Tax-250 – Federal Income Taxation I - Homework #1 -

1. Our regular personal income tax system has tax rates that increases as a taxpayer’s income
increases. Our alternative tax system basically has a single rate. Discuss some of the policy
reasons for having those sorts of rate systems.

The intention of taxes should be to raise the funds required to cover government
spending needs without distorting economic decision-making or limiting Americans' ability to
spend, save, and invest. A flat tax is a tax with a single rate applied to the taxable amount, after
taking into account any deductions or exemptions from the tax base. It may not always be a
proportionate tax. Due to exemptions, implementations are frequently progressive; yet, when
there is a maximum taxed amount, they are regressive. The Federal income tax uses a
progressive rate structure that applies higher rates to taxable income (the tax base) as that
income increases - meaning that it imposes a higher average tax rate on higher-income people
than on lower-income people since it operates off a theory that high-income earners can afford
to pay more. Under a progressive tax system, marginal rates rise with income. The rationale for
a progressive tax is that a flat percentage tax would be a disproportionate burden for people
with low incomes. The dollar amount owed may be smaller, but the effect on their real spending
power is greater.

2. Give two examples of how taxes are used to influence social policy.

Taxation is often used to encourage certain behaviors of individuals and businesses. An

income tax credit may be granted to encourage people to buy an electric car. A tax on
unhealthy practices such as smoking tobacco or drinking alcohol is also enforced to discourage
individuals from these habits.

To discourage the use of something, they impose a higher tax. To encourage the use of
something, they impose tax credits/deduction. Nevada has hotel taxes so that they don’t need
to tax their residents. Deduction reduces income at whatever tax bracket you’re in. 100k to
charity, is 100k off your income, tax liability gone down by 37k. Credits reduce your tax liability
(more valuable).

3. Why was it necessary to integrate the estate tax and gift tax?

An estate tax is levied on the right to pass property at death. It is enforced so that the
government may receive taxes if you are receiving property upon the death of an owner. A gift
tax is an estate tax that is levied on property transfers while the owner is still alive. These two
tax codes complement each other, and make sure nobody avoids the taxation of property.
We want to tax the transfer of wealth. Sales and use tax are complementary as well.
4. After an audit by the IRS, the agent proposes to increase the tax liability by $500,000. What
alternatives does a taxpayer have?

The tax payer may agree to pay the liability, or he may argue and refuse to pay this
liability with a few options. The taxpayer can speak to an IRS agent to resolve the liability
amount, they may request an appeal with the IRS, or take the case to a tax court or a federal
district court.

1. Argue with agent

2. Appeals process within IRS (supervisor)
3. IRS sends bill (30 days to pay)
a. Go to tax court (do not have to pay tax before, no jury trial, only tax cases are
seen by judge)
b. Go to federal district court + sue for refund (must pay tax before, don’t see many
tax cases, jury doesn’t know IRS law)