TAX 3221 Chapter 1
Federal Tax #4: Transfer Taxes!
- Federal transfer taxes -- aka those estate and gift taxes -- can be substantial for certain individual taxpayers and have been the subject of much debate. - These estate and gift taxes -- they're BASED ON the fair market values of wealth transferred due to death or by gift. - Typically though, most taxpayers are not even subject to estate and gift taxation -- b/c of the annual gift exclusion and gift and estate unified tax credits. - Basically, only those tax payers with SUBSTANTIALLLLL wealth will actually be subject to the gift and estate taxes. (Basically: you gotta be boujee for these to even apply to you LOL).
Evaluating Criteria #1: SUFFICIENCY
- SUFFICIENCY of a tax system means: ASSESSING the amount of tax revenues said tax system must GENERATE in order to ENSURE that it provides them. - & well, in order for a tax system to be successful, it MUST provide sufficient revenues to pay for government expenditures (for defense systems, social services, etc.) - Accurately estimating government expenditures and revenues -- is a DAUNTING and IMPRECISE process. B/c estimating governmental expenditures is DIFFICULT, given how impossible it is to predict the unknown. - & so, precisely estimating and matching governmental expenditures with tax revenues is NEARLY impossible. - & well, this process becomes even MORE daunting when the government attempts to make SIGNIFICANT changes to the existing tax system or design a new one.
More about DYNAMIC forecasting for evaluating sufficiency of a tax system:
- When it comes to a progressive tax like INCOME tax, a tax rate increase or expansion of the tax base can result in ONE of two taxpayer responses: 1) The INCOME EFFECT -- which predicts that when taxpayers are taxed more, they are likely to work HARDER to generate the same after-tax dollars. 2) The SUBSTITUTION EFFECT -- which predicts that when taxpayers are taxed more, rather than working more, they'll simply substitute NONTAXABLE activities (like leisure pursuits) for taxable ones b/c the marginal value of the taxable values has decreased. - And as far as which prediction is most likely: well it DEPENDS on the tax payer.
OVERALL! The response to a tax law change, as seen before, can VARY by taxpayer and can GREATLY affect the magnitude of tax revenues generated by the change. - & so HEREIN lies one of the challenges in significantly changing an existing tax system or designing a new one. For if the said new tax system FAILS to generate sufficient revenues, then the government MUST seek other sources to pay for governmental expenditures. - & what are those other sources for getting those additional needed funds?
--> 1) The issuance of debt instruments such as Treasury bonds /// However, this is typically only a SHORT-TERM solution to a budget deficit. Also, b/c debt issuances require both INTEREST and PRINCIPAL payments, they also inherently require the federal government to identify even MORE sources of revenue. Yikes. --> 2) Where the government may simply choose to DEFAULT on its current debt obligations. /// Potentially very devastating though LOL. - SO! The best option is for the government, to the best of its ability,, to MATCH its revenues with its expenses -- so that it can PLAN to not spend more than it collects. - & well, typically STATE governments tend to be better at this than our federal government LOL.
Criteria #3 for Evaluating Tax Systems: CERTAINTY!
--> CERTAINTY means that taxpayers should be able to determine: WHEN to pay the tax, WHERE to pay the tax, and HOW to determine the tax. - For EX: sales taxes, property taxes, and excise taxes are each determined with relative ease. /// In contrast, income taxes are often criticized as being too complex.
Criteria #4 for Evaluating Tax Systems: CONVENIENCE!
--> CONVENIENCE suggests that a tax system should be designed to FACILITATE the collection of tax revenues WITHOUT undue hardship on the taxpayer or the government. - For EX: retailers collect sales taxes when buyers purchase the goods -- nice n' convenient! Likewise, employers WITHHOLD federal income and S.S. taxes DIRECTLY from wage earners' paychecks -- nice n' easy!
Criteria #5 for Evaluating Tax Systems: ECONOMY!
--> ECONOMY requires that a GOOD tax system should MINIMIZE the compliance and administration costs associated with the tax system. - EX: the INCOME tax is often criticized for the compliance costs imposed on the taxpayer, considering paying the income tax typically involves --> record-keeping costs, accountant fees, attorney fees, etc.
EX of the INCOME effect VS the SUBSTITUTION effect.
--> EX 1-14 illustrates the INCOME effect, in which, as a result of higher taxation: George chooses to INCREASE his after-tax income (AKA works more) so that he can keep the same amount. - & so, because George chose to WORK MORE to keep the same after-tax dollars: the tax change ultimately resulted in INCREASED government revenues received due to the increased tax rate AND the increased tax base. --> EX 1-15 illustrates the SUBSTITUTION effect, in which, as a result of higher taxation: George instead chooses to work less and earn less -- not deeming the negative effect of the increased tax rate worth it, thus resulting in the government collecting much less than would he have maintained his full-time position.
Now...to SUM IT UP! - What are those 4 main FEDERAL taxes? - What are those 4 main STATE/LOCAL taxes?
--> Federal Taxes: income, employment, transfer, excise taxes --> State/Local Taxes: income, sales + use tax, property taxes, excise taxes (ALL of these explicit taxes, meaning they are DIRECTLY imposed by a government and easily quantified).
What are some examples of taxes with progressive tax rate structures?
--> Federal and most state income taxes are PROGRESSIVE tax rate structured.
OVERVIEW of CH 1: An introduction to tax !!!!
--> In almost any society, taxes are a PART of life. They influence decisions about personal finance, ,investment, business, and politics. --> Here we discussed: - WHAT a TAX is --> which says the 3 criteria for a payment to be considered a tax include: must be required, must be imposed by the government, &&& the benefit must not be DIRECTLY received by the taxpayer paying it. - The various TAX RATES --> (MAE) marginal, average, and effective. - The various tax rate STRUCTURES --> (PPR) proportional, progressive, and regressive. - The different types of taxes imposed by FEDERAL (income tax, employment tax, transfer tax, excise tax), STATE + LOCAL (income tax, sales tax, property tax, excise tax) governments - The criteria used to evaluate alternative tax systems: SECEE
Question: are tolls, parking meters, and annual licensing fees considered taxes?
--> NO! They're not. Because though they're required and imposed by governments, by paying these -- WE, THE PAYERS receive direct benefit. --> So no they're not considered taxes.
What are some examples of taxes that exhibit the proportional tax rate structure?
--> The 21% corporate tax rate. Sales tax.
NOW! Moving away from federal taxes and towards state + local taxes: what are they?!
--> WELL! Like the federal government, state and local governments (such as counties, cities, and school districts) use a VARIETY of taxes to generate revenues for their programs (such as education, highways, and police and fire departments). --> Some of the more COMMON state and local taxes include: income taxes, sales + use taxes, excise taxes, and property taxes. --> & well: TYPICALLY, the LARGEST state tax revenues are GENERATED by individual income taxes and state sales taxes. (SO, to distinguish :) --> Those taxes which make up the largest portions of FEDERAL tax revenues = individual income tax and employment/unemployment taxes. /// Those taxes which make up the largest portions of STATE tax revenues = individual income tax and sales taxes!)
State/Local Tax #3: PROPERTY taxes!
--> When it comes to property taxes, state and local governments commonly use *2* types of property taxes: REAL property taxes and PERSONAL property taxes. --> In which case, BOTH are AD VALOREM TAXES: meaning that the tax base for real + property taxes is the FMV of the property. --> ANYWAYS! What's the difference? - Well REAL property taxes consists of: land, structures, and improvements permanently attached to land. /// Whereas personal property includes all OTHER types of property, both tangible and intangible: cars, boats, private plans, business inventory, equipment, furniture, stocks, etc. - These REAL property taxes? They're pretty easy to administer. PERSONAL property taxes though? They're more tough to value.
&&& so, OVERALL, at the heart of ANY debate about tax reform, are FUNDAMENTAL decisions and concessions based on the 5 criteria we just discussed: (SECEE) sufficiency, equity, certainty, convenience, and economy.
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FEDERAL TAXES: the federal U.S. government imposes a VARIETY of taxes to fund federal programs, such as national defense, Social Security, an interstate highway system, educational programs, and Medicare. Major federal taxes include: the individual and corporate income taxes, employment and unemployment taxes, excise taxes, and transfer taxes (AKA estate and gifts taxes). (NOTICE: not sales tax OR value-added taxes).
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NOTE: Federal, state, and local jurisdictions use a LARGE variety of tax bases to collect tax. Such as --> federal and state income taxes, sales tax, real estate tax, and personal property tax too.
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Note: DIFFERENT portions of a tax base -- MAY BE TAXED AT *different rates*.
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Note: taxes do NOT include fines and penalties, in that taxes are not intended to punish or prevent illegal behavior. NEVERTHELESS, by ALLOWING deductions from income, our federal tax system DOES encourage certain behaviors like: charitable contributions, retirement savings, and research + development. THUS we can view taxes as also DISCOURAGING other legal behavior, via SIN taxes.
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Note: the AVERAGE tax rate is typically LOWER than the marginal tax rate.
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Refer to EX 1-3, 1-4, and 1-5 on loose leaf to see different scenarios execute the calculation of the MARGINAL tax rate :)
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Refer to EX 1-6 to see the calculations for the average tax rate :)
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Refer to EX 1-7 to see the effective tax rate calculations :)
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Refer to EX 1-9 in the TB to see these 3 tax rate structures come to life.
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Reminder that: EFFECTIVE tax rates are typically MORE INFORMATIVE about taxpayers' relative tax burdens than are the marginal or average tax rates.
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Taxes affect MANY aspects regarding: personal, business, AND political decisions. & so, developing a solid understanding of taxation should ALLOW you to make informed decisions IN these areas :)
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When it comes to taxpayers, many of them INCORRECTLY believe that all of their income is taxed at their MARGINAL tax rate. - Which is NOT true. Because though they fall in XX tax bracket, NOT ALL of their income is TAXED at this rate !!!!! - & so all that this marginal tax rate bracket tells us is: by HOW MUCH small increases or small deductions in income will be TAXED (or saved!) at.
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SO: in order to determine sufficiency of a tax system, as we said -- we NEED to make projections/forecasts about governmental expenditures and revenues. - What are the two options for forecasting revenues?
1) The FIRST option for forecasting revenues is to simply --> IGNORE how taxpayers may ALTER their activities in response to a tax law change, and to instead base projected tax revenues on the EXISTING state of transactions. /// This is called: STATIC FORECASTING, in which essentially we assume the change in the tax law will impact the tax payers not at all. - This static forecasting however MAY RESULT in a LARGE discrepancy in projected vs. actual tax revenues should taxpayers ACTUALLY DO change their behavior. 2) The SECOND option for forecasting revenues is to --> ATTEMPT to account for possible taxpayer responses to the tax law change. /// This is called: DYNAMIC FORECASTING, which ultimately is ONLY as good as the assumptions which underlie it and do NOT guarantee accurate results. - Basically, with dynamic forecasting: we assume and anticipate that taxpayers WILL change their behavior according to the change in tax laws, and then try and predict such effects on the revenues generated.
What is a FLAT TAX?
A flat tax is where a SINGLE tax is applied to an entire base.
What is an EARMARKED tax?
An EARMARKED TAX is a tax that IS assessed for a specific purpose. & well, though an earmarked tax is created for a SPECIFIC purpose -- b/c the taxpayer paying it is NOT directly benefitting from it: it's still considered a tax!
State/Local Tax #4: EXCISE taxes!
As mentioned earlier, the TAX BASE for these excise taxes is typically: the QUANTITY of an item or service purchase -- basically:: HOW MUCH DID YOU BUY BABY ?! (As opposed to the tax base being the RETAIL price of these g/s as is for the sales tax). & so, states typically impose excise taxes on items subject to FEDERAL excise tax: the sale of alcohol, diesel fuel, gasoline, tobacco products, telephone services, etc.
State/Local Tax #2: SALES + USE Taxes!
As mentioned earlier, the tax base for a SALES tax is: the RETAIL price of goods/services, in which case then RETAILERS are then responsible for collecting and paying that tax. - Contrarily, the tax base for the USE tax is: the RETAIL price of goods owned, possessed, or consumed within a state that were NOT purchased within the state. (So essentially the same thing as a sales tax, but for those g/s not purchased within the state). - & so the PURPOSE of a use tax is --> to DISCOURAGE taxpayers from buying goods from retailers who don't have sales tax collection responsibilities, such that THEY can benefit from avoiding or minimizing the sales tax in their home state. - The use tax also works to REMOVE any competitive disadvantage a retailer may incur from operating in a state with a high sales tax. - Basically the use tax exists so that we as consumers can't skirt paying taxes on our retail purchases :') B/c even though YAY no sales tax in this non-home state :D well...don't get too excited, you'll have to pay a use tax still within your home state hahah. - Also note: states have only RECENTLY begun to enforce the use tax.
Notes about state/local bonds:
BECAUSE of these state/local bonds tax-advantaged status, municipalities are ultimately then ABLE to offer/pay LOWER interest on their bond issuances &&& investors are, in turn, WILLING TO ACEPT these lower rates. - This allows municipalities then to raise money at a REDUCED costs :-)
Federal Tax #3: Excise Taxes! - What are they? - What is the tax base for these taxes? - What are they imposed on?
EXCISE taxes are those levied on the RETAIL sale of particular products. The tax base for these excise taxes typically depend on the QUANTITY purchased rather than a monetary amount. - & so, the federal government imposes a number of excise taxes on goods such as: alcohol, diesel fuel, gasoline, and tobacco products and on services such as telephone use, air transportation, and the use of tanning beds. (Side note: while there are FEDERAL excise taxes, there also STATE excise taxes). - & so, basically: these excise taxes are INDIRECT taxes that we as consumers pay to producers of such goods, who then take and use such collections to pay the government. Typically, we aren't even aware of these built in taxes which increase the prices we pay! But they're there hah.
Federal Tax #2: Employment and Unemployment Taxes! - What are they? - What does this group of taxes consists of?
Employment and unemployment taxes make up the 2nd largest group of taxes imposed by the US government. - EX: Social Security (12.4% split b/w the employer and employee) and Medical Health Insurance (2.9% split b/w the employer and employee). (& so, if you're self-employed: you have to pay these in their entirety!) - In which case the SS tax PAYS the monthly retirement, survivor, and disability benefits for qualifying individuals. /// And then Medicare tax pays for medical insurance for individuals who are elderly or disabled. - Also important to note: the SS tax base is CAPPED @ $137,700 wages. Medicare -- is not capped heh. - & well, in ADDITION to the SS and Medicare taxes: EMPLOYERS are also required to pay federal and state unemployment taxes, which fund temporary unemployment benefits for individuals terminated from their jobs w/o cause ("Federal Unemployment Tax Act," FUTA). This tax is 6% and only on the first $7,000 of income for each employee.
TYPES of taxes: There are MANY types of taxes currently implemented by federal, state, and local governments.
Here are some of those!
State/Local Tax #1: INCOME Taxes!
Most states impose income taxes on individuals and corporations who either reside in or earn income within the state. - This requires individuals working in these states to file a STATE tax return IN ADDITION to the FEDERAL return they already file. - Typically speaking: STATE taxable income calculations are generally the SAME as federal taxable income calculations. - However, state income tax RATES are typically significantly less than the federal rates heh.
EX 1-2: Margaret's parents, Bill and Mercedes, recently built a house and were assessed $1,000 by their county government to connect to the county sewer system. Is this a tax?
NO! This is not a tax. - Though it's required and imposed by the county government, BECAUSE her parents are DIRECTLY receiving a benefit (connecting to the sewer system), this does NOT constitute as a tax.
PLEASE DO refer to EX 1-12 showing the implicit tax in action by comparing a city municipal bond vs. a corporate bond!
PG 1-16 to 1-17 :) Takeaways: - The better investment will be the STATE municipal bond, b/c of it's higher after-tax rate of return. Thus: demand will increase, its price will increase, and well this very increase in price will ultimately LEAD TO a lower before-tax rate of return all due to the bond's tax favored status. And THIS, my friends is the implicit tax. - When it comes to municipal bonds, while it's true they are technically subject to ZERO income taxes, they ARE still subject to these IMPLICIT taxes in the form of the LESS interest they'll accept. So even though they're not paying the tax directly, they are paying for it indirectly.
How do we calculate the proportional tax rate?
Proportional tax = Tax Base x Tax Rate
What are SIN TAXES?
Sin taxes impose relatively high surcharges on alcohol and tobacco products.
How do we calculate TAX OWED? (What's the formula?)
Tax Owed = Tax Base x Tax Rate - In which case, the tax based defines that income which is actually TAXED, and where the tax rate determines the LEVEL of taxes imposed on the tax base.
NOW, moving on from marginal tax rates. What is the *2nd* tax rate? & what does it represent? Its formula?
The 2nd tax rate is that: AVERAGE tax rate! Which represents a taxpayer's AVERAGE level of taxation on each dollar of taxable income. Average tax rate = total tax owed / taxable income
What are the 3 key criteria which MUST BE met for a payment to be considered a tax?
The 3 criteria required for a payment to be considered a tax are: 1) the payment must be --> required. 2) the payment must be --> imposed by a government agency (federal, state, or local) 3) the payment must NOT be --> directly tied to a benefit received by the taxpayer.
SO...moving on from the 3 tax rates :) NOW: What are the 3 tax rate STRUCTURES?
The 3 tax rate structures are: (PPR) 1) Proportional 2) Progressive 3) Regressive & so any given tax will FIT one of these 3 structures.
What is the 3rd tax rate? & what does it represent? Formula?
The 3rd tax rate is that: EFFECTIVE tax rate, and it represents the taxpayer's AVERAGE rate of taxation on each dollar of his/her TOTAL incomes (YES! TOTAL income -- includes both taxable AND nontaxable income!). Effective Tax Rate = total tax owed/ TOTAL income (taxable AND nontaxable) - & well, relative to the AVERAGE tax rate, the EFFECTIVE tax rate provides a BETTER depiction of a taxpayer's burden BECAUSE it gives the taxpayer's total tax paid as a ratio of the SUM OF both taxable and NONTAXABLE income earned.
Question: what is the AVERAGE tax rate often useful for?
The average tax rate is OFTEN USED in --> BUDGETING tax expense as a portion of income -- that is, in determining what percent of taxable income earned will likely be paid in the form of taxes. (Average, Budgeting) (A,B)
EX 1-13 demonstrating STATIC FORECASTING for evaluating sufficiency purposes:
The city of Heflin would like to increase tax revenues by $2m to pay for needed roadwork. A concerned taxpayer recently proposed increasing the cigarette excise tax from $1 per pack to $6 per pack to raise the additional needed revenue. Last year, 400K packs of cigarettes were sold in the city. Will the proposal be successful in raising the additional $2m in proposed tax revenue? - NO! Not likely. The proposed tax increase of $5, and the static assumption that 400K packs will still be sold --> is an example of STATIC FORECASTING. - Which ultimately IGNORES that many taxpayers may respond to the tax change by quitting, cutting down, or buying cheaper cigarettes in the next town.
What is the GENERAL PURPOSE of a tax?
The general purpose of a tax is to: FUND the operations of the government, that is --> to raise revenue.
Federal Tax #1: Income Tax! - What is it? - Who is it levied on? - Its brief history?
The individual income tax is --> the MOST significant tax assessed by the US government, representing approximately 49.8% of all tax revenues collected !!!! (& then 60% when you combine corporate and individuals!) - It is levied on: individuals, corporations, estates, and trusts. - The 1st ever personal income tax in the US was enacted in 1861, to fund the Civil War. However, it was temporary. - In 1982, however: the income tax was RESURRECTED. Which then brought upon the infamous 1895 case "Pollock v. Farmers' Loan and Trust Co," which challenged the income tax. - The ruling? --> That the income tax was UNCONSTITUTIONAL b/c direct taxes were PROHIBITED by the Constitution UNLESS the taxes were apportioned across states based on their populations. - Though the 1895 case ruled income taxes unconstitutional, in 1913, income taxes were ALLOWED by the Constitution and the 16th amendment was --> RATIFIED. - Following that, in the same year the Revenue Act of 1913 was enacted which created the graduated income tax structure.
What are the *3* different tax rates?
The three different tax rates include: (MAE) 1) the MARGINAL tax rate 2) the AVERAGE tax rate 3) the EFFECTIVE tax rate
*Criterion #2: Equity (cont.) - What are TWO basic types/measures of equity?
The two basic types of equity are: 1) HORIZONTAL equity 2) VERTICAL equity --> 1) Horizontal equity means that: two taxpayers in similar situations pay the SAME tax. While this seems pretty straightforward to assess, on closer inspection we might argue that two taxpayers with the same income may not actually PAY the same tax. --> For EX: - 2 individual taxpayers with the same income will NOT pay the same federal income tax IF one's income was earned as salary and the other individual's income was tax-exempt municipal bond interest income, dividend income, or capital gains income -- which can be subject to a lower tax rate. - 2 taxpayers with the same dollar amount of purchases may not pay the same sales tax if one buys a higher proportion of goods that are subject to a lower sales tax rate, such as groceries. - Etc. - OVERALL, the FAILURES of horizontal equity are DUE to :::: TAX PREFERENCES present, which the government provides for a variety of reasons. --> 2) The 2nd type of equity to consider in evaluating a tax system is VERTICAL EQUITY, which is achieved when taxpayers with GREATER ability to pay tax -- pay MORE tax than taxpayers with less ability to pay. - Regressive tax rate structures are generally considered NOT to satisfy vertical equity. - Overall, evaluating vertical equity in terms of EFFECTIVE tax rates may be MUCH MORE informative than simply evaluating tax STRUCTURES.
Note about implicit taxes:
These implicit taxes: they're very difficult to estimate. Still you should understand the concept of these taxes so that you can make informed judgements -- considering both explicit and implicit taxes :)
Describe the PROPORATIONAL tax rate structure.
WELL! A proportional tax rate structure, also known as a FLAT TAX, imposes a CONSTANT tax rate NO MATTER the tax base. /// Essentially: every dollar is taxed the SAME amount -- no matter how much you make. - As the tax base increase, the taxes paid will INCREASE accordingly (read: proportionally). - & so, BECAUSE this rate stays the same throughout ALL levels of the tax base: the marginal tax rate remains constant, and it always EQUALS the average tax rate!
Question: WHAT ARE marginal tax rates generally useful for?
WELL! Marginal tax rates are PARTICULARLY useful in ::: TAX PLANNING, b/c it represents the rate of taxation OR savings that would apply to ADDITIONAL taxable income (OR tax deductions).
& so, question: WHY do tax-advantaged assets BEAR an implicit tax? (Why am I punished for celebrating a tax-advantaged asset? M)
WELL! Tax-advantaged assets bear an implicit tax, AKA a REDUCED before-tax rate of return B/C --> the tax benefits associated with this tax-favored asset, it INCREASES the demand for said asset. - This increased demand then INCREASES the price of the asset. Which in turn REDUCES the before-tax rate of return. Which is: by its very nature, the definition of an implicit tax.
What are GRADUATED taxes?
Well graduated taxes indicate that the tax base is DIVIDED into a series of monetary amounts, aka BRACKETS -- in which case each successive bracket is TAXED at DIFFERENT (gradually higher or gradually lower) percentage rates.
IMPLICIT Taxes! What are they?
Well, IMPLICIT taxes are INDIRECT taxes. They are taxes NOT paid directly to the government which result from a tax ADVANTAGE the government grants to certain transactions to satisfy social, economic, or other objectives. - & so, implicit taxes are defined as ::: the REDUCED before-tax return that a tax-favored asset produces because of its tax-advantaged status. (Basically implicit taxes = that lower return you are subject to BC of the fact that you're already experiencing benefits in other ways, typically via more favorable taxation! Like girl don't get greedy: you already got favorable tax treatment, you can't have that PLUS a higher rate of return. Thus rate of returns are lower). - So basically, implicit taxes = the resulting LOWER before-tax return that came as a result of some nifty lil tax-favored asset :') - & so: WHAT does it mean to be TAX-FAVORED? --> Well an asset is considered to be TAX-FAVORED when the INCOME the asset produces is either EXCLUDED from the tax base or SUBJECT to a LOWER (aka preferential) tax rate OR if the asset generates some other tax benefit such as large tax deductions. - & thus, all of these TAX BENEFITS associated with this tax-favorability -- it RESULTS in higher after-tax-PROFITS from investing in such tax-advantaged assets.
Describe the MARGINAL tax rate. What is it's formula?
Well, the MARGINAL TAX RATE is the tax rate that applies to the NEXT additional increment (dollar) of a taxpayer's taxable income. Basically, the marginal tax rate measures HOW MUCH MORE you're paying on that next taxable dollar. Marginal Tax Rate = change in tax owed / change in taxable income Marginal Tax Rate = new tax owed - old tax owed / new taxable income - old taxable income - Where "OLD" refers to the CURRENT tax, and "NEW" refers to the PROPOSED or REVISED tax after INCORPORATING/TAKING INTO ACCOUNT the additional income or deductions. - In which these additional income or deduction amounts can actually have the effect of PUSHING a taxpayer into a HIGHER or LOWER tax bracket -- thus CHANGING their marginal tax rate.
What is a tax?
Well: a TAX is a --> PAYMENT required by a government that is UNRELATELLD to any specific benefit or service received from the government.
Where does the difficulty lie: in calculating the tax base or the tax rate?
Well: most of the difficulty lies in determining WHAT EXACTLY consists of the tax base. Determining the tax rate is the easy part hah.
Describe the PROGESSIVE tax rate structure.
Well: the PROGRESSIVE tax rate structure imposes an INCREASING marginal tax rate as the tax base increases. Meaning: for every additional dollar made, it's taxed at higher levels.
Describe the REGRESSIVE tax rate structure. Some examples?
Well: the REGRESSIVE tax rate structure imposes a DECREASING marginal tax rate as the tax base increases. & well, regressive tax rate structures are NOT very common. Some EX though include: the Social Security tax and then also federal and state unemployment taxes.
What are VALUE-ADDED taxes?
Well: value-added taxes are taxes imposed on the producers of goods and services BASED on the value added to the g/s at each stage of production. (These are typically STATE and LOCAL, not really federal FYI hehe.)
MOVING ON...to evaluating alternative tax systems.
When it comes to designing tax systems, we're constantly debating: WHO to tax, WHAT to tax, and HOW MUCH to tax. - TO help evaluate alternative tax systems, we've got 5 criteria: sufficiency, equity, certainty, convenience, and economy. (SECCE) (suck-ee) - Satisfying all of these at the same time is difficult -- alas, we try our best.
Criteria #2 to Evaluate Tax Systems: EQUITY (aka "fairness)
While evaluating a tax system's SUFFICIENCY is crucial, an equally challenging issues is HOW the tax burden should be DISTRIBUTED across taxpayers. - In which case, there IS NO "one-size-fits-all" definition of equity or fairness. - & so: WHAT qualifies as "fair"? --> Well, typically a tax system is considered FAIR or EQUITABLE if the tax is based on the taxpayer's ability to pay. (SO: taxpayers with greater ability to pay tax, should pay more tax).
EX 1-1: Margaret travels to Alabama, where she rents a hotel room and dines at several restaurants. The price she pays for her hotel room and meals includes an additional 2 percent city surcharge to fund roadway construction in Birmingham. Is this a tax?
YES! Because it meets the 3 criteria for a payment to be considered a tax: 1) It's required. 2) It's imposed by the government. 3) She receives no direct benefit from paying it.
