Tax
I. Introduction
a. Importance of Income Taxes
i. Some Data
1. The fact that the rich pay a high proportion of total income taxes is in part attributable to the progressive rate structure, but mainly to the fact that their incomes and wealth are such a large proportion of the total.
2. Tax burden on households in top 1% reduced by various changes of Bush in 2000
ii. Effects on the Law
1. Central role in financing government
2. Special interest to lawyers: effects many other branches of law
a. Property, marriage, partner/corporate, compensation, settlement, trust, respondeat superior
iii. Economic Consequences
1. Substantial effect on allocation of resources
a. Tax expenditures: showing us what revenue is forgone for certain incentives
b. Property Tax deductions encourage buying homes
c. Favorable treatment of oil industry
i. Both add to population shift to suburbs
d. Charitable institution support
2. Using tax system to delivery subsidy permits its advocates to call it a tax cut rather than a spending increase
b. History
i. Tax: How to allocate burdens of collective society
ii. Till Civil War: tariffs
iii. Civil War: simple income
iv. 1894: revival based on CW income tax, mainly on well-to-do
v. SC heard attach in Pollock v Farmers Loan and Trust Co.
1. Violation of prohibition on unapportioned direct taxes in Article I S 9 C 4
2. 5-4 Decision: sustained challenge of imposition of tax on rents, dividends and interest and held that provision taxing those receipts were inseparable from other provisions, striking out whole thing
vi. 16th Amendment now: The Congress shall have the power to lay and collect taxes on incomes from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
vii. 1913: imposed on well-to-do, had exemptions
viii. WWI expanded, reduced exemptions, still major burden on high incomes
1. Rates Climbed,
ix. WWII, suddenly becomes a mass tax, more like we have today
x. 1961: Marginal rates peaked at 91% (today, we’re around 35%)
xi. Widespread taxes effect economic and social activity. Deliberate tool
1. 1981: Business expense deduction to stimulate economy
c. Theory and Policy
i. Why Income?
1. Head tax: unfair
2. Ability to pay:
a. Narrow: Convenience, liquid assets BUT encourages people to have nonliquid assets and thus be a mismeasure
b. Broader: Material well being, not liquidity
c. Broadest: Ability/wage rate, opportunity to earn wealth whether or nto exercised.
d. FAIR / Vertical Equality meaning that the rich pay more
i. More? Debate on whether just more dollars (flat) or a greater proportion /progressive (because of marginal utility, dollar has less value to rich people)
3. Snapshot timeframe of ability?
4. Wealth taxation has never been seriously considered. State: property taxes though.
5. A preference for relying in the main on observable transactions has always led, and in all ikelihood always will lead, to the disregard of what economists call “imputed income” or the vaule of goods and services one provides to one-self.
6. GOALS: Raise Money, Economic Effects, No Perverse Incentives, Fair distribution of burden
ii. Definition of Income
1. Haig-Simons definition: the sum of the taxpayer’s consumption plus change in net worth, each defined in terms of market value during the accounting period.
a. Would include unrealized appreciation and value of government services as well as imputed income.
2. Really depends on statutory concept
3. Reg. 61: All income from whatever source derived (listing 15 examples). Exclusions follow.
iii. Tax Expenditure Budget
1. Quantification of revenue forgone because of incentives through exceptiosn and deductions. Shows our social policies
2. Under which certain tax ebenfits are equated with direct subsidies.
3. Approach: identify eclusions, deductions, deferrals and credits that are seen as departures of neutral income taxation, figure ou cost of special provisions, and then attribute these costs to various budget functions.
4. Dependson notion that there is a natural, netural or normal income tax and that it is possible to identify departures without great difficulty or dissent.
a. Much debate.
iv. Tax Incidence
1. Incidence of a tax is its ultimate burden.
2. Determine: compare world with tax or provision and the world without it.
3. Generally assumed that burden of individual is not shifted from individuals on whom it is imposed.
4. As resource allocations shift in response to tax incentives, before-tax rates of return will eb altered.
5. Before-tax reduction in return on the investment in the tax-exempts is a form of self-imposed tax, implicit or putative tax.
a. Gets rid of unfairness.
b. i.e. tax-exempt bonds have lesser interest than taxable bonds, so you are i
lternative of providing home services results in imputed income not taxed at all
4. Secondary worker: significant burden of social security tax
f. Compliance and Administration
i. Initial self-assessment – returns
ii. IRS, Branc of treasury department, Commissioner leads
iii. Civil/Crim penalties for not doing it. No statutory limitation on civil, six years on criminal
iv. Reviews for computational error. 3 years to assert deficiency
1. Underpayment gets interest, set quarterly
2. Additional negligence interest (20%) if reckless and intentional
a. Substantiall understate
b. Can be waived with reasonable casue and good faith
3. Fraud: 75%: highly flagrant, willful attempt to evade, punish in cases of large amounts over several years with reprehensible forms of concealment. No limitation of time.
a. Can be undercut by payer “red flagging”
b. Lawyer not barred from weak but reasonable grounds. Some realistic possibility.
c. Odds heavily in favor of aggressive taxpayer reporting postures
v. Mistake?
1. Adustment if subsequent facts
2. Amendment if discovered old facts
a. 3 year SoL
b. No explicit statutory penalty for failure to file amended return
vi. Audit: usually you bargain, and if not, IRS orders plus interst and penalties. Pay or Court.
1. Tax Court: no jury trails, reviewed by circuit and SC
2. Pay tax, sue for refund in DC. Jury and inexperienced judge.
3. Pay tax, sue in US Court of Fed Claims
g. Some Tax Terminology and Concepts
i. Tax Base and Calculation of Tax Payable
1. Tax base: general concept to describeda moutn to be taxed
2. We call it taxable income in statutory language
a. Bottom line.
3. Top line is Gross Income
a. All income from whatever soure derived except as otherwise provided.
b. Exclusions/Exemptions listed, do not enter into computation. – not reported (i.e. certain fringe benefits)
i. ABOVE THE LINE
