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Lecture notes - Introduction to Federal Income Taxation TAX ENVIRONMENT Types of U.S Taxes Assessed on income Assessed on specific types of income

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Unformatted text preview: Introduction to Federal Income Taxation TAX ENVIRONMENT Types of U.S. Taxes Assessed on income Assessed on specific types of income employment taxes. Property - Real estate & personal property tax Transaction based taxes Question 1 How is the tax formula applied to various taxes? Tax = Base x Rate For example, under the federal income tax, Base = taxable income Rate varies according to the base (taxable income) & family status Tax = Base x Rate Property or Transactions In general, base = value of the property or the transaction (ad valorem), and the rate is set. Question 2 What revenue source provides the most revenue for the federal government? Corporate income tax Individual income tax Social security & medicare taxes Other RECEIPTS BY SOURCE--SUMMARY (In millions of dollars) Source Actual 1996 % Estimate 1997 I n d i v i d u a l i n c o m e t a x e s . . . . . . . . . . . . . . . . . . . . . . . . . . . .0...4.5. . . . . . . . . . . . . . . . .0 . 4 5 . . . . . . . . . . . . 656,417 672,683 .... C o r p o r a t i o n i n c o m e t a x e s . . . . . . . . . . . . . . . . . . . . . . . . . . .0...1.2. . . . . . . . . . . . . . . . .0 . 1 2 . . . . . . . . . . . . 171,824 176,199 .... S o c i a l i n s u r a n c e t a x e s . . . . . . . . . . . . . . . . . . . . . . . . . . . .0...3.5. . . . . . . . . . . . . . . . .0 . 3 6 . . . . . . . . . . . . 509,414 535,766 .... E x c i s e t a x e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .0...0.4. . . . . . . . . . . . . . . . .0 . 0 4 . . . . . . . . . . . . 54,014 57,247 .... E s t a t e a n d g i f t t a x e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .0...0.1. . . . . . . . . . . . . . . . .0 . 0 1 . . . . . . . . . . . . 17,189 17,588 .... C u s t o m s d u t i e s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .0...0.1. . . . . . . . . . . . . . . . .0 . 0 1 . . . . . . . . . . . . 18,670 17,328 .... M i s c e l l a n e o u s r e c e i p t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . .0...0.2. . . . . . . . . . . . . . . . .0 . 0 2 . . . . . . . . . . . . 25,534 28,614 .... ------------------- -----------------------------T o t a l r e c e i p t s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1...0.0. . . . . . . . . . . . . . . . .1 . 0 0 . . . . . . . . . . . . 1,453,062 1,505,425 .... Federal Receipts (in billions) Major Source Individual Income Tax Corporate Income Tax Social insurance Other 2005 927 278 794 154 2,154 2006 1,044 354 838 171 2,407 2007 1,163 370 870 164 2,568 % for 07 0.45 0.14 0.34 0.06 1.00 Total Question 3 What is the US federal budget surplus or deficit for FY 2007? http://www.cbo.gov/ftpdocs/87xx/doc8792/11-2 Question 4 When is `tax freedom' day in 2007? In 1950? http://www.taxfoundation.org/taxfreedomday/ Question 5 What is the US national debt? http://www.publicdebt.treas.gov/opd/opdpdodt.htm Question 6 Who is subject to the federal income tax? Taxable entities under the income tax Individuals US Citizens or residents are taxed on world-wide income. Nonresident aliens are taxed on US source income . Corporations Trusts & estates History 16th Amendment The Revenue Act of 1913 Income earned after 3/1/13 was taxed. Later acts amended tax law. Codification Sources of federal tax law Statutory law Amendments to the IRC & Tax Treaties Treasury Regulations Written by Treasury to clarify & explain. Adopted after public review and comment. Judicial interpretations STANDARDS FOR A GOOD TAX Sufficient Convenient Efficient Fair Sufficient Relates to raising sufficient revenue How can government increase revenue? It can increase the base, increase the rate, or exploit a new base. Static vs dynamic forecasting income or substitution effect Convenient Relates to ease of administration Cost/benefit for government Cost of compliance for TP Efficient Relates to the neutrality of tax on market & decision making Investment Opportunity Investment Annual cash flow expected Tax rate A B 40,000 25% 40,000 20% Assume same initial investment for both. Which is the best opportunity? Why? Which investment is best? Consider What is the investor's objective? Which investment is best? What is the investor's objective? Consider Is it to minimize total tax? maximize after-tax return on investment? Investment Opportunity Investment Annual cash flow expected Tax rate A B 40,000 25% 35,000 20% Assume same initial investment for both. Which is the best opportunity now? Why? Fair relates to equity Tax should be based on ability to pay. Horizontal equity Similarly situated taxpayers should be taxed the same. When are taxpayers similarly situated? Vertical equity Taxpayers who have the greatest ability to pay should pay the largest proportion of the tax. Question 7 What is the share of the individual income tax paid by each income group (by quintile)? http://www.taxfoundation.org/news/show/85.html Tax Rate Structures Progressive tax rate of tax increases as the base increases. Proportional tax rate of tax remains the same for all. Regressive tax rate of tax decreases as the base increases. Tax Rate Terminology Marginal tax rate: rate of tax assessed on the next $1 of income. Average tax rate: total tax paid / taxable income Effective tax rate: total tax paid / economic income ...
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This note was uploaded on 05/19/2008 for the course ACCT 3531 taught by Professor Ryan during the Spring '08 term at Temple.

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