Out1 - Introduction to Taxation Chapter 1 Introduction to...

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Introduction to Taxation Chapter 1 Introduction to the Federal Tax System Fall 2009 Kulsrud
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A515/A328 Fall 2009 CHAPTER 1: AN OVERVIEW OF FEDERAL TAXATION 1. What is a tax and why tax? 1.1 Raise revenues 1.2 Use taxes as instrument of fiscal or social policy 1.3 Tax expenditures 1.3.1. Defined: amount of revenue lost for failing to tax particular item or allowing a deduction or credit to reduce the tax that otherwise would be paid 1.3.2. Examples: tax breaks for a. Education: exclusion for scholarships, credit for education expenses b Investing: research and development c. Charitable giving: 1.3.3. Compared to direct government expenditures 2. Structure of a tax 2.1 Formula for all taxes Base x Rate Tax 2.2 Identification of base and rate structure 3. What should be taxed? 3.1 Criteria for selection of a good tax base 3.1.1. Fair or equitable a Horizontal equity : taxpayers who are in similar situations should be taxed similarly. b. Vertical equity : taxpayers in different situations should be taxed in a different manner with the difference being fair and just. c. Operationalizing the concept: the relevant factor in assessing the taxpayer's situation is his ability to pay 3.1.2 Economically efficient ; the tax should be able to produce the desired economic and social effects, and otherwise be neutral 3.1.3. Simple , easy to administer, and convenient. 3.1.4 Economical and productive (low cost to operate yet produce substantial revenues). 3.1.5 Certain ; base selected should yield little or no surprise on the day that the tax is determined. 3.1.6 Conflicts between criteria 3.2. Possible tax bases 2
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4. How to tax the selected base? 4.1. Rate concepts 4.2.1. Marginal rate is the rate that applies to the last unit (or next unit) of tax base. 4.2.2. Average tax rate is determined by dividing the tax by the tax base. 4.2.3. Effective tax rate which is the tax divided by economic income. 3
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1962 TAX RATES MARRIED FILING JOINTLY If taxable income is Of the Over But not over Tax liability Amount over $ 0 $ 4,000 20% $ 0 4,000 8,000 $800 + 22% 4,000 8,000 12,000 1,680 +26% 8,000 12,000 16,000 2,720 +30% 12,000 16,000 20,000 3,920 +34% 16,000 20,000 24,000 5,280 +38% 20,000 24,000 28,000 6,800 +43% 24,000 28,000 32,000 8,520 +47% 28,000 32,000 36,000 10,400 +50% 32,000 36,000 40,000 12,400 +53% 36,000 40,000 44,000 14,520 +56% 40,000 44,000 52,000 16,760 +59% 44,000 52,000 64,000 21,480 +62% 52,000 64,000 76,000 28,920 +65% 64,000 76,000 88,000 36,720 +69% 76,000 88,000 100,000 45,000 +72% 88,000 100,000 120,000 53,640 +75% 100,000 120,000 140,000 68,640 +78% 120,000 140,000 160,000 84,240 +81% 140,000 160,000 180,000 100,440 +84% 160,000 180,000 200,000 117,240 +87% 180,000 200,000 300,000 134,640 +89% 200,000 300,000 400,000 223,640 +90% 300,000 Over 400,000 313,640 + 91% 400,000 2008 2008 2008 Filing Status MARRIED SINGLE MARRIED Gross income $80,000 $80,000 $160,000 Standard deduction ($11,400) ($5,700) ($11,400) Exemption(s) ($7,300) ($3,650) ($7,300) Taxable income
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Out1 - Introduction to Taxation Chapter 1 Introduction to...

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