Principles of Taxation-Chapter One Chapter 1 Overview Tax: Different from fines or fees? Taxpayer: Person or entity? Incidence: Who bears the economic

Principles of Taxation-Chapter One

Chapter 1 OverviewChapter 1 Overview

Tax: Different from fines or fees?Tax: Different from fines or fees?

Taxpayer: Person or entity?Taxpayer: Person or entity?

Incidence: Who bears the economic burden?Incidence: Who bears the economic burden?

Tax = Rate X BaseTax = Rate X Base

Types of TaxesTypes of Taxes

History of TaxationHistory of Taxation

Sources of Authority: Statutory, Sources of Authority: Statutory, Administrative & JudicialAdministrative & Judicial


Taxing AmericaTaxing America Basic TerminologyBasic Terminology

– Tax: Tax: a payment to support the cost of governmenta payment to support the cost of government

– Taxpayer: Taxpayer: a person or organization required to pay a tax to a a person or organization required to pay a tax to a

government authoritygovernment authority

– Tax Incidence: Tax Incidence: the ultimate economic burden represented by the the ultimate economic burden represented by the

tax. The ultimate burden is not necessarily the tax. The ultimate burden is not necessarily the entity writing the check. entity writing the check.

– Jurisdiction: Jurisdiction: the right of a government to levy tax on a specific the right of a government to levy tax on a specific

person or organizationperson or organization


Taxing AmericaTaxing America Tax Base, Rate, and Revenue Tax Base, Rate, and Revenue

Relationship– Tax Base:

an item, occurrence, transaction, or activity with respect to which a tax is levied

– Tax Rate: a percentage multiplied times the tax base to

determine tax revenue

– Tax Revenue: total tax collected by the government and

available for public use

– Tax Base X Tax Rate = Tax Revenue: revenue increases or decreases with changes in

base, rate, or both


Taxing AmericaTaxing America Classifying a TaxClassifying a Tax

– Transaction or Event Based: Transaction or Event Based: triggered only when an event or transaction triggered only when an event or transaction

occursoccurs examplesexamples

– Sales tax, Estate tax, Excise taxSales tax, Estate tax, Excise tax

– Activity Based: Activity Based: taxes imposed on the results of an ongoing taxes imposed on the results of an ongoing

activity.activity. examplesexamples

– Corporate and Individual income taxesCorporate and Individual income taxes


Taxing AmericaTaxing America Taxes ImposedTaxes Imposed

– LocalLocal Property, Earnings, and Sales TaxesProperty, Earnings, and Sales Taxes

– StateState Sales and Income TaxesSales and Income Taxes

– FederalFederal Income TaxesIncome Taxes Employment TaxesEmployment Taxes Excise TaxesExcise Taxes Transfer TaxesTransfer Taxes


Taxing AmericaTaxing America

Local TaxesLocal Taxes– Real property and Personal property Taxes Real property and Personal property Taxes

These taxes which are also are referred to as ad These taxes which are also are referred to as ad valorem taxes because they are imposed on the valorem taxes because they are imposed on the “value” of the property. “value” of the property.

– Earnings Taxes Earnings Taxes Taxes imposed on individuals who work in one city Taxes imposed on individuals who work in one city

but live elsewhere. These taxes are usually but live elsewhere. These taxes are usually determined by the individuals’ earnings from determined by the individuals’ earnings from employment and are a form of income tax.employment and are a form of income tax.

– Sales TaxSales Tax Usually piggy-backed with state sales tax and Usually piggy-backed with state sales tax and

remitted to local authority. See State Taxesremitted to local authority. See State Taxes


Taxing AmericaTaxing America State Taxes State Taxes

– Sales and Use TaxSales and Use Tax Sales taxes are imposed on in-state tangible Sales taxes are imposed on in-state tangible

personal property and selected service sales. The personal property and selected service sales. The sales tax rate is typically between 3 and 7 sales tax rate is typically between 3 and 7 percent of the purchase price. The use tax percent of the purchase price. The use tax complements the sales tax by taxing the complements the sales tax by taxing the ownership or possession or consumption of ownership or possession or consumption of tangible goods that were not subject the sales tax.tangible goods that were not subject the sales tax.

– Excise TaxExcise Tax Typically imposed on the retail sale of specific Typically imposed on the retail sale of specific

goods. Common are taxes on gasoline, cigarettes, goods. Common are taxes on gasoline, cigarettes, and alcoholic beverages.and alcoholic beverages.


Taxing AmericaTaxing America State TaxesState Taxes

– Excise TaxesExcise Taxes For example, here are some gasoline excise tax For example, here are some gasoline excise tax

amounts from various states:amounts from various states:– Georgia--7.5 cents per gallonGeorgia--7.5 cents per gallon– Alabama--16 cents per gallonAlabama--16 cents per gallon– Tennessee--20 cents per gallonTennessee--20 cents per gallon– Montana--27 cents per gallonMontana--27 cents per gallon– Wyoming--9 cents per gallonWyoming--9 cents per gallon



– Personal Income TaxPersonal Income Tax Forty-three states and the District of Columbia Forty-three states and the District of Columbia

impose a personal income tax on residents and impose a personal income tax on residents and nonresidents earning income in their state during nonresidents earning income in their state during the taxable year. Tax rates vary considerably the taxable year. Tax rates vary considerably from state to state. from state to state.

– Corporate Income TaxCorporate Income Tax Forty-five states and the District of Columbia tax Forty-five states and the District of Columbia tax

corporations on their net income. Although each corporations on their net income. Although each state could have a unique definition of taxable state could have a unique definition of taxable income, most refer to federal taxable income as income, most refer to federal taxable income as the starting point for determining corporate the starting point for determining corporate taxable income for state purposes.taxable income for state purposes.



– Personal Income TaxPersonal Income Tax Here are personal income tax rate ranges for Here are personal income tax rate ranges for

various states:various states:– Arizona--2.9 to 5.2 percentArizona--2.9 to 5.2 percent– California--1 to 9.3 percentCalifornia--1 to 9.3 percent– Georgia--1 to 6 percentGeorgia--1 to 6 percent– Kansas--3.5 to 7.75 percentKansas--3.5 to 7.75 percent– Maine--2 to 8.5 percentMaine--2 to 8.5 percent– Nebraska--2.51 to 6.68 percentNebraska--2.51 to 6.68 percent– South Carolina--2.5 to 7 percentSouth Carolina--2.5 to 7 percent– Wisconsin--4.9 to 6.93 percentWisconsin--4.9 to 6.93 percent


Taxing AmericaTaxing America Federal TaxesFederal Taxes

– Income TaxIncome Tax The federal income tax does not have a The federal income tax does not have a

particularly long history in America. In 1861 particularly long history in America. In 1861 Congress passed an income tax for the purpose of Congress passed an income tax for the purpose of funding the Civil War. However, it wasn’t until funding the Civil War. However, it wasn’t until Sixteenth Amendment was ratified in 1913 that Sixteenth Amendment was ratified in 1913 that the income tax was here to stay. The first the income tax was here to stay. The first organized Internal Revenue Code was created in organized Internal Revenue Code was created in 1939 and subsequently revised in 1954 and 1986. 1939 and subsequently revised in 1954 and 1986. The Internal Revenue Code determines taxes The Internal Revenue Code determines taxes imposed on individuals and business entities or imposed on individuals and business entities or organizations. organizations.



– Income TaxesIncome Taxes Total individual tax returns filed for various years:Total individual tax returns filed for various years:

– 1944--47.1 million1944--47.1 million– 1953--57.8 million1953--57.8 million– 1963--63.9 million1963--63.9 million– 1973--80.7 million1973--80.7 million– 1983--96.3 million1983--96.3 million– 1993--114.6 million1993--114.6 million

Source IRS Statistics of Income (SOI)Source IRS Statistics of Income (SOI)



– Employment TaxesEmployment Taxes The two largest programs sponsored by the The two largest programs sponsored by the

federal government are the Social Security federal government are the Social Security System and Medicare. These programs are System and Medicare. These programs are funded by taxes earmarked exclusively to pay for funded by taxes earmarked exclusively to pay for Social Security and Medicare. The taxes are Social Security and Medicare. The taxes are based on annual wages and salaries of employees based on annual wages and salaries of employees and net income of the self-employed. The taxes and net income of the self-employed. The taxes earmarked for Social Security are not imposed on earmarked for Social Security are not imposed on wages and salaries in excess of an amount wages and salaries in excess of an amount specified for the tax year. The tax for Medicare specified for the tax year. The tax for Medicare applies to all taxpayer wages and salary.applies to all taxpayer wages and salary.



– Excise TaxesExcise Taxes Originally intended to reduce consumption of Originally intended to reduce consumption of

socially unacceptable goods (cigarettes, alcohol) socially unacceptable goods (cigarettes, alcohol) or discourage consumption of goods in short or discourage consumption of goods in short supply (gasoline, oil, tires) these taxes are supply (gasoline, oil, tires) these taxes are currently a small portion of total federal currently a small portion of total federal government tax collections.government tax collections.

– Transfer TaxesTransfer Taxes Based on the value of an individual’s wealth Based on the value of an individual’s wealth

transferred by gift or death. These taxes transferred by gift or death. These taxes represent a form of wealth redistribution. Like represent a form of wealth redistribution. Like excise taxes, transfer taxes are a small portion of excise taxes, transfer taxes are a small portion of total tax collections.total tax collections.


Exhibit 1-1Exhibit 1-1


Tax Research ProcessTax Research Process


Statutory SourcesStatutory Sources


Judicial SourcesJudicial Sources


Federal Judicial SystemFederal Judicial System


Judicial Routes Available to Judicial Routes Available to the Taxpayerthe Taxpayer

Documents

Principles of Taxation-Chapter One Chapter 1 Overview Tax: Different from fines or fees? Taxpayer: Person or entity? Incidence: Who bears the economic