Chapter 1 - Federal Income Taxation -- An Overview

Chapter 1 - Federal Income Taxation -- An Overview -...

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Chapter 1: Federal Income Taxation – An Overview I. Introduction a. Definition of a Tax i. The IRS defines a tax as “an enforced contribution, exacted pursuant to legislative authority in the exercise of the taxing power, and imposed and collected for the purpose of raising revenue to be used for public or governmental purposes” ii. A tax has the following characteristics 1. The payment to the governmental authority is required by law 2. The payments is required pursuant to the legislative power to tax 3. The purpose of requiring the payment is provide revenue to be used for public or governmental purposes 4. Special benefits, services, or priveleges are not received as a result of making the payment. a. The payment is not a fine or penalty that is imposed under other powers of government b. Standards for Evaluating a Tax i. Adam Smith identified four basic requirements for a good tax system: 1. Equality : a. A tax should be based on the taxpayer’s ability to pay i. The payment of a tax in proportion to the taxpayer’s level of income results in an equitable distribution of the cost of supporting the government b. Horizontal Equity: i. Exists when two similarly situated taxpayers are taxed the same c. Vertical Equity:
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i. Exists when taxpayers with different situations are taxed differently but fairly in relation to each taxpayer’s ability to pay the tax 2. Certainty: a. A taxpayer should know when and how a tax is to be paid i. In addition, the taxpayer should be able to determine the amount of tax to be paid b. An individual’s federal income tax return is due on the April 15 th after the close of the tax year i. A corporation’s return is due on the fifteenth day of the third month after the close of its tax year 3. Convenience: a. A tax should be levied at the time it is most likely to be convenient for the taxpayer to make the payment i. The most convenient time for taxpayers to make the payment is as they receive income and have the money available to pay the tax b. Pay-as-you-go Concept : taxes are paid as close to the time the income is earned as is reasonable 4. Economy: a. A tax should have minimum compliance and administrative costs i. The cost of compliance and administration should be kept at a minimum so that the amount that goes to the U.S. Treasury is as large as possible b. IRS operates on a budget of about 0.5% of the total taxes collected c. Tax Rates and Structures i. To compute tax, it is necessary to know the tax base and the applicable tax rate 1. The tax is then computed by multiplying the tax base by the tax rate a. Tax = Tax Base x Tax Rate
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i.
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This note was uploaded on 04/24/2011 for the course MGMT 504 taught by Professor Hatcher during the Spring '08 term at Purdue.

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Chapter 1 - Federal Income Taxation -- An Overview -...

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