Labor Law Outline

Tax Outline

** If exam question asks about tax consequences à always look at basis

Introduction

Welcome to Tax

i. Federal Income Taxation
1. Specifically individuals
2. Personal income taxes represent 48% of federal revenue
3. Out of every $1.00
a. Federal Gov takes approx. 20c or 20%
b. State takes approx 10c or 10%
c. Total of 28% of each dollar goes to taxes
4. United States is the 3rd most lightly taxed industrial society
a. We get less than other countries for our tax money
b. Only Turkey and Australia pay less
ii. Outlays – Where does the Money Go?
1. Little on education
2. Majority à 35% on Social Security, Medicare & other retirement
3. Not a lot of discretionary spending
iii. Social Security
1. You pay 7 ½ % and employer pays 7 ½ %
2. Arguable that the employers portion really comes out of your wages because without it you would make more money
iv. Real Incidence
1. Person who tax is shifted onto
2. Not the same as legal incidence
3. E.g. Corporations are liable for tax, but the tax is really paid by share holders, workers, and consumers

Bases & Rates

i. All taxes are conceptually Base X Rate
ii. Base
1. Income
2. Goods à Sales tax
3. Excise Taxes à luxury tax, targeted at items like alcohol
4. Property Tax à most states only tax real property, but can also be on some larger items like cars and boats
iii. Sales Tax
1. More broadly is a transfer tax
2. In Europe called a value added tax (VAT)
3. May also view this as a consumption tax à items of final consumption
iv. Rate
1. Progressive à as base increases the rate also increases
2. Flat/ Proportional à everyone pays the same percentage
3. Regressive à as base increases the rate decreases

v. Progressive
1. You pay a different rate on different parts of income à marginal rate
2. You pay a lower % on lower amounts and that % increases accordingly
vi. Regressive
1. Social security is regressive
a. Base is capped around 80K
b. You only pay on 1st 80K regardless of income
c. People are not aware of this
vii. Withholding
1. Great invention
2. Created in 1940
3. Rather than waiting to pay, the government just withholds
4. Without à would be difficult to collect
5. Makes it possible for the government to recover higher rates of tax
viii. Criteria for Judging a Tax System
1. Distribution à fairness
a. Is this a fair way to collect taz
2. Efficiency à Effect on economy
a. How is tax affecting economy?
b. Measure by asking how it distorts decision making in the economy
c. All taxes create some drag on economy, but without tax there would be no economy at all
3. Administrability à Cost of tax
a. How much does it cost to collect?
b. How much does it cost to pay it?
c. How much do people pay to figure it out?
d. Is it over intrusive?
4. Sufficiency à Will tax raise the required amount?
ix. Ways to Collect
1. Taxes are really charges for government services
2. Two Ways to Collect
a. Benefit
i. E.g. toll roads, postage
ii. Not always thought of as taxes
b. Ability to pay
i. Fire, police, military, education
ii. Logic à th