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Income-Taxation-Buchanan-Sp07

Income-Taxation-Buchanan-Sp07 - INCOME TAXATION OUTLINE...

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INCOME TAXATION OUTLINE PROF. NEIL BUCHANAN SPRING 2007 Basic Income Tax outline - What is income? - When is it taxable? (Timing) o Realization – when non-cash income is turned into cash (i.e. when  goods are sold) Issues here are liquidity &  valuation  o Recognition – Congress often allows people to defer paying taxes - What can be subtracted from income before it’s taxed? (Deductions) - What tax rate is applied?  o Some kinds of income have better tax rates (ex. capital gains) General Info on Taxes - US economy produces $13  ½  trillion per yr. - Income taxes produce 55% of fed. revenues – top income earners pay a  proportionally larger amount b/c system is progressive meaning as income  level increases rates increase o Tax base = item or activity used to determine tax liability  o Here tax base is income o Middle income people don’t pay a lot of fed. income tax – pay  mostly SS & Medicare taxes - Tax code is very complicated partly due to encouragement of certain  economic activities through deductions, credits o This allows politicians to call a subsidy a tax cut - 16 th  amendment in 1913 allowed income taxation - There are four rates (listed in favorability order from most) o Married couples filing together o Heads of households o Single people o Married couples filing separately - There are civ. & crim. penalties for not filing a return - IRS selects only a few returns to audit – has 3 yrs. to assert deficiency return  – tp’s pay interest on underpayments o Also fines and civ. & crim. penalties for fraud but these apply only  to very severe cases
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o Usually tp will just have to pay interest - If a realize a mistake should file amended return but no penalty for not doing  so Tax Policy   - Tax expenditures – code exempts certain things from taxable income but this  can be seen as an expenditure b/c revenue is lost by not taxing thes things –  it’s really a subsidy o Ex. code subsidizes home ownership, pensions, healthcare  - Gov’t is trying to encourage spending in these areas b/c as public policy think  these are good ways for tp’s to act  o Ex. want people to take care of their health b/c puts less strain on  SS & Medicare later - Important note is that if we create a subsidy gov’t is losing revenue which  then needs to be replaced somehow or results in spending cuts, less services  for public – so tax cuts aren’t free, they always cost someone (although  probably different person than the one being helped) The IRS - In 1995 Congress has hearings on IRS abuse – only found 4 documented 
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