For individuals: a rate schedule
concept of "marginal bracket"
eff 2002: 10% -15% - 27% - 30% - 35% -38%. Higher brackets are to be gradually reduced over next few years
Also for corporations: 15% - 25% -34% - 35%
Interaction of progressivity and the entity principle: Corporations
Resulting Loophole: fragmenting income amoung multiple corporations under common control reduces tax
Response: the Arms Length principle
The "controlled group" allowed only 1 bracket ride: Sec. 1561
Loophole: the professional services corporation
Response: only 1 35% bracket for "PC"'s
Interaction of progressivity and entity: for individuals
Result: incentive for Income splitting within the family
Need for the "Anti-Assignment of Income" principle
Lucas v. Earl: tax person who earns, not person who collects
Because of community property, led to MFJ w/ separate rate schedule. And MFS.
Now a "marriage tax" on equal incomes, and a marriage bonus for unequal incomes
Incentive for Income splitting with children
Gifts of "unripened" income: Horst v. Helvering
Gifts of income producing property w/ strings, as in trust or CUTMA accounts
Response: The "Kiddie Tax":
Subsidies can be implemented through tax credits
Example: Earned income Cr for low Y workers
Example: college tuition credits
Subsidies and penalties can be implemented by granting or denying deductions
Example: generous rental building depreciation
Example: disallow exec comp over $1mm unless a performance plan
Note: easier to give an allowance than enforce a tax penalty
Interaction: Deduction for charitable contributions. Suppose the contribution is stock -- an appreciated capital asset?