taxation system

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this is a full explanation of taxation system and its importance
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  1 chapter An Introduction to Tax  Learning Objectives Upon completing this chapter, you should be able to: LO 1 Demonstrate how taxes influence basic business, investment,personal, and political decisions. LO 2 Discuss what constitutes a tax and the general objectivesof taxes. LO 3 Describe the different tax rate structures and calculate a tax. LO 4 Identify the various federal, state, and local taxes. LO 5 Apply appropriate criteria to evaluate alternate tax systems.  1-1   argaret is a junior beginning her first taxcourse. She is excited about her careerprospects as an accounting major buthasn’t had much exposure to taxes. Onher way to campus she runs into an old friend,Eddy, who is going to Washington, D.C., toprotest recent proposed changes to the U.S. taxsystem. Eddy is convinced the IRS is evil andthat the current tax system is blatantly unfair and corrupt. He advocates a simpler, fairer way of taxation. Margaret is intrigued by Eddy’s passion but questions whether he has a completeunderstanding of the U.S. tax system. She decides to withhold all judgments about it (or aboutpursuing a career in taxation) until the end of her tax course. ■  Storyline Summary  Taxpayer: Margaret Employment status: Margaret is a full-timestudent at the Universityof Georgia. Current situation: She is beginning her firsttax class. M 1-1  1-2   chapter 1 An Introduction to Tax    WHO CARES ABOUT TAXES AND WHY? A clear understanding of the role of taxes in everyday decisions will help you makean informed decision about the value of studying taxation or pursuing a career intaxation. One view of taxation is that it represents an inconvenience every April 15th(the annual due date for filing federal individual tax returns without extensions).However, the role of taxation is much more pervasive than this view suggests. Yourstudy of this subject will provide you a unique opportunity to develop an informedopinion about taxation. As a business student, you can overcome the mystery thatpervades popular impressions of the tax system and perhaps, one day, share your ex-pertise with friends or clients.What are some common decisions you face that taxes may influence? Inthis course, we alert you to situations in which you can increase your return on in-vestments by up to one third! Even the best lessons in finance courses can’t ap-proach the increase in risk-adjusted return that smart tax planning provides.Would you like to own your home someday? Tax deductions for home mortgageinterest and real estate taxes can reduce the after-tax costs of owning a home rela-tive to renting. Thus, when you face the decision to buy or rent, you can make aninformed choice if you understand the relative tax advantages of home owner-ship. Would you like to retire someday? Understanding the tax-advantaged meth-ods of saving for retirement can increase the after-tax value of your retirementnest egg—and thus increase the likelihood that you can afford to retire, and do soin style. Other common personal financial decisions that taxes influence include:choosing investments, evaluating alternative job offers, saving for educationexpenses, and doing gift or estate planning. Indeed, taxes are a part of everydaylife and have a significant effect on many of the personal financial decisions all of us face.The role of taxes is not limited to personal finance. Taxes play an equally impor-tant role in fundamental business decisions such as the following:ã What organizational form should a business use?ã Where should the business locate?ã How should business acquisitions be structured?ã How should the business compensate employees?ã What is the appropriate mix of debt and equity for the business?ã Should the business rent or own its equipment and property?ã How should the business distribute profits to its owners?Savvy business decisions require owners and managers to consider all costs andbenefits in order to evaluate the merits of a transaction. Although taxes don’t neces-sarily dominate these decisions, they do represent large transaction costs that busi-nesses should factor into the financial decision-making process.Taxes also play a major part in the political process. U.S. presidential candi-dates often distinguish themselves from their opponents based upon their tax rhet-oric. Indeed, the major political parties generally have very diverse views of theappropriate way to tax the public. 1 Determining who is taxed, what is taxed, andhow much is taxed are tough questions with nontrivial answers. Voters must have abasic understanding of taxes to evaluate the merits of alternative tax proposals.Later in this chapter, we’ll introduce criteria you can use to evaluate alternative taxproposals. LO1 1 The U.S. Department of the Treasury provides a “history of taxation” on its Web site (www.treas.gov/education/fact-sheets/taxes/ustax.shtml). You may find it interesting to read this history in light of thevarious political parties in office at the time.  chapter 1 An Introduction to Tax  1-3 In summary, taxes affect many aspects of personal, business, and political deci-sions. Developing a solid understanding of taxation should allow you to make in-formed decisions in these areas. Thus, Margaret can take comfort that her semesterwill likely prove useful to her personally. Who knows? Depending on her interest inbusiness, investment, retirement planning, and the like, she may ultimately decide topursue a career in taxation.  WHAT QUALIFIES AS A TAX?  Taxes have been described in many terms, some positive, some negative, some print-able, some not. Let’s go directly to a formal definition of a tax, which should proveuseful in identifying alternative taxes and discussing alternative tax systems.  A   tax   is a payment required by a government that is unrelated to any specific bene- fit or service received from the government. The general purpose of a tax is to fund theoperations of the government (to raise revenue). Taxes differ from fines and penaltiesin that taxes are not intended to punish or prevent illegal behavior. Nonetheless, byallowing deductions from income, our federal tax system does encourage certain be-haviors like charitable contributions, retirement savings, and research and develop-ment, and we can view it as discouraging other legal behavior. For example, “ sintaxes ” impose relatively high surcharges on alcohol and tobacco products. 2 Key components of the definition of a tax are thatã the payment is required (it is not voluntary),ã the payment is imposed by a government agency (federal, state, or local), andã the payment is not tied directly to the benefit received by the taxpayer.This last point is not to say that taxpayers receive no benefits from the taxesthey pay. They benefit from national defense, a judicial system, law enforcement,government-sponsored social programs, an interstate highway system, public schools,and many other government-provided programs and services. The distinction is thattaxes paid are not directly related to any specific benefit received by the taxpayer.Can taxes be assessed for special purposes, such as a 1 percent sales tax for edu-cation? Yes. Why is an earmarked tax, a tax that is assessed for a specific purpose,still considered a tax? Because the payment made by the taxpayer does not directlyrelate to the specific benefit received by the taxpayer . George H. W. Bush famously stated in his 1988presidential election campaign, “Read my lips, nonew taxes.” In 1990, he signed legislation increasing individual income tax rates. Political observers citethis as one reason he lost the 1992 presidentialelection to Bill Clinton.  Taxes in the Real World No New Taxes LO2 2 Sin taxes represent an interesting confluence of incentives. On the one hand, demand for such productsas alcohol, tobacco, and gambling is often relatively inelastic because of their addictive quality. Thus,taxing such a product can raise substantial revenues. On the other hand, one of the arguments for sintaxes is frequently the social goal of  reducing  demand for such products. Example 1-1 Margaret travels to Birmingham, Alabama, where she rents a hotel room and dines at several restau-rants. The price she pays for her hotel room and meals includes an additional 2 percent city surchargeto fund roadway construction in Birmingham. Is this a tax?  Answer:  Yes. The payment is required by a local government and does not directly relate to a specificbenefit that Margaret receives.   THE KEY FACTS  What Qualifies as a Tax? ❚  The general purpose of  taxes is to fund govern-ment agencies. ❚ Unlike fines or penalties, taxes are not meant topunish or prevent illegalbehavior; but “ sin taxes ”are meant to discouragesome behaviors. ❚  The three criteria neces-sary to be a tax are that the payment is ã requiredã imposed by agovernment ã and not tied directly tothe benefit received bythe taxpayer.
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