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Tax
Seton Hall Unversity School of Law
Coverdale, John F.

FEDERAL INCOME TAX
PROFESSOR COVERDALE
Fall 2006
 
I.                   INTRODUCTION
A.              WELCOME TO TAX
1.              Purposes
a.              Primarily used to raise revenue for the govt.
b.              Used to distribute resources from those that have a lot to those who have a little
c.              Used to influence behavior (ex: tax credit for making more low income housing)
d.              Used to discourage behavior (ex: excise tax on cigarettes)
 
2.              How highly are we taxed?
a.              30% of gross domestic product goes to some form or other of tax (out of every dollar that is spent in this society, govt. spends about 30%)
i    20% is federal
ii 10% is state and local
 
3.              Federal govt.’s tax income
a.              50% comes from individual income tax
b.              32% comes from social security taxes
c.              10% comes from corporate income tax
d.              8% comes from excise tax
 
B.               BASES AND RATES
Basic Formula: Base x Rate = Tax
1.              What bases might there be for taxing?:
a.              Taxable income or wage tax (social security)
b.              Property tax – stocks etc. are a subset of this type of tax.
i    This is mostly focused on real property/real estate
ii Personal property – e.g. VA used to have a tax on the value of your automobile.
iiiDeals with registered property – cars, boats – things that needs licenses.
c.              Consumption
i    Sales tax or excise tax (targeted taxes: cigarettes, alcohol, luxury cars, gasoline, telephone service, etc.)
d.              Transfer tax or inheritance tax (estate and gift tax in which the taxable event is a gratuitous transfer). This is most common or important. E.g. if your grandmother dies and leaves you a lot of money, the estate has to pay a tax on the transfer from your grandmother to you.
e.              Head tax (a fixed sum that everybody pays for whatever reason). This is not a very common or useful form of tax.
 
2.              Taxable event: something that triggers the tax
a.              For gift tax, it’s a transfer
b.              For sales tax, it’s a purchase
c.              For income tax, it’s receipt of income
d.              For property tax, it’s ownership of property
e.              For social security tax, it’s receipt of income in the form of wages
 
3.             Consumption tax v. Income tax
a.              Consumption deals with how much you spent whereas income deals with h

u buy). This is bc poor people can’t spend all that they make.
 
5.              Flat rate and progressive are the two most argued between types of tax
a.              Flat rate is more fair whereas progressive will raise a higher revenue
b.              Progressive taxation promotes equal sacrifice.
 
6.              Factors to Consider in Determining Good vs. Bad Tax:
a.              Will it raise sufficient money?
b.              Is it enforceable? Is it relatively easy to administer?
i    Is it easy or burdensome?
c.              Is it fair?
i    Is the burden imposed on each person proportionate to the benefit they get?
ii Equity
1.    Horizontal equity: similarly situated taxpayers should pay the same amount of tax
(i)      Relevant factors for determining who is similarly situated:
Benefit principle: person who gets more should pay more (ex: pay more if you want to mail 10 letters instead of 1). The amount of tax that people pay should be proportionate to the benefits they derive.