What is Effective Tax
Planning?
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Maximize net present value of after-tax return
on investment
How does this differ from tax minimization?
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Consider both tax and nontax factors
Consider alternative forms of business
transactions and their tax effects, versus an
after-the-fact tax compliance approach
Strategic, active participation in the tax system
versus a passive, uninformed role
What is a Tax?
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A compulsory, non-penal transfer of resources
from the private sector to the public sector
Levied without receipt of a specific benefit
Levied on a predetermined basis
Typical tax formula: T = r B
where T is the tax liability
r is the tax rate
B is the tax base
Common Tax Bases
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Income tax
Payroll taxes - fund Social Security and
Medicare
Property taxes - usually on real property, but
some states also impose on personal property
Franchise tax - a tax on net worth
Sales tax
Value-added tax - a tax imposed on
corporations theoretically based on the
increase in value of a good ‘created’ by a
corporation
Wealth transfer taxes - gift and inheritance
Objectives of Taxes
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Raising revenue
Usually the most common objective, so that
governmental (public) units have an income
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Economic objectives
Specific tax provisions may be enacted to stimulate
economic activity
Examples: investment tax credit, lower tax rates to ‘jump
start’ the economy in periods of recession
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Social objectives
Tax provisions may be used to promote social welfare
Examples: tax exempt organizations, taxes or credits
(dependent-care, earned income) whose objective is to
redistribute wealth
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Some Conceptual Issues
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Tax incidence - identifying the party who
ultimately bears the burden of taxation
Example: taxes may be passed on to the
consumer in the form of higher prices. Implies an
inelastic demand curve.
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Implicit taxes - taxes that are paid in the form
of a lower return on investment in a taxfavored asset, rather than through explicit
taxation
Example: tax exempt municipal bonds, which
typically pay lower pre-tax returns than taxable
corporate bonds
Tax Avoidance Vs. Evasion
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Tax Avoidance involves legal, legitimate tax
planning techniques to reduce tax liability
Tax Evasion involves illegal means to reduce
tax liability
A federal crime (felony offense) punishable by
significant monetary penalties and imprisonment
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The Creation of Tax Law
In the beginning was the Act, then the Regulations and Interpretations. And the Act
was without form and the Interpretations were void. And darkness was upon the
faces of the taxpayers. And they spoke unto a member of the Revenue Service
saying, “It is a crock of ___ and it stinketh.”
And the member of the Revenue Service went to his Manager saying, “It is a crock of
excrement, and none may abide its odor.”
And the Manager went to the Commissioner of Internal Revenue saying, “It is a
container of excrement, and is very strong, such that all are stunned by it.”
And the Commissioner went before a member of Congress saying, “It is a vessel of
fertilizer, and none may stand before its strength.”
And the member of Congress went before the Joint Committee saying, “It contains
that which aids plant growth, and it is very strong.”
And the Joint Committee went before the House of Representatives and the Senate
saying, ”It promotes growth and it is powerful.”
And the House of Representatives and the Senate went before the President saying,
“This powerful new law will promote employment and reduce the deficit.”
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And the President looked upon the law and saw that it was good. And so it was
written.