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Cunnignham F05 Tax Notes

Cunnignham F05 Tax Notes - [email protected] Federal Income...

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[email protected] Federal Income Tax Policy o Tax is designed to raise revenue. Income Tax is the largest way for the government to collect revenue. o Why Income Tax? A head tax would have no basis on how much people are able to pay and an income tax was a reasonable reflection of ability to pay. Income is an appropriate measuring stick. Europeans often use a consumption/sales tax, a value added tax, which taxes based on consumption. o What is Income? Tax Code’s Definition – Increase in value of assets = increase in wealth Economists Definition - An economist would focus on how much was spent and how much the wealth increased: Consumption + changes in the value of taxpayer’s wealth = accretion in wealth over the course of a year. Anti Income Tax Argument - Some people argue that income tax is not fair and that another method should be used. Income is, in essence, savings. Taxing savings discourages people from saving, which is bad for the economy. There is a movement to move from an income tax to no taxation on savings. Income Tax does not tax fluctuations in value until the taxpayer sells the asset. If your apartment goes up in value, you do not get taxed on it until you sell it. Goals of an Income Tax Code o Effective The code must be effective in raising money for government o Equity Horizontal Equity - Treating people in the same economic position fairly, vis a vis each other. Two similarly situated taxpayers should pay the same amount of tax. If one person takes a given job and another person does not take the job and sits on the beach. Difficult to establish earning potential. Freedom of choice to sit down and do nothing. What if the second person works for legal aid? Then he could not come up with the same tax amount. We don’t want to force people to take the highest earning job consistent with our notions of public service and freedom of choice. Vertical Equity - Treating people in different economic positions fairly, vis a vis each other. Proportional - Taxpayer 1 has $100,000 and taxpayer 2 earns $10,000. If everyone was to pay 10%, then taxpayer
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1 would be paying $10,000 and 2 would pay $1,000. Tax payer 1 paying 10 times as much in taxes. Progressive – Taxpayer 1 pays a higher tax rate because he earns more money. We currently have a progressive system - Rates used to be a lot higher. Prior to 1986, there used to be 14 brackets. Reagan hated high taxes and that progressivity was communism in disguise. Democrats and republicans got together and broadened the base and eliminated tax shelters. Once you broadened the base, you could bring down the brackets, so it went from 14 to 2 brackets. No preferential rate for capital gains. That did not last long o Simplicity Complexity discourages people from paying o Neutrality Taxes should not affect economic behavior. In reality, it does. In fact, increasingly, congress uses the tax code to manipulate behavior.
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