Lecture 1- Tax Basics
Lecture 1- Tax Basics MGMT 504
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This 3 page Class Notes was uploaded by Emily McIlhattan on Thursday January 15, 2015. The Class Notes belongs to MGMT 504 at Purdue University taught by Jason Stanfield in Winter2015. Since its upload, it has received 181 views. For similar materials see Tax Accounting in Accounting at Purdue University.
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Date Created: 01/15/15
MGMT 504 Lecture 1 Outline of Last Lecture NA Outline of Current Lecture What is a Tax ll Purposes of Taxes lll Adam Smith s Four Principles for a quotGoodquot Tax System IV Calculating Taxes V Types of Tax models Current Lecture What is a Tax a Taxes are enforced and involuntary contributions not a choice which i Are part of and required by law From Congress who delegates much of the authority to the IRS they enforce the law but they do not write it they just write regulations ii Raise Revenues for governments iii Yield no speci c bene ts to the payor Getting a license or paying a fee for city septic system is NOT a tax because you receive a bene t ll Purposes of Taxes a Raise revenues government needs money b Penalize quotbadquot behavior cigarette tax new people may not start smoking but those with the habit continue to have to pay more money relative to income this tax would be regressive in nature i a and b are rarely independent c Initiate or support social changes if I put enough taxes on alcohol maybe people will quit drinking d Promote equity These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute GradeBuddy i People who earn income are taxed higher than those with assets Warren Buffet once said that he paid less taxes than his secretary lll Adam Smith s Four Principles for a quotGoodquot Tax System a Equality a tax should take into consideration the taxpayer s ability to pay i Horizontal equity we treat the similarly situated tax payers the same ii Vertical equity we treat differently situated tax payers different but fairly what is fair this is why there is disagreements between political parties b Certainty should know amount and when you have to pay it i Amount of tax should be determinable by the taxpayer ii The taxpayer should know when and how a tax must be paid 1 Tax law should be in place before income is earned c Convenience a tax should not be due before a taxpayer has the funds to pay i Cant collect taxes before taxpayer has money d Economy i The costs of administering calculating and paying a tax should be minimal to both tax payer and collector government ii Taxpayer compliance burden is bigger here thrown out the widow with rules like less tax when raising kids etc lV Calculating a Tax a All taxes follow the same general formula i Tax Tax Base x Tax Rate ii Tax dollar amount iii Tax Base complicated what is being taxed 1 When different rates apply to different bases each base is multiplied by the appropriate rate and the resulting taxes are added together to arrive at Tax If Tax decreases by 1 this is a Tax Credit preferred over a deduction because you get the whole dollar not just a percentage Marginal Tax Rates rate of tax applied to the next dollar of taxable income incremental MTRs are statutorily prescribed not calculated Tax Tax Base x MTR as long as you don t move into next relevant range it s the same math If Tax increases by 1 this is a tax deduction GradeBuddy Average Tax Rate calculated as the total tax divided by the tax bases used to estimate the taxes you ll have to pay ATR TaxTax Base Effective Tax Rates calculated as the total tax divided by total income ETR Taxlncome not all your income is included in your tax base 0 This is the rate shown on your nancial statements ETRs vary depending on the income measure used nancial accounting income economic income and taxable income V Types of Tax Models a Proportional Taxes the ATR remains the same as the tax base increases i ATRMTR at all times only way is via at marginal rate ii Whether its rst 1 or last 1 of income the MTR is the same iii MTR being the y axis b Regressive Taxes most taxes designed NOT to be regressive the ATR decreases as the tax base decreases MTR also decreases c Progressive Taxes ATR increases as tax base increases US income tax system functions like this makes it reach equality criteria