection is income tax Other possibilities: -Value Added Tax: Consumption tax. Tax what you spend, don't tax investments. -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: (1) Administrability (2) Fairness (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. B. History 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 concepts: 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 www.swapnotes.com
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2 government giving the taxpayer $1000. Deviate form ideal tax to encourage people to save for retirement In a progressive tax structure, each person puts 10,000 in 401K, the person making $100,000 saves $1000, and the person making $200,000 saves $2000 -- government gives a greater subsidy to the person in the higher tax bracket. Undercuts the progressivity of income tax-- greater benefits for the wealthy. E. Rate Schedules, the Taxable Unit, and the Marriage Penalty Marriage Penalty: Married couple is one unit for tax purposes: aggregate income of husband & wife. Suppose: H earns $100,000. W earns $100,000, before they get married they each pay $10,000. How much should they pay as a married couple? Apply the same rate structure there's a penalty: Joint income $200,000 = $30,000 tax. Increase tax by $10,000. Apply a different rate structure: Raise the 10% bracket for joint returns : $0-$200,000 - 10% tax rate -- fully solves marriage penalty. Don't do this because it creates a windfall for married couples if H earns $200,000 and W earns $0. Actually rate structure is adjusted to be somewhere in between -- doesn't fully solve penalty, and doesn't give windfall.
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