#1-1

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Chapter 1Chapter 1

Types of Taxes and the Types of Taxes and the Jurisdictions that Use Jurisdictions that Use

ThemThem

#1-2

ObjectivesObjectives

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

#1-3

DefinitionsDefinitions

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 formulaTax 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 taxDescribe 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 taxesState 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 taxesState 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 TaxHistory of Federal Income Tax

Pre-1861: tariffs, excise and property taxes First income tax enacted to pay for Civil War in

1861, expired in 1871. 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 taxesFederal 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 taxesForeign 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 competitionJurisdictional 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 lawSources 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 2Looking 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.