413sol1-04 - Chapter 1: Federal Income TaxationAn Overview...

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Chapter 1: Federal Income Taxation An Overview 1-1 ________________________________________________________________________ CHAPTER 1 FEDERAL INCOME TAXATION - AN OVERVIEW ______________________________________________________________________ DISCUSSION QUESTIONS 1. Briefly state Adam Smith's four requirements for a good tax system. a. Equality - A tax should be imposed based on the taxpayer's ability to pay. b. Certainty - The taxpayer should be able to determine the amount of tax and how to make the required payment. c. Convenience - The tax should be levied as close as possible to the time the taxpayer receives the amount subject to tax. d. Economy - The cost of taxpayer compliance and administering the tax system should be small in relation to the revenue generated. 2. Based on the discussion in the chapter, evaluate how well each of these taxes meets Adam Smith's four requirements: a. Income tax Adam Smith's four criteria for evaluating a tax are Equality, Certainty, Convenience, and Economy. The aspects of the income tax that promote each of the individual criteria are: Equality - Progressive tax rates; the use of a standard deduction and exemption amounts have the effect of exempting low-income taxpayers from the tax; indexing of tax rates, standard deduction and exemption amounts are adjusted for inflation. Certainty - The use of an annual accounting period and the consistent use of the same tax return due date. Convenience - The use of a pay as you go system of collecting taxes is more convenient than collecting all taxes at one date. Taxpayer's determine their own tax due in privacy. Economy - The cost of running the IRS is a small percentage of the total tax collected. Factors in the tax system that dilute Adam Smith's requirements: Equality - Income exclusions and special deductions allow taxpayers with high incomes to pay taxes equivalent to those with lower incomes. The use of tax planning by higher income taxpayers also negates some of the equality of the system. Certainty - The complexity of many of the tax law provisions and numerous changes in the tax law from year to year make proper calculation of the tax less certain. Convenience - Some would contend that determining the amount of tax to be withheld is difficult for many people, making the pay as you go system less convenient.
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Chapter 1: Federal Income Taxation An Overview 1-2 Economy - There are significant costs of record-keeping and compliance that are borne by the taxpayers, making the tax less economical. b. Employment taxes The aspects of employment taxes that promote compliance with each of the four requirements: Certainty - The taxes are due as income is earned. The amount of tax is known with little uncertainty in its calculation. Convenience - Taxes are collected by employers and paid by the employer to the
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This note was uploaded on 02/08/2012 for the course MGMT BA 413 taught by Professor Lindamittermaier during the Spring '04 term at Capital University.

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413sol1-04 - Chapter 1: Federal Income TaxationAn Overview...

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