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Engler - F04 Fed Tax

Engler - F04 Fed Tax - www.swapnotes.com Federal Income Tax...

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1 Federal Income Tax Outline CHAPTER 1 I. Introduction a. Themes i. What is the actual result under tax law? ii. From a policy standpoint, what should the law be? b. Possible Types of Taxation i. Head Tax barb2right flat rate for each person ii. Wealth Tax barb2right Looking to worth of property rather than the income that is generated iii. Consumption Tax barb2right Looking to what money is actually used rather than saved/earned (example is state retail sales tax) c. 3 Classic Criteria in evaluating the choice of taxation i. Fairness/”Ability to Pay” barb2right People have different abilities to pay and fairness dictates that these people should pay different amounts ii. Economic Effects/Efficiency barb2right What impact do the taxes have on the behavior of TPs? iii. Administrative Concerns/Complexity barb2right How complicated will the taxes be for TPs? Simplicity is important d. Why Tax Income? i. Head Tax is NOT fair barb2right although simple in terms of administration and good economic effects barb2right It does NOT address “ability to pay” barb2right the rejection of the head tax demonstrates the importance of fairness and “ability to pay.” ii. General debate is: Income vs. Consumption 1. Arguments Against Consumption : a. People will work less b. NOT fair because people who have a high income but saves more than they spend will not pay much in taxes— does not base taxes on “ability to pay” c. People who live paycheck to paycheck will bear the brunt of taxes d. Income tax is organized in a progressive rate structure— consumption has difficulty fitting into this structure i. However it has recently been shown that consumption can be put into a modified progressive rate structure 2. Arguments For Consumption: a. On an overall basis, those who earn more money will consume more b. Those who are saving for their future may not pay a lot of taxes at that point, but will ultimately spend and be taxed at that point c. Consumption taxes you later on—only when you spend vs. Income tax that taxes you currently even if you save d. People will actually work more to cover basic needs e. Definitions i. Tax Accounting Methods www.swapnotes.com
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2 1. Cash Method barb2right Taxed when income is received (used by most individuals) 2. Accrual Method barb2right Taxed when income was earned (used by most businesses) ii. Capital Gain barb2right Gain from the sale of capital assets ( §1221 ) 1. Long-Term Capital Gain (LTCG) barb2right Gain from the sale of a capital asset that is held for more than 1 year a. LTCG is given a lower tax rate (15%), in order to encourage investment (especially risky investments that stimulate capital gains) in capital assets for the long haul b. There is an argument that LTCG rate encourages people to let go of investments and get involved in others (gets rid of Lock-In effect) iii. Realization 1. When dealing with securities or property, the gain will generally be reported when it is sold [see §61(a)(3) and §1001(a)] 2. Is this fair?
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