Taxes are pervasive (widespread & come in may variety) and dynamic (change frequently)

Terminologies
Tax: Compulsory payment to support the cost of government.
o Not intended to deter unacceptable behavior like fines/penalty.
Taxpayer: Any person/organization required to pay tax (individuals/corps).
Incidence: Ultimate economic burden of tax.
o May not fall on the tax payer (e.g. tax property higher rent & & monopoly
fall on customers because they will pay higher prices)
Jurisdiction: The right of government to levy tax
Tax base: An item, occurrence, transaction, or activity on which a tax is levied (in
monetary terms e.g. value of property)
Revenue: Total tax collected by the government.
Tax formula
Tax = Rate * Base
Rate can be:
Flat: single percentage
Graduated: multiple percentages that apply to portions brackets of tax base
Two ways to characterize tax:
1- Frequency
Event/transaction based
o Sales, excise, estate, gift taxes
Activity based
o Income tax result of ongoing activities
2- Link to government expenditures
Earmarked to finance designated projects
Federal payroll taxes Social security & Medicare
Environmental excise taxes Environmental protections agency
Local Taxes
Property taxes (ad valorem) make up more than 70% of local government tax revenue
Real property (Realty: land and whatever affixed to it) taxes
o Levied annually based on market value assessed by tax assessors or local gov
o Tax rate is determined annually based on need for revenue
o Abatement (temporary tax exemptions) to entice new business
Personal property (Personalty) taxes
o Three classes: Household tangibles, business tangibles, and intangibles
(securities).
o Individuals/organizations assess the value of their taxable personalty and
report to the tax assessor.
State Taxes
Sales and income taxes make up about 90% of total state tax revenue
Sales/use tax
o Business tax on seller OR consumption tax purchaser (Seller collect tax)
o Use tax apply if states sales tax wasnt paid when the goods were purchased
Excise tax
o Imposed on the sale of specific goods
Cigarette and gasoline

Hotel/ motel accommodations

Income tax
o Personal / corporate
Federal taxes
The major source of revenue is income tax
Income taxes
o First income tax was enacted to pay for civil war (1861-1871)
o First permanent income tax passed 1894 but it was unconstitutional
o 16th amendment 1913. Internal Revenue code 1939
Employment & unemployment taxes
o Social Security & Medicare funded by the federal employment tax
o Unemployment insurance system unemployment taxes
Transfer taxes (wealth transferred by gift / death)
Excise taxes (tobacco, luxury automobile, firearms)
Foreign Taxes
Value added tax (VAT)
Similar to sales tax. A tax on the incremental value added by a business at
each stage of the production process
Jurisdictional Competition
Government that fail to be assertive when taxing may lose revenue to other taxing authorities,
but being too aggressive can cause taxpayers to flee the tax jurisdiction.

Tax law is dynamic in nature

- Taxes and Each time taxpayers find new method to reduce tax, the government respond
with new rule
- Tax base changes
Legalized gambling
Sales tax expansion
Taxing services (utilities, cable, parking)
Mail-order & internet companies arent required to collect taxes where they
dont have physical presence
Sources of federal tax law
Statutory authority
o The Internal Revenue Code
Numerically ordered sections
Administrative authority
o The Department of the Treasury writes Treasury regulations
o IRS (subdivision of the treasury) provides:
Revenue ruling: explains how IRS applies the tax law to set of facts
Revenue procedure: advises taxpayers how to comply with IRS
Published weekly in Internal Revenue Bulletins (IRBs), and
semiannually in Cumulative Bulletins (CBs)
Judicial authority
o Supreme court verdict is equivalent of law
o Appellate courts
o Trial courts
Property tax vs Transfer

A property tax is a periodic (usually annual) tax levied on the ownership of property and
based on the value of the property on a particular assessment date. A transfer tax is a
transaction-based tax levied on the transfer of property from one party to another. A transfer
tax is based on the value of the property at date of transfer.