tax notes ch.1 - Ch 1 Intro to Taxation I Structure of...

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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 b). Rates: -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 increase. 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. VS. General Sales Tax: Broader Tax Base * All levels of govt. impose excise taxes . State and local govts. make heavy use of 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 “surcharge” . These are a political windfall and finance special projects that generate civic pride. e). General Sales Tax: Major source of revenue for most state and local govts. 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
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good being sold. Sales tax collected by retailer and paid to state govt. Some locations within the same state may have different sales tax rates. f). Use tax : Exist to prevent tax reduction policy of purchasing goods in a state that has little or no sales tax and transporting them to one’s home state. Ex: purchasing an automobile in a neighbor tax-free state and using it in a taxed state. Difficult to enforce for other purchases and often avoided.
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