Principles of Taxation-Chapter One Chapter 1 Overview Tax: Different from fines or fees? Taxpayer: Person or entity? Incidence: Who bears the economic burden? Tax = Rate X Base Types of Taxes History of Taxation Sources of Authority: Statutory, Administrative & Judicial

Principles of Taxation-Chapter One Taxing America n Basic Terminology –Tax: n a payment to support the cost of government –Taxpayer: n a person or organization required to pay a tax to a government authority –Tax Incidence: n the ultimate economic burden represented by the tax. The ultimate burden is not necessarily the entity writing the check. –Jurisdiction: n the right of a government to levy tax on a specific person or organization

Principles of Taxation-Chapter One Taxing America n Tax Base, Rate, and Revenue n Tax Base, Rate, and Revenue Relationship – –Tax Base: n n an item, occurrence, transaction, or activity with respect to which a tax is levied – –Tax Rate: n n a percentage multiplied times the tax base to determine tax revenue – –Tax Revenue: n n total tax collected by the government and available for public use – –Tax Base X Tax Rate = Tax Revenue: n n revenue increases or decreases with changes in base, rate, or both

Principles of Taxation-Chapter One Taxing America n Classifying a Tax –Transaction or Event Based: n triggered only when an event or transaction occurs n examples –Sales tax, Estate tax, Excise tax –Activity Based: n taxes imposed on the results of an ongoing activity. n examples –Corporate and Individual income taxes

Principles of Taxation-Chapter One Taxing America n Taxes Imposed –Local n Property, Earnings, and Sales Taxes –State n Sales and Income Taxes –Federal n Income Taxes n Employment Taxes n Excise Taxes n Transfer Taxes

Principles of Taxation-Chapter One Taxing America n Local Taxes –Real property and Personal property Taxes n These taxes which are also are referred to as ad valorem taxes because they are imposed on the “value” of the property. –Earnings Taxes n Taxes imposed on individuals who work in one city but live elsewhere. These taxes are usually determined by the individuals’ earnings from employment and are a form of income tax. –Sales Tax n Usually piggy-backed with state sales tax and remitted to local authority. See State Taxes

Principles of Taxation-Chapter One Taxing America n State Taxes –Sales and Use Tax n Sales taxes are imposed on in-state tangible personal property and selected service sales. The sales tax rate is typically between 3 and 7 percent of the purchase price. The use tax complements the sales tax by taxing the ownership or possession or consumption of tangible goods that were not subject the sales tax. –Excise Tax n Typically imposed on the retail sale of specific goods. Common are taxes on gasoline, cigarettes, and alcoholic beverages.

Principles of Taxation-Chapter One Taxing America n State Taxes –Excise Taxes n For example, here are some gasoline excise tax amounts from various states: –Georgia--7.5 cents per gallon –Alabama--16 cents per gallon –Tennessee--20 cents per gallon –Montana--27 cents per gallon –Wyoming--9 cents per gallon

Principles of Taxation-Chapter One Taxing America n State Taxes –Personal Income Tax n Forty-three states and the District of Columbia impose a personal income tax on residents and nonresidents earning income in their state during the taxable year. Tax rates vary considerably from state to state. –Corporate Income Tax n Forty-five states and the District of Columbia tax corporations on their net income. Although each state could have a unique definition of taxable income, most refer to federal taxable income as the starting point for determining corporate taxable income for state purposes.

Principles of Taxation-Chapter One Taxing America n State Taxes –Personal Income Tax n Here are personal income tax rate ranges for various states: –Arizona--2.9 to 5.2 percent –California--1 to 9.3 percent –Georgia--1 to 6 percent –Kansas--3.5 to 7.75 percent –Maine--2 to 8.5 percent –Nebraska to 6.68 percent –South Carolina--2.5 to 7 percent –Wisconsin--4.9 to 6.93 percent

Principles of Taxation-Chapter One Taxing America n Federal Taxes –Income Tax n The federal income tax does not have a particularly long history in America. In 1861 Congress passed an income tax for the purpose of funding the Civil War. However, it wasn’t until Sixteenth Amendment was ratified in 1913 that the income tax was here to stay. The first organized Internal Revenue Code was created in 1939 and subsequently revised in 1954 and The Internal Revenue Code determines taxes imposed on individuals and business entities or organizations.

Principles of Taxation-Chapter One Taxing America n Federal Taxes –Income Taxes n Total individual tax returns filed for various years: – million – million – million – million – million – million n Source IRS Statistics of Income (SOI)

Principles of Taxation-Chapter One Taxing America n Federal Taxes –Employment Taxes n The two largest programs sponsored by the federal government are the Social Security System and Medicare. These programs are funded by taxes earmarked exclusively to pay for Social Security and Medicare. The taxes are based on annual wages and salaries of employees and net income of the self-employed. The taxes earmarked for Social Security are not imposed on wages and salaries in excess of an amount specified for the tax year. The tax for Medicare applies to all taxpayer wages and salary.

Principles of Taxation-Chapter One Taxing America n Federal Taxes –Excise Taxes n Originally intended to reduce consumption of socially unacceptable goods (cigarettes, alcohol) or discourage consumption of goods in short supply (gasoline, oil, tires) these taxes are currently a small portion of total federal government tax collections. –Transfer Taxes n Based on the value of an individual’s wealth transferred by gift or death. These taxes represent a form of wealth redistribution. Like excise taxes, transfer taxes are a small portion of total tax collections.

Principles of Taxation-Chapter One Exhibit 1-1

Principles of Taxation-Chapter One Tax Research Process

Principles of Taxation-Chapter One Statutory Sources

Principles of Taxation-Chapter One Judicial Sources

Principles of Taxation-Chapter One Federal Judicial System

Principles of Taxation-Chapter One Judicial Routes Available to the Taxpayer