0538742437_242233_ch1_study_guide

0538742437_242233_ch1_study_guide - Chapter 1 An...

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Chapter 1 An Introduction to Taxation and Understanding the Federal Tax Law CHAPTER HIGHLIGHTS proper analysis of the U.S. tax system begins with an examination of historical principles that guide the development of the system, and with an investigation of the various motivations that underlie existing provisions of the tax law. This chapter also introduces the reader to important tax terminology. I. History of U.S. Taxation A. An income tax on individuals was used to provide financing for the Civil War. When the war ended, the tax was repealed. In 1894, a new individual income tax was enacted, but the Supreme Court held the tax to be unconstitutional. After a constitutional challenge to the taxation of income, the Sixteenth Amendment, which sanctioned both the federal individual and corporate income taxes, was ratified in 1913. The present income tax on individuals was enacted in 1913. The corporate income tax, which was originally adopted in 1909, withstood constitutional challenge because it was viewed as an excise tax, not a direct tax. B. Numerous revenue acts, which rewrote completely the federal tax provisions, were enacted between 1913 and 1939. These provisions were reorganized and included, in a more permanent form, in the Internal Revenue Code of 1939. Thereafter, tax laws were changed when Congress adopted amendments to the 1939 Code; a complete rewriting of the laws was unnecessary. A revised Internal Revenue Code was adopted in 1954. The 1954 Code was the controlling body of tax law until 1986. In 1986, Congress enacted the most comprehensive overhaul of the Internal Revenue Code in over thirty years. As a result of the massive changes contained in the new law, the federal tax code was renamed the Internal Revenue Code of 1986. Nevertheless, many of the provisions of the 1954 Code were carried over to the 1986 Code. C. In an effort to close various loopholes and to reduce a recurring budget deficit, changes in the tax law have been enacted nearly every year since 1986. 1-1 A
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1-2 2011 Annual Edition/Study Guide D. One trend that has caused considerable concern is the increased complexity of the federal income tax laws, which imposes substantial taxpayer compliance costs. Congress has added to this complexity through frequent changes in the tax laws. E. Income tax collections from individuals constitute about half of all federal tax receipts. Social insurance taxes now constitute just under one-third of all federal tax receipts, while corporate income tax receipts have fallen drastically since the 1940s. II. Tax Terminology A. Tax rates can be structured to yield a 1. Proportional tax -- The rate of tax remains constant over the tax base; 2. Progressive tax -- Tax rates increase as the tax base grows larger; or 3. Regressive tax -- Tax rates decrease as the tax base grows larger. B.
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0538742437_242233_ch1_study_guide - Chapter 1 An...

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