#1-1 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 1 Types of Taxes and the Jurisdictions that Use Them

#1-2Objectives  Define tax, taxpayer, jurisdiction  Tax = rate x base  Types of taxes by jurisdiction  Explain tax competition among jurisdictions  Changing tax systems  Sources of federal tax law

#1-3Definitions  Tax = payment to support government  contrast with fine/penalty or user fee  Taxpayer = person or organization that pays tax (includes individuals and corporations)  Incidence refers to ultimate economic burden of a tax.  may not be person who pays tax (see Q4)  Jurisdiction is the right of a government to tax.

#1-4 Tax formula  Tax revenue = rate x base  Rate can be flat or graduated (usually progressive)  Base may change in response to changes in rate (see chapter 2)

#1-5 Describe by frequency of levy or purpose of tax  Transaction (event) based taxes  Sales or excise tax  Estate or gift tax  Activity based tax  Income tax  Earmarked taxes: social security, superfund

#1-6 State and local taxes  Property (ad valorem taxes)  Real property tax  Abatements often granted to entice new business  Personal property tax  Household tangibles (vehicles), business tangibles, intangibles (securities)

#1-7 State and local taxes  Sales/use  Broad-based but, typically excludes necessities (food, drugs)  Personal responsibility for use tax  Effects of catalogs and internet purchases  Excise tax – special rates  Income tax (personal or corporation)

#1-8 History of Federal Income Tax  Pre-1861: tariffs, excise and property taxes  First income tax enacted to pay for Civil War in 1861, expired in  First permanent income tax passed in 1894, but struck down by Supreme Court.  Sixteenth Amendment ratified in 1913 created income tax.  Internal Revenue Code was created in 1939 and subsequently revised in 1954 and 1986.

#1-9 Federal taxes  Employment and unemployment taxes  Excise taxes (luxury, sin, transportation, communication)  Transfer taxes (gift, estate, generation skipping)  Income taxes (individual and corporation)

#1-10 Foreign taxes  Income taxes similar to U.S.  Value added tax VAT  like a sales tax on incremental value added by manufacturing.  VAT is self-enforcing because taxpayer can claim a credit for VAT paid to supplier with proof of payment.

#1-11 Jurisdictional competition  Increasing (or imposing) tax rate, or expanding definition of tax base, can cause taxpayers to avoid/evade tax jurisdiction.  Trends in increasing base:  Annexation to expand city property  gambling/lotteries  sales tax expansion: Supreme Court case Quill Corporation vs. North Dakota held that mail-order companies need not collect sales tax from customers located in states where the company did not have physical presence. What are the implications for internet?

#1-12 Sources of tax law  Statutory authority = Internal Revenue Code  Administrative authority  Treasury regulations  IRS Revenue Rulings, Revenue Procedures  Judicial authority  Supreme Court  Appeal courts  Trial courts (Tax Court, District Court)

#1-13 Looking ahead to Chapter 2  Assume you are the fair-minded tax manager of LilLand. Queen Lil demands that you collect $32,000 from the following four taxpayers:  A earns $100,000  B earns $50,000  C earns $25,000  D earns $10,000.  Write on a piece of paper how much you will collect from each taxpayer. The sum must be $32,000. Turn this in on your way out, and we’ll discuss next time.