FIT OUTLINE
Criteria for Evaluating a Tax System-
(1) Fairness: divided into 2 components:
a. Horizontal Equity: fairness in the sense of treating like cases alikeànotion that “similarly situated taxpayer’s ought to be treated similarly”
b. Vertical Equity: considers the impact of the tax system on broad social classesàasks whether the tax structure imposes an unfair burden on poorer individuals, or whether it ought actively to redistribute income from wealthier to poorer individuals
i. Vertical equity arguments are highly subjective and political
(2) Economic Efficiency: concerned with 2 ideas
a. The imposition of taxes reduces the marginal incentive to earn extra income because taxpayers will keep less than 100% of what they earn
b. Taxes cause distortion in favor of specific activities or industries that benefit from lower taxation
i. Ex. tax preferences in X industry will cause more money to flow into X industry, and less money will be available for Y and Z industry than would be before the pre-tax market.
1. Efficiency arguments tend to be tied to behavioral assumptions that are difficult to prove
a. Ex. an 80% tax rate would definitely discourage some people from working, but it is by no means clear that a 30 or 40% rate has the same effect.
(3) Simplicity/Administrability-Weakest argument to make
a. Our tax code is complex, partly because of the need to meet the conflicting golas of horizontal and vertical equity and economic efficiency in a variety of personal and business settings.
Time Value of Money
(1) Phenomenon-$1 today is worth more than $1 a year from now which more that $1 two years from now until $1 has virtually no present value.
a. Reason for this phenomenon
i. Subjective-it is more fun to have money now than later
1. you can always choose to save and you have the option to spend it
ii. Objective (more important)-money is worth more now than in the future because of interest
Examples:
Assume
i = 10% compounded
$1 invested today
After
Year 1 = $1.10
Year 2 = $1.21
Year 30 = $17.50
In reverse:
To have $1 a year from today you need $.91 today, to have $1 in 30 years you need to set aside $.06 today
How TVM applies in the Tax World:
(1) since taxes are debts to the government, the TVM encourages TP’s to delay payment of taxes extent possible:
a. Ex. If TP can delay a $1 tax payment from this year until next year, the present value of the cost of the tax has been reduced from $1 to $.91à
i. TP can set aside $.91 today and have enough to pay taxes after a year.
(2) If TP can delay long enough its almost as good as avoiding taxes altogether.
(3) Deductions and Credits:
the meals are provided for the Convenience of the ER; and
iii. the meals are provided on the business premises of the employer.
(3) ER Provided LODGING
a. § 119 excludes from income the value of ER provided Lodging if:
i. It is provided on the business premises of the ER to an EE, EE’s spouse or dependant;
ii. It is provided for the convenience of the ER; and
iii. The EE is required to accept the lodging as a condition of employment
1. § 152-Dependant Defined:
a. any U.S. Citizen who resides with the TP and who either:
i. receives a majority of his support from the TP; or
ii. is treated under special rules of §152(c)-(e) as having received over half of his support from TP.
