Lecture12a0.ppt

Lecture12a0.ppt - Lecture12:TaxDeductions Outlineoflecture...

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    Lecture 12:  Tax Deductions
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    Outline of lecture Description of law, past and present: standard vs. itemized deductions Most important itemized deductions: State and local tax payments Mortgage interest payments Medical expenditures Charitable donations Rationale for deductions in each case? Proposed reforms
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    Description of law Adjusted gross income minus: Exemption of $3,300 for each individual in family Standard deduction, equal to $5,150 or Itemized deductions, consisting of: Property tax and either state income or sales tax Medical expenditures (over 7.5% of AGI) (Mortgage) interest payments on own house Charitable donations (up to 50% of AGI) Employee business expenses, if over 2% of AGI Equals taxable income
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    Traditional Rationale for itemized  deductions Pay tax on “net” income Employee business expenses a cost of earning income State and local taxes deducted from pay Measure income available for ordinary consumption Charitable donations not available for own consumption Medical expenditures not “ordinary” consumption, so reflects differences in “needs”
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    State and local tax payments Choice on tax payments undermines traditional rationale for deduction Choose amount of public services through Voting, though only median voter happy Choice of community: high tax & high services vs. If tax payments simply a price for local public services, then why treat payments for public services differently from payments for private services?
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    State and local tax payments Deduction lowers price of services purchased through state and local governments for those who itemize Public schools cost $(1- t ) per $1 of expenditures, while private schools cost $1 per $1 Public vs. private swimming pools, golf courses Roads: additional matching funds from national government Publicly financed trash collection and lawn- mowing
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    Alternative rationale Externalities from local public services Nonresidents use roads and some parks, and gain from police and fire protection Trash collection reduces eye-sores, and avoids illegal dumping Higher tax rates benefit neighboring jurisdictions by shifting tax base there More education raises tax base elsewhere to extent people move and generates more informed co-workers. But so does private education
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    Alternative rational and tax policy But is an itemized deduction the appropriate way to address such externalities?? Only those who itemize receive deduction
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This note was uploaded on 11/03/2009 for the course ACCT 130 taught by Professor Huxhold during the Spring '09 term at UCSD.

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Lecture12a0.ppt - Lecture12:TaxDeductions Outlineoflecture...

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