engler 2001-my fed tax outline

engler 2001-my fed tax outline - My Fed Tax Outline Engler...

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My Fed Tax Outline – Engler 2000 1 C HAPTER 1 I NTRODUCTION 2 Central Themes: 1) What is the treatment under current tax law? 2) What should the treatment be under an ideal tax system? I. Why Income Tax over other possibilities A. The main source of tax at the federal level is Income Tax. B. Other possibilities : 1. VAT – Value Added Tax – the equivalent of a consumption tax a. Income tax encourages consumption as opposed to savings while a consumption tax does the opposite b. under a Consumption Tax, progressivity would be lacking; no increase as Income rises 2. Wealth Tax – Tax according to assets (have this at state level in form of property tax) a. Income and Wealth Tax are not identical but somewhat similar 3. Head Tax – everybody pays the same C. Ways to evaluate what tax to use : 1. Administration/Complexity a. In terms of Administration/Complexity, a head tax is easiest; it might eliminate the code and tax lawyers, but it hurts the poor, so in terms of fairness, not a good option. 2. Fairness – Ability to Pay a. Fairness (ability to pay) is the underlying reason supporting an Income Tax 3. Economic Effects D. Arguments for Consumption tax rather than Income: 1. Income tax encourages consumption rather than savings, disincentive for savings, need savings for good economy. 2. Income Tax favored on Fairness grounds: a. Consumption tax hurts those who have to spend a high percentage of their income in consumption, and protects those with the ability to save. b. Ability to pay, to bear the burden of funding gov't operations, 1. higher income handptright higher ability to bear burden. 3. If we went to consumption tax, wouldn't have progressivity that we have under 4. income tax: As income rises, the tax rate rises. II. The Rate Structure, Progression, and Marginal Rates A. Progressive Tax Rate Structure: as taxable income increases, the tax rate increases 1. Example: $0- $100k - Tax rate = 10% $100k - $200k - Tax Rate = 20% Someone earns $100k: pays $10k in tax. Someone earns $200k: pays $10k on first 100k; and pays $20k on second 100k; Total tax = $30k. www.swapnotes.com
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My Fed Tax Outline – Engler 2000 2 B. 401K plans: deduct amounts from salary put into savings, reduces taxable income. Raises notions of tax expenditure budget concepts: 1. Example: $10k to a 401K- reduces income from $100k to $90k , only pay $9k in tax rather than $10k. 2. Not an ideal income tax. Really the government spent $1k, equivalent of the government giving the taxpayer $1k. Deviate form ideal tax to encourage people to save for retirement 3. In a progressive tax structure, each person puts 10k in 401K, the person making $100k saves $1k, and the person making $200k saves $2k -- government gives a greater subsidy to the person in the higher tax bracket. Undercuts the progressivity of income tax-- greater benefits for the wealthy.
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