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Tax outline

Tax outline - Federal Income Tax Reading Notes Overview a...

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Federal Income Tax Reading Notes Overview a. Importance of Income Tax Income tax accounts for 87% of the total. Income tax plays a central role in financing the government. Tax lawyer: someone who advises clients on how to shape their transaction so as to minimize their tax liability. Economic Consequences o Encouraged to buy homes rather than rent o Encourage the production of oil and reducing the price of gasoline o Encouraged to make charitable contributions, raising the level of support for private colleges and universities, museums, orchestras, and organized religion. b. History Pollock v. Farmers’ Loan and Trust o Attack based on theory that a tax on rental income and on dividends and interest was a tax on the underlying property interest; because it was not levied on states in proportion to pollution, it violated the prohibition on unapportioned “direct” taxes. Art. I, sec. 9, clause 4 of Constitution: no tax shall be laid, unless in proportion to census or enumeration herein before directed to be taken. o Sustained the constitutional challenge to the imposition of the tax on rents, dividends, and interest and further held that since the provisions taxing those receipts were inseparable from the other provisions of the law, the entire law was invalid. o Response The Sixteenth Amendment “The Congress shall have the power to law and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” c. Theory and Policy Why “Income”? o View that the rich should pay more than the average tax, and the poor less or none at all, might rest on declining marginal utility, or the claim that the wealthier you are, the less each loss of a dollar to the tax collector diminishes your well-being. o “Ability” or “Wage Rate”: the opportunity to earn wealth whether or not exercised. o Choosing between income, consumption, and wealth as tax bases Wealth: may depend on one’s entire bank account, not just the interest income that the account earned or the year’s spending out of the account. 1
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- Never seriously considered Consumption: decisions to hold wealth before consuming it do not end up increasing their tax burdens State and local governments impose property taxes, as well as retail sales taxes, that reach consumption. Income: intermediate position o “Imputed income”: value of goods and services one provides to one-self Definition of Income o At first, “income” means something like the accounting concept of net income Net income: receipts less allowances for the costs of producing those receipts. o
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