Chapter 1Chapter 1

Taxes and Taxing JurisdictionsTaxes and Taxing Jurisdictions

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ObjectivesObjectives

• Define tax, taxpayer, incidence, jurisdiction• Express the relationship between tax base, rate, and

revenue as a formula• Describe the taxes levied by local, state, and federal

government• Explain why different jurisdictions compute for revenues

from the same taxpayer• Identify the reasons why governments modify their tax

systems• Describe the three primary sources of federal tax law

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DefinitionsDefinitions

• Tax = compulsory payment to support the cost of government• contrast with fine/penalty or user fee

• Taxpayer = any person or organization that pays tax (includes individuals and corporations)

• Incidence = ultimate economic burden of a tax • May not fall on the person or organization who pays tax

• Jurisdiction = right of a government to tax

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Tax FormulaTax Formula

• Tax = rate × base• Rate can be:

• Flat (single rate applies to entire tax base)• Graduated (multiple rates apply to portions

[brackets] of tax base)

• Base is an item, occurrence, transaction, or activity on which a tax is levied (expressed in monetary terms)

• Revenue is total tax collected by the government• Increased by increasing either rate or base

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Two Ways to Characterize TaxesTwo Ways to Characterize Taxes

• Frequency with which tax occurs• Transaction (event) based taxes, such as:

• Sales or excise tax

• Estate or gift tax

• Activity based tax, such as:• Income tax

• Link to specific government expenditures• Earmarked to finance designated projects, such as:

• Social Security and Medicare

• EPA’s environment excise taxes

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State and Local TaxesState 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 TaxesState and Local Taxes

• Sales/use• Broad-based but often excludes necessities (food, drugs)• Personal responsibility for use tax

• Excise tax • Imposed on retail sale of specific goods or services

• Cigarettes and gasoline• Hotel and motel accommodations

• Income tax• Personal• Corporate

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Federal TaxesFederal Taxes

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• Income taxes• Individual• Corporate

• Employment taxes• Social Security• Medicare

• Unemployment taxes

• Excise taxes

• Transfer taxes

History of Federal Income TaxHistory 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 as unconstitutional• Sixteenth Amendment ratified in 1913 made the

income tax constitutional • Internal Revenue Code was enacted in 1939 and

subsequently revised in 1954 and 1986

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Foreign TaxesForeign Taxes

• Income taxes similar to U.S.• Value added tax (VAT)

• Similar to a sales tax on the incremental value addedby a business at each stage of the production process

• Business can claim a credit for VAT paid to a supplierwith proof of payment

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Jurisdictional CompetitionJurisdictional Competition

• Increasing the tax rate or expanding the definition of the tax base can cause taxpayers to flee the tax jurisdiction

• Current trends in increasing the tax base• Annexation to expand city property• Sales tax expansion• Lotteries and casino gambling

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Sales Tax ExpansionSales Tax Expansion

• The Supreme Court case of 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 the internet?

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Sources of Tax LawSources of Tax Law

• Statutory authority is the Internal Revenue Code• Administrative authority

• Treasury regulations• IRS Revenue Rulings and Revenue Procedures

• Federal judicial authority• Supreme Court• Appellate courts• Trial courts

• Tax Court• District Court• Court of Federal Claims

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