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Tax
Wayne State University Law School
Beale, Linda

FLLS 2-17, 29-44
 
Tax practice is of 2 main types:
An application of tax principles to past events or transactions
Advice as to how tax principles will apply to proposed events or transactions
Study tax using the Why, Why method
Why do we postulate a particular answer to a tax problem (bc the Code told us to)
Why did Congress write this provision into the Code?
The Power to Tax:
Derived from Art 1, Sec 8, clause 1 of the Con
Gives Congress the power to lay and collect taxes, duties, imposts and excises
Sec 2, clause 3 and Sec 9, clause 4 of Art 1
Require “direct” taxes be apportioned among several states in accordance w/ their respective populations
Art 1 Sec8 clause 1 also says that these taxes must be uniform
Direct Tax: is a tax demanded from the very person who is intended to pay it
Indirect tax: tax paid primarily by a person who can shift the burden of the tax to someone else or who at least is under no legal compulsion to pay the tax
Ex: sales tax is on the seller, who then shifts it to the buyer
Apportionment Among the States:
After Congress has established a sum to be raised by direct taxation, the sum must be divided among the states in proportion to their respective populations
Use of direct tax as federal revenue raising measures
A failure to provide an apportionment rule might make it possible for a central taxing authority improperly to burden some states to the great advantage of others
Application of an apportionment rule might create interpersonal inequities at least as bad as the interstate inequities sought to be avoided.
Because of those reasons Congress doesn’t enact direct taxes (unless income tax is still properly classified)
16th Amendment
Provides that income taxes shall not be subject to the rule of apportionment regardless of the “sources” from which the taxed income is derived
NOTE TO SELF: it appears that you cant have a direct tax unless it is apportioned
Uniformity Among the States:
Rule of Uniformity: Art1 Sec8 Clause1:
But all duties, imposts, and excises shall be uniform throughout the US
All fed income taxes must be uniform throughout the US
Due Process
5th Am is not a limitation upon the taxing power conferred upon Congress by the Con
Unless it amounts to confiscation. Then it can be held invalid as a denial of due process
Most taxing statutes aren’t vulnerable to Con attack
Self Incrimination:
Requiring a taxpayer to file taxes doesn’t violate 5th Am right to not have to incriminate self
 
 
 
TAX POLICY CONSIDERATIONS
Fed income tax is far from a neutral revenue raising device
Alternatives to the Fed Income Tax
Flat tax: a tax w/ a broad base on which tax is imposed at a single low rate
Modified flat tax: tax on a tax base containg more deductions but imposed at modestly graduated low rates
Consumption tax: personal tax at graduated rates on consumption, or consumed income, levied by exempting all savings from tax, allowing a deduction for repayment of debt and taxing all borrowing and w/drawals from savings
General sales tax: either a familiar retail sales tax or value added tax (a multistage sales tax that is collected at each stage in the production or distribution process
 
WARREN EXERPT:
US has low levels of overall taxation on its population (compared to other advanced nations)
US relies more on income tax and less on consumption tax (compared to other advanced nations)
 
IMPROVING AN EXISTING TAX BASE (the discussion of the US’s first tax reform)
Use the Haig Simons definition of income:
Key idea is that gains or increases in wealth, from whatever source, constitute the ideal personal income tax base, whether those gains are saved or spent on current consumption.
This idea really isnt translatable into an operational income tax
It has always used salary or sales of assets to trigger tax
Haig-Simons concept had to be translated into operational terms to deal w/ ?s like:
Should fringe benefits be taxed diff from salary under an income ta

y (economic reasonableness)
Simplicity (admin workability)
Marginal Utility of the $:
The wealthier you are, the less important the last dollar you made is to you.
Concepts of Fairness:
Ability to pay (this is most important)
Benefits received
Tax burden must be setup as objective as possible
Like market transactions (income)
When thinking about fairness:
John Rawls-writes about what justice is
Cant take where u r right now and arrive at notion of justice
Should put ourselves behind veal of ignorance
Ronald Warken-
Concepts of Efficiency:
Transactions in regular society shouldn’t be effected too much by tax
How much should be taxed on different things
Cant make taxes distortive or it will harm the economy
Its hard to determine the actual effects of a tax
It needs to be based on observable transactions in the market place to make it fair and efficient
Concepts of Simplicity:
It should be simple for even the “avg Joe”
They need to be able to file or tax $ gets lost. If they don’t know how to file they cant pay taxes.
Less important for the wealthy bc they can afford help with their taxes
Simplicity is relative to the tax payer
What about how the code itself is written?
It should be understandable;
Most parts of the code aren’t needed by the normal guy
Doesn’t really rank in the tax code….it gets ignored for the 1st 2 concepts
Terms to describe fairness:
Horizontal equity: if you are in the same position they should be taxed the same
Vertical equity: notion that as you have a greater ability to pay, more should be expected of you