Basic Federal Income Taxation
Chapter 1: Introduction
I. The Constitution and the Income Tax
A. Apportionment of Direct taxes
1. Art I, §2
a) Representatives and direct Taxes shall be apportioned among the several States…according to their respective Numbers…
2. Art I, §9
a) No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.
3. 16th Amendment (1913): Gives Congress the power to lay and to collect taxes on incomes without apportionment among the several States, and without regard to any census or enumeration.
B. The Uniformity Clause
1. Art. I, §8
a) Requires that taxes be “uniform throughout the United States”
2. This requirement
a) Does not prohibit a progressive tax or a tax that distinguishes between different sources of income.
b) Requires that taxes be “geographically uniform” in the sense that “whatever plan or method Congress adopts for laying the tax in question, the same plan and the same method must be operative throughout the United States.”
II. Basics of the tax system
A. Federal Income Tax
1. Accounts for 65% of Federal revenue
a) 56%—Personal Income Taxes
b) 9%—Corporate Income Taxes
B. Taxes aren’t simply enacted to bring dollars into the treasury, but also to absorb purchasing power from individuals so that inflation won’t rise rapidly
C. Non-revenue raising purposes of taxes
1. Taxes promote certain transactions
a) Ie. Charitable donation tax benefits (lead to good educational systems in the United States)
2. Redistribution of Wealth
3. Stabilize/Stimulate economic growth
D. Goals of the Tax System
1. Fair & Equitable
2. Won’t impede productivity/incentive to work
3. Simple & non-exploitable
E. $115-&125 billion/year to comply with tax laws
1. includes: lawyers, tax prep., record-keeping, admin & enforcement
III. Progressive Tax System
A. Progressive Tax
1. Definition
a) Tax higher incomes at a higher rate (ie. Take a higher % of income as taxes from higher earners)
2. Nominal Average Rate
a) Tax / taxable income = nominal avg. rate
3. Effective Average Rate
a) Takes economic income into account
b) Tax / total inc. (taxable income + deductions) = Eff. Avg. Rate
4. Progres
6%
F. Arguments “For” Progressive taxation
1. Diminishing marginal utility of money
a) Additional money for high-income earners is worth less b/c they can give up luxuries easier than a poor person can give up necessities which all their money goes towards
b) Economists say this is not a valid argument b/c you can’t make interpersonal utility comparisons
2. Ability to Pay
a) Those that are more able to pay should bear more of the tax burden.
3. Fairness
a) Some say the market outcomes are unfair & progressive taxes correct this unfairness
G. Arguments “Against” progressive taxation
1. Wealth is a reward for those who’ve earned it and this class shouldn’t be punished via a heavier tax rate
2. Why tax a productive person but not a non-productive person?
3. Social Darwinism—why punish those who’ve “won” in the market?
4. Hurts Incentive to work
Leisure becomes more valuable than earning income
