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EnglerSp02 Fed Tax KOHN

EnglerSp02 Fed Tax KOHN - Engler/Spring 2002...

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Engler/Spring 2002 Kohn 1 FEDERAL INCOME TAX OUTLINE INTRODUCTION SOURCES OF FEDERAL TAXATION - Consumption tax : Tax what people spend. Very simple to administer, as one rate would apply (probably in the form of a sales tax). Encourages saving, not spending. Fairness issues arise, as people at the lower end tend to spend a higher percentage of their income than the rich. Also, no progressive rate for those who spend more. - Head tax : Tax everyone the same amount, no matter what they make. Easy to administer and does not dissuade people from working, as it has minimal effect from economic standpoint. Fairness issue, as poor can’t afford tax as easily as rich. - Wealth tax : Tax what people have accumulated. Similar to property taxes, it’s imposed on your property. Earnings per year become irrelevant. - Value added tax (VAT) : Tax the value added to goods/services by those who manufacture, distribute and sell them. Each link in production chain pay tax equal to difference between its cost of materials and its sales proceeds. Similar to a sales tax, this increases costs of goods to consumers. Can’t be levied at different rates. - INCOME TAX : This is what we’ve settled on. This tax encourages consumption over savings. It is favored on fairness grounds, as its progressivity focuses on the ability to pay and places the burden on those more able to pay it. Unfortunately, it is very complex. o Progressive tax rates : As taxable income increases, tax rate increases. square4 For example: $0 - $100,000: rate is 10 percent $100,000 - $200,000: rate is 20 percent Thus, T earns $100,000, T pays $10,000 in tax. But if T earns $200,000, pays $10,000 on first $100,000 and $20,000 on second $100,000. Total tax is $30,000. CRITERIA FOR EVALUATING THESE POSSIBILITIES - Economic effect or efficiency : What impact do taxes have on the behavior of taxpayers? - Fairness/ability to pay : People have different abilities to pay and fairness dictates these people should pay different amounts. - Administrative concerns/complexity : How complicated is this going to be for taxpayers? Simplicity is an important virtue here. TAX ACCOUNTING - Must use same method of accounting for both tax accounting and financial reporting. § 446(a) . - Tax system uses an annual accounting period so taxpayer must compute tax owed each year. - Cash method : Must report income in year received, although under § 451(a) , some manipulation of timing of inclusions and deductions exists. o Limitations: Cost of capital investments may not be deducted when cash outlay is made – only as the asset is used or when it’s sold, exchanged, etc. o Constructive receipt: Payment is treated as received when taxpayer has unrestricted right to receive the case, even if cash is not taken. o Cash equivalent/Economic benefit: Under § 83 , when taxpayer receives property/rights, they are treated as if they received cash equal to property/rights fair market value.
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