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Chapter 1
Types of Taxes and the
Jurisdictions that Use
Them
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Objectives
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
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Definitions
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.
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Tax 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)
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Describe 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
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State 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)
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State 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)
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History 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.
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Federal taxes
Employment and unemployment taxes
Excise taxes (luxury, sin, transportation,
communication)
Transfer taxes (gift, estate, generation skipping)
Income taxes (individual and corporation)
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Foreign 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.
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Jurisdictional 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?
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Sources 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)
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Looking 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.