UGBA 121 Fall 2019 Chapter 1 Introduction to Taxation.pptx...

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Eric Ryan, J.D., CPA Fall 2019UGBA 121Federal Income Tax AccountingAugust, 2019For educational purposes onlyChapter 1: Introduction to Taxation
“Taxes are what we pay for a civilized society.” - Justice Oliver Wendell HolmesTaxation is money levied by various levels of government for:1. Revenue for government operationsDefensePolice and FireEducationRoads Social Services2. Tool to influence behavior of individuals or businessesUsing an income tax credit to encouragepeople to buy fuel efficient cars, or to perform Research & DevelopmentImposing an excise tax on tobacco to discouragesmoking3. Provide direct benefits to taxpayers / redistribute wealthTaxes used to help pay for individual health insurance (“ObamaCare”)Reduce wealth of high net worth individuals - inheritance taxesAugust, 2019UGBA 121 Fall 20192
August, 2019UGBA 121 Fall 20193
Basic Tax FormulaAugust, 2019UGBA 121 Fall 20194Tax Base Tax RateTax Liabilityx=Tax BaseAmount to which the tax rate is appliedExample: In Federal income tax, the tax base is taxable incomeExample: For gasoline taxes, the tax base is a gallonof gasTax RateApplied to the tax to determine the taxpayer’s liability. In a mathematical sense, it may be progressive or proportional:Progressive tax rate: Tax rate in which a higher rate of tax applies as the tax base increases. Federal income tax, federal gift and estate taxes.See slide #28 - Federal Estate Tax Rates 2018Proportionaltax rate: Tax rate that remains constant for any given income level. Includes excise taxes, general sales tax, and employment taxes.
Examples of Progressive and Proportional Tax RatesProgressiveIf Linda has taxable income of $25,000, her Federal income might be $2,500, for an averagetax rate of 10%. If Linda’s taxable income is $80,000, her Federal income tax might be $16,000 for an average tax rate of 20%. The tax is progressivebecause higher rates are applied to greater amounts of taxable income.Proportional (sometimes referred to, in a societal sense, as regressive)Assume that a jurisdiction applies a 30% tax rate to all taxable income. If Bill has $10,000 of taxable income, he will pay a tax of $3,000. If Sam has taxable income of $50,000, he will pay a tax of $15,000. If this constant rate is applied throughout the rate structure, the tax is proportional.

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