Introduction to Tax Accounting generally
Federal Income Taxes as primary example
Note extensive overlap of rules for measuring business income of individuals and corporations. They use the same definition of income, most of the same adjustments, and calculate tax in very similar ways
This forces a difference from financial accounting: need rules that cover both Joe Street and Chevron, Inc.
What is a "tax"?
As long as there has been civil society (@4000 yrs.) the function of government has been to provide the social infrastructure and "common goods" that can't feasibly be funded by user fees
Flood control. Roads. Law Courts. Protection from foreign enemies
Government gets the resources for these works and hundreds like them by taking a share of transactions/ wealth and giving nothing specific in return
"Taxation is the exaction of necessary public resources from the unwilling individuals who make up that public. Taxes are not good. They are, at best, necessary evils."
"Taxes are enforced exactions, not voluntary contributions."
The Tax "Game"
Taxpayers and Tax Collectors are the players, each seeking advantage.
Governments develop the bureaucratic machinery to rationalize and systematize the tax grab -- to make it predictable and bearable
Taxpayers (and their advisors -- a cadre of professionals whose practice mixes law and accounting) seek to exploit the language of the rules. The rules often provide incentives for some economic arrangements and penalize others.
The Rules Evolve towards Complexity
Sometimes taxpayers profit from exploiting unintended interactions of the rules -- tax loopholes.
Government responds by rule changes to protect the revenue base (tho sometimes affected by the lobbying of affected taxpayers)
Generally, the moves of the players drive any tax system towards greater complexity and increasing detail.
Tax Incidence
Who Pays, Who Shifts, and Who Bears the Burden
Concept of a "Hidden" Tax. The person paying the tax might be able to pass it on (to some extent) in higher prices. The more meaningful question: who bears the burden? Who is less well off because of the tax (apart from any benefit from the spending financed by the tax.)
Example: Who bears the burden of the retail sales tax? Merchant or customer? What if tax is not expressly stated? What if merchant is on the State line?
Who bears the burden of property taxes -- landlord or tenant?
What about payroll taxes (the employer's 1/2)? Note the crucial factor seems to be elasticities of supply/demand. What about estate taxes? What is the marginal elasticity of death?
Tax Base and Rate
Base: *what* is measured and taxed. (Full cash value of Cal real estate, retail sales, annual income)
Rate. The government's "cut" of the base, as computed. Can be a single fixed rate, or can vary
Progressive, Proportionate and Regressive
Proportionate tax examples: Retail Sales, Real property. Question: are the things taxed a proportionate share of how rich, middle and poor use their resources?
Regressive usually not explicit (except US payroll tax), but due to base not including things that those better off do with their resources.
Progressivity has to be designed: eg. US income tax. A system of "brackets" Single with $30K income vs $60K income
Tax on $30K in 2001 (inflation adjusted annually) ($22,550 txbl Y w/ standard allowances) = 15% of 1st $27,050 , so is $3,382.5.
(Actually, due to change in the law in 5/01, need to adjust for 10% rate on the first $6,000 = save 5% x $6,000 = $300.) Paid out as "advance rebate)
Tax on $60K ($52,550 after allowances) = 15% of 1st $27,050 equals $4,057.50, plus 27.5% of the next $37,300 equals .275 * $25,500 = $7,012.5. Total $11,070
Progressivity drives planning: tax on $30k + $30K is less than tax on $60K + $0K. Creates incentive to income shifting among taxpayers and among years, and need for blocking measures
Local: Property taxes (CA example), revenue sharing
State: Sales taxes, personal and corporate income, other transaction taxes
Federal: Personal and Corporate income, payroll, estate, customs, excises
Other Nations: All the above, plus Value Added Tax and Wealth taxes
A framework to make sense of all the variations
Driven by revenue needs, general public sentiment, specific lobbying, loophole closing
Political desirability of hiding the tax, or finding someone else to tax
Tendency to raise revenue by distorting the base rather than increasing the rate
Constitution. Amend XVI
Congress enacts laws
Collected in the IRC with frequent amendments
If the Code is clear, this is basic source. But it is "code" many ambiguities: eg. Sec. 61 definition of income
Administrative Implementation: Treasury/IRS
IRS collects, informs and regulates
Budget about $10.0 bb; about 110,000 employees
Various levels of administrative guidance
- Regulations
- Revenue Rulings and Procedures
- Letter Rulings
- Publications and Forms
- Notices
- Various types of internal advice
Courts
Federal courts decide lawsuits between Tp and IRS over what the Code means
courts write up reasons - used as precedent
Notes and format (c) 2001-02 Robert H. Daniels
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