Ch. 1 Intro to Taxation
I. Structure of Taxes
a). Most taxes have 2 components:
1. Tax Base
Tax base includes: income, wage, value, sales price, etc.
2. Tax Rate: Can be progressive, regressive, or proportional
Total Tax Liability = Tax Base x Tax Rate
-Progressive: Rate increases as tax base increases. Ex: Fed. Income tax, fed.
Estate and gift taxes
-Proportional: Tax rate is constant, regardless of tax base size. Ex: Retail
Sales tax, fed. Medicare tax on salaries.
-Regressive: Rate decreases as tax base increases. Ex: Fed. Employment tax.(FICA)
Tax burden decreases as a percentage of taxpayer’s ability to pay.
Important*: The amount of taxes due increases under all 3 tax rate structures as
the tax base increases. Structure of tax rates ONLY AFFECTS the RATE of
c). Tax Bases: 4 Main types
1. Transactions (ex: sales/purchases of goods or services and transfer of wealth).
2. Property and wealth (ex: ownership of certain property)
3. Privileges and rights (ex: ability to do business as a corporation, the right
to work in certain profession, ability to move goods between countries, etc).
4. Income on gross (Net of expense) basis. Federal Income tax has most relevant
influence on business decisions!
II. Types of Taxes
a). Sales/ Excise Taxes: Taxes on Production and Sale of Goods
-Excise taxes: limited to specific kind of good/service. Extend beyond sales
transactions into privileges and rights.
General Sales Tax: Broader Tax Base
. State and local
govts. make heavy use
general sales tax
b). Federal Excise Taxes: have important impact on specific industries. Ex:
trucks, trailers, tires, liquor, tobacco, firearms, etc.
Excise Tax Bases are very diverse. Taxes levied on consumer, reseller, and
producers. Federal excise taxes due at least quarterly with exception of
alcohol, tobacco, and firearms.
C). State Excise Taxes: Many
states levy excise taxes
on same items as taxed by
Fed. Govt. However, tax on specific goods can vary from one state to the next.
d). Local Excise Taxes: Two types;
hotel occupancy tax
and rental car
. These are a political windfall and finance special projects that
generate civic pride.
e). General Sales Tax:
Major source of revenue
state and local
Used in all but 5 states. Employs
a proportional tax rate
and includes retail
sales of tangible personal property (sometimes personal service) in the base.
-some states exempt medicine and food, and sometimes tax rates vary with the