Chapter 1 Notes
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This 4 page Class Notes was uploaded by Victoria Andreski on Wednesday January 13, 2016. The Class Notes belongs to ACCT 404 at Clemson University taught by Sarah Martin in Spring 2016. Since its upload, it has received 75 views. For similar materials see Individual Taxation in Accounting at Clemson University.
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Date Created: 01/13/16
Chapter 1—An Introduction to Tax Who cares about taxes? o Businesses o Politicians o Individuals What is a tax? o Tax—a payment that a government agency (federal, state, local) requires that is NOT related to related to the service/benefit received o Requirements 1) Payment required 2) Payment enforced by government agency Federal, state, local 3) Payment is not directly related to benefit(s) received by taxpayer o Purpose—to fund government operationsraise revenue Are NOT intended to punish individuals or prevent them from taking part in illegal behavior o Earmarked tax—a tax charged for a particular purpose o Sin tax—levy surcharges on products like tobacco & alcohol Examples of Taxes o Local school taxes o Gas tax o Vehicle registration taxes Examples of Fees o Business registration tax o Fishing license o License plate fees o Building permit tax o Marriage licenses o Sewer & water taxes How do you calculate a tax? o Tax = Tax Base X Tax Rate Tax Base—what is actually taxed (monetary terms) Tax Rate—level of taxes levied on tax base (%) Ways to measure tax rates o Marginal tax rate—tax rate applied to taxpayer’s additional block of taxable income Marginal Tax Rate = Change in Tax ÷ Change in Taxable Income Additional income can push a taxpayer into a higher tax bracket which would change the marginal tax rate Not all income is taxed at marginal rate o Average tax rate—how much of each dollar of taxable income is used to pay taxes Average Tax Rate = Total Tax ÷ Taxable Income o Effective tax rate—total tax paid as a ratio of taxable & nontaxable income earned Effective Tax Rate = Total Tax ÷ Total Income Most usefulbetter picture of a taxpayer’s tax burden Tax Rate Structures o Proportional Tax Rate aka Flat Tax Constant tax rate—same tax rate no matter how much you buy As the tax bases increases, the tax paid increases proportionately Example: Sales Tax o Progressive Tax Rate Marginal tax rate increases as tax base increases The higher your taxable income, the higher the tax rate Average rate will always be ≤ marginal rate Example: Federal & State Income Taxes o Regressive Tax Rate As tax base increases, marginal rate decreases Not a common tax rate structure Examples: Social Security Tax & Federal/State Unemployment Taxes Types of Taxes o Federal Taxes First enacted in 1861 to fund Civil War 1892 enacted again by Congress, challenged as unconstitutional (direct taxes were prohibited) February 1913, 16 amendment ratified, allowing Federal gov’t to enact Federal Income Tax Income Taxes Imposed on individuals, corporations, estates, trusts Employmend & Unemployment Taxes 2 largest group of taxes Employment taxes: o OASDI—Old Age, Survivors, & Disability Insurance Tax Social Security (6.2%) Mirror tax: both employer & employee pay it o MHI—Medical Health Insurance Medicare Tax (1.45%) Mirror tax Unemployment taxes o Fund temporary unemployment benefits o Only employers pay o The lower the turnover employers have, the lower the unemployment tax rate Excise Taxes Imposed on quantity of products sold/purchased o NOT the value o Example: # of gallons of gas Estate & Gift Taxes Taxed on Fair Market Value of wealth transfers by death or gift aka Transfer Taxes o State & Local Taxes Most states have personal income tax States without: Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, Tennessee, New Hampshire Sales & Use Taxes Sales Tax o Tax base= retail sales of goods/services Use Tax o Tax base= retail price of goods owned, possessed, or consumed within a state not purchased within the state o Mirror image of sales tax Property Taxes Ad valorem taxes—based on FMV of property Real property—land, buildings, & things permanently attached to land Personal property—all other types of property o Examples: boat, car, business equipment, furniture (tangible); stocks, bonds, intellectual property (intangible) Income Taxes Conform w/ federal taxable income taxes Excise Taxes Examples: gasoline, cigarettes, diesel fuel, telephone o Implicit Taxes Indirect taxes from tax advantages gov’t gives for certain transactions Challenging to quantify Tax benefits drive up the price How to evaluate different tax systems? o Sufficiency Does tax generate enough tax revenue to support gov’t functions? Static: ignore how taxpayers change their activities as a result of tax law change & base projected tax on existing state of transactions Dynamic: attempts to predict possible taxpayer responses to tax law change Income Effect people will work harder to maintain same aftertax income when tax rates increase Substitution Effect people will substitute nontaxable activities when tax rates increase because marginal value of taxable activities has decreased o Equity Fairness of the tax Tax should be based on your ability to pay Horizontal Equity 2 taxpayers in similar situation pay the same tax Vertical Equity taxpayer w/ greater ability to pay, pays more in comparison to taxpayers w/ less ability to pay o Certainty Taxpayer determines when, where, & how to pay tax Are income taxes too complex for the average taxpayer? o Convenience Tax system designed to be collected without undue hardship to taxpayer/gov’t Tie the collection of the tax as closely as possible to the transaction that generates it o Economy Minimize compliance & administrative costs
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