Principles of Taxation

Introduction and Chapter 1 Types of Taxes and the Jurisdictions that Use Them
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Introduction to Students
Slide 1-2

Taxes as Business Costs - Maximize after-tax values - why is this different from tax minimization? Taxes as Household Expenditures - tax bite is 3 / 8 hours. Objectives: tax policy: helps understand law, become better informed voter link finance and taxation - NPV of after-tax cash flows - tax deferral framework of taxation is stable
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Taxing America
Slide 1-3

Basic Terminology Tax Base, Rate, and Revenue Relationship Classifying and Describing taxes Tax Policy Sources of Law

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Taxing America
Slide 1-4

Basic Terminology Tax =

(How is this different from a fee or a penalty/fine?)

Taxpayer = Incidence refers to the ultimate economic burden of the tax. Not always the person who pays the tax. see Q4, Q6. Jurisdiction = See IR5, 9
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Taxing America
Slide 1-5

Tax Base X Tax Rate = Tax Revenue Tax Base: Tax Rate: Tax Revenue:

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Transaction or ActivityBased Taxes

Slide 1-6

What are examples of transaction (event) based taxes?

What is an example of an activity based tax?

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Taxing America
Slide 1-7

Taxes Imposed by Jurisdiction Local Property, Earnings, and Sales Taxes State Sales and Income Taxes Federal Income Taxes Employment Taxes Excise Taxes Transfer Taxes
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Taxing America
Slide 1-8

Local Taxes Real property and Personal Property Taxes

Why are these called ad valorem taxes? See Q7, IR2.

Earnings Taxes
Sometimes imposed on individuals who work in one city but live elsewhere. Many big cities impose.

Sales Tax
Usually piggy-backed with state sales tax and remitted to local authority.

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Taxing America
Slide 1-9

State Taxes Sales and Use Tax How is the use tax related to the sales tax?

What kinds of property is the use tax easily enforced against?

Excise Tax
What are common goods subject to an excise tax? See Q13 What states do you think have low excise taxes on beer?
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Taxing America
Slide 1-10

State Taxes Personal Income Tax

_________________ states and the District of Columbia impose a personal income tax. Tax rates vary considerably from state to state. See IR7

Corporate Income Tax

_________________ states and the District of Columbia tax corporations on their net income. Most refer to federal taxable income as the starting point for determining corporate taxable income for state purposes. See Chapter 12 for how to apportion income among states.
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Taxing America
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Federal Taxes Income Tax In your own notes, briefly describe the history of the US income tax.

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Taxing America
Slide 1-12

Federal Taxes Employment Taxes

The two largest programs sponsored by the federal government are the ___________________ and ________________. . 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 selfemployed. See Chapter 9.

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Taxing America
Slide 1-13

Federal Taxes Excise Taxes

Originally intended to reduce consumption of socially unacceptable goods (like what? __________ , ___________ ) or discourage consumption of goods in short supply (like what? ______________ , _______________ ). Class discussion - does this work?

Transfer Taxes
Based on the value of an individuals _________ transferred by ________ or ____________. These taxes represent a form of wealth redistribution. What effect do you think an estate tax has on savings? The McGraw-Hill Companies, Inc., 2002

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Foreign Taxes
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Income taxes like the U.S. Value-added taxes (the U.S. does NOT have this).
Value-added taxes are like sales taxes, but they are assessed incrementally on value added throughout production process. VAT is self-enforcing because taxpayer can claim a credit for VAT paid to supplier with proof of payment.

Foreign governments compete for tax dollars and foreign investment through rates and tax preferences.
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Dynamic Nature of Taxation

Slide 1-15

New tax bases: Urban tax bases decline - what are alternatives? Gambling - where is the incidence of taxation? Sales and use tax - What did the Supreme Court case Quill Corporation vs. North Dakota hold? What are the implications for internet commerce?

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Three Primary Sources of Tax Law

Slide 1-16

What is the source of statutory authority?

What are examples of administrative authority? Go to www.irs.gov and look at a Revenue Ruling. Judicial authority. A Supreme Court verdict is the equivalent of law. Other jurisdictions carry less weight (hierarchical).

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Looking Ahead to Chapter 2

Slide 1-17

Assume you are the fair-minded tax manager of LilLand. Queen Lil demands that you collect $36,000 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 $36,000. Turn this in on your way out, and well discuss next time.
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