Pope Individual Chpt 1
Pope Individual Chpt 1
Chapter I:1
An Introduction to Taxation
Discussion Questions
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The Supreme Court held the income tax to be unconstitutional in 1895 because the income tax was considered to be a direct tax. At that time, the U.S. Constitution required that an income tax be apportioned among the states in proportion to their populations. This type of tax system would be extremely difficult to administer because different rates of tax would apply to individual taxpayers depending on their states of residence. p. I:1?2.
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The pay-as-you-go withholding was needed in 1943 to avoid a significant tax collection problems as the tax base broadened from 6% of the population in 1939 to 74% in 1945. Pay?as?you?go permitted the federal government to deduct taxes directly out of an employees wages. p. I:1-3.
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Under a progressive tax rate structure, the tax rate increases as the taxpayers income increases. Currently, for 2010, tax rates of 10%, 15%, 25%, 28%, 33% or 35% apply depending upon the taxpayers filing status and taxable income levels. Under a proportional tax rate or “flat tax” structure, the same tax rate applies to all taxpayers regardless of their income levels. Under a regressive tax rate structure, the tax rate decreases with an increase in income level. The concept of vertical equity holds that taxpayers with higher income levels should pay a higher proportion of tax and that the tax should be borne by those who have the “ability to pay.” Thus, Congressman Patricks opposition to the flat tax is theoretically correct; all taxpayers will pay taxes at the same rate, regardless of the ability to pay. pp. I:1?4 and I:1-5.
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It is possible for the government to raise taxes without raising tax rates. Because there are two components in computing a taxpayers tax, the tax base and the tax rate, taxes can be raised by increasing either the rate or the base. Thus, even though the Governor proclaimed that tax rates have remained at the same level, adjustments to the tax base, such as the elimination of deductions, result in tax increases which can be as much, or more, as increases in tax rates. p. I:1-4.
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The marginal tax rate is of greater significance in measuring the tax effect for Carmens decision. The marginal tax rate is the percentage that is applied to an incremental amount of taxable income that is added to or subtracted from the tax base. Through the marginal tax rate, the taxpayer may measure the tax effect of the charitable contribution to her church. If her marginal tax rate is 25%, she will save 25¢ for each $1 contributed to her church. The average tax rate is simply the total tax liability divided by taxable income. pp. I:1-5 and I:1-6.
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Gift and estate taxes are levied when a transfer of wealth (property) takes place and are both part of the unified transfer tax system. The tax base for computing the gift tax is the fair market value of all gifts made in the current year minus an annual donee exclusion of $13,000 (2010) per donee, minus a marital deduction for gifts to spouse and a charitable contributions deduction if applicable, plus the value of all taxable gifts in prior years. The tax base for the estate tax is the decedents gross estate, minus deductions for expenses, and a marital or charitable deduction if applicable, plus taxable gifts made after 1976. pp. I:1-7 through I:1-10.
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Cathy, the donor, is primarily liable for the gift tax on the two gifts. The children are contingently liable for payment of the gift tax in the event the donor fails to pay.
Before considering the unified tax credit of $345,800 for 2010 (or the $1,000,000 equivalent deduction), a gift tax is due on the two gifts computed as follows:
Total gifts
$100,000
Minus: Annual gift tax exclusion ($13,000 x 2 donees)
( 26,000)
Gift tax base
$ 74,000
Note: Cathy is permitted a $13,000 annual exclusion for gifts of a present interest to each donee. Since Cathy has never made gifts in prior years, no gift tax will be due because of the $345,800 unified tax credit that is available. pp. I:1?8 and I:1-9.
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