Principles of Taxation
Introduction and Chapter 1
Types of Taxes and the
Jurisdictions that Use Them
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Introduction to Students
Slide 1-2
 Taxes as Business Costs - Maximize after-tax
values - why is this different from tax
minimization?
 Taxes as Household Expenditures - tax bite is
3 / 8 hours.
 Objectives:
 tax policy: helps understand law, become
better informed voter
 link finance and taxation - NPV of after-tax
cash flows - tax deferral
 framework of taxation is stable
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Taxing America
Slide 1-3
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Basic Terminology
Tax Base, Rate, and Revenue Relationship
Classifying and Describing taxes
Tax Policy
Sources of Law
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Taxing America
Slide 1-4
 Basic Terminology
• Tax =
(How is this different from a fee or a penalty/fine?)
• Taxpayer =
• Incidence refers to the ultimate economic
burden of the tax. Not always the person
who pays the tax. see Q4, Q6.
• Jurisdiction =
See IR5, 9
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Taxing America
Slide 1-5
 Tax Base X Tax Rate = Tax Revenue
 Tax Base:
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 Tax Rate:
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 Tax Revenue:
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Transaction or ActivityBased Taxes
Slide 1-6
 What are examples of transaction (event)
based taxes?
 What is an example of an activity based tax?
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Taxing America
Slide 1-7
 Taxes Imposed by Jurisdiction
 Local
Property, Earnings, and Sales Taxes
 State
Sales and Income Taxes
 Federal
Income Taxes
Employment Taxes
Excise Taxes
Transfer Taxes
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Taxing America
Slide 1-8
 Local Taxes
 Real property and Personal Property Taxes
 Why are these called “ad valorem” taxes?
See Q7, IR2.
 Earnings Taxes
 Sometimes imposed on individuals who work in one city but
live elsewhere. Many big cities impose.
 Sales Tax
 Usually piggy-backed with state sales tax and remitted to
local authority.
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Taxing America
Slide 1-9
 State Taxes
 Sales and Use Tax
How is the use tax related to the sales tax?
What kinds of property is the use tax easily
enforced against?
 Excise Tax
 What are common goods subject to an excise tax?
 See Q13
 What states do you think have low excise taxes on beer?
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Taxing America
Slide 1-10
 State Taxes
 Personal Income Tax
 _________________ states and the District of Columbia
impose a personal income tax. Tax rates vary
considerably from state to state. See IR7
 Corporate Income Tax
 _________________ states and the District of Columbia
tax corporations on their net income. Most refer to
federal taxable income as the starting point for
determining corporate taxable income for state purposes.
See Chapter 12 for how to apportion income among
states.
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Taxing America
Slide 1-11
 Federal Taxes
 Income Tax
In your own notes, briefly describe the
history of the US income tax.
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Taxing America
Slide 1-12
 Federal Taxes
 Employment Taxes
 The two largest programs sponsored by the
federal government are the
___________________ and ________________. .
These programs are funded by taxes earmarked
exclusively to pay for Social Security and
Medicare.
 The taxes are based on annual wages and
salaries of employees and net income of the selfemployed. See Chapter 9.
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Taxing America
Slide 1-13
 Federal Taxes
 Excise Taxes
 Originally intended to reduce consumption of socially
unacceptable goods (like what? __________ ,
___________ ) or discourage consumption of goods in
short supply (like what? ______________ ,
_______________ ).
 Class discussion - does this work?
 Transfer Taxes
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 Based on the value of an individual’s _________
transferred by ________ or ____________. These taxes
represent a form of wealth redistribution. What effect do
you think an estate tax has on savings?
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Foreign Taxes
Slide 1-14
 Income taxes like the U.S.
 Value-added taxes (the U.S. does NOT have
this).
 Value-added taxes are like sales taxes, but they are
assessed incrementally on value added throughout
production process.
 VAT is self-enforcing because taxpayer can claim a
credit for VAT paid to supplier with proof of
payment.
 Foreign governments compete for tax dollars
and foreign investment through rates and tax
preferences.
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Dynamic Nature of Taxation
Slide 1-15
 New tax bases:
 Urban tax bases decline - what are
alternatives?
 Gambling - where is the incidence of
taxation?
 Sales and use tax - What did the Supreme
Court case Quill Corporation vs. North
Dakota hold?
What are the implications for internet
commerce?
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Three Primary Sources of Tax
Law
Slide 1-16
 What is the source of statutory authority?
 What are examples of administrative
authority?
 Go to www.irs.gov and look at a Revenue
Ruling.
 Judicial authority. A Supreme Court verdict is
the equivalent of law. Other jurisdictions
carry less weight (hierarchical).
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Looking Ahead to Chapter 2
Slide 1-17
 Assume you are the fair-minded tax manager
of LilLand. Queen Lil demands that you
collect $36,000 from the following four
taxpayers:
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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
$36,000. Turn this in on your way out, and
we’ll discuss next time.
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