Taxation

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Chapter 1

Introduction to Taxation

Taxation (34221) Prepared by: Radhi Hamadeen © Dept. of Accounting , PSUT 2022
Learning Objectives
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What is the definition of tax?

Explain why do public authorities impose
taxes?
What is the tax structure (Tax Terminology)?
What are the key types of taxes?
How could income tax on business entities be
described?

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Learning Outcomes
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By the end of this Chapter, students should be able to:

 Define Tax,
 Distinguish different types of Taxes,
 Understand the concept of Income Tax,
 Distinguish different types of business entities
and how they should be treated for taxation

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Definition of Tax
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 Tax originally from the Latin taxo: “I estimate”

 Taxing is to impose a financial charge or other levy
upon a taxpayer (an individual or legal entity) by a
state or the functional equivalent of a state such
that failure to pay is punishable by law.

 A compulsory contribution to state revenue, levied

by the government on workers' income and
business profits or added to the cost of production. 4
Tax Definition … Cont.
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A tax "is not a voluntary payment or
donation; it is an enforced contribution

Tax may holds different names such as: toll,

tribute, gable, impost, duty, custom, excise,
subsidy, aid, supply, or other name.
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 Why to Impose Taxes?
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Money provided by taxation has been used by states to carry
out many functions, these include:
 the enforcement of law and public order,
 protection of property,
 economic infrastructure (roads, legal tender, enforcement of contracts, etc.),
 public works, social engineering,
 the operation of government itself,
 fund welfare and public services.
 pay off the state's debt and the interest this debt accumulates,
 fund education systems, health care systems, pensions, unemployment
benefits, and public transportation, and
 Energy, water and waste management systems are also common public
utilities. 6
The Structure of Taxes
(Tax Terminology)
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Taxes have two components: Tax Rate; Tax Base
• Tax Rates – Can be structured to yield:
1.Proportional tax: the rate of tax remains constant
over the tax base (sales tax);
2. Progressive tax: tax rates increase as the tax base
grows larger (Federal income, gift & estate tax);

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The Structure of Taxes (Tax
Terminology) …Cont
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3. Regressive tax: tax rates decrease as the tax

base grows larger (Federal employment taxes)

4. Lump-sum tax: is a tax that is a fixed amount,

no matter the change in circumstance of the
taxed entity.
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The Structure of Taxes
(Tax Terminology) … Cont’d
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• Tax Base: most taxes are levied on one of the following
tax bases:
1. Transactions (including sales and transfers of wealth);
2. Property or wealth (including real estate taxes and
ownership of property);
3. Privileges and rights (including the ability to use the
corporate form or to be in certain professions, excise taxes,
and custom duties);
4. Income (can be on gross or net income) 9
Types of Taxes
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• Income Tax
• Taxes on the Production and Sale of Goods,
this includes for example:
- excise tax – levied on specified commodities
e.g. oil, tobacco, phone services;
- sales and use tax – major source of income
for a state; items subject to tax are varied 10
Types of Taxes … Cont’d.
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- Value Added Tax (VAT) - a sales tax levied on
the value added at each stage of production
• Employment Taxes - these taxes include
- FICA taxes (Federal Insurance Contributions Act) –
social security and Medicare;
- FUTA (Federal Unemployment Tax Act) – a
regressive tax being paid by employer (e.g. 6.2% of
the first $7000 of wages – US) 11
Types of Taxes … Cont’d.
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• Death Taxes
• Gift Taxes
• Property Taxes
• Taxes on Privileges and Rights (custom duties;
franchise and occupational; severance –
extraction of natural resources)

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Income Taxation of Business Entities
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__ • Proprietorships:
- Simple form of business is not a separate entity
from the individual owner;
- Profits are reported on the taxpayer’s personal return.
• Corporations:
- separate legal entities. Most corporations are
separate taxable entities, called C corporations or
regular corporations.
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Income Taxation of Business Entities …
Cont’d
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• Partnerships:
- While required to file a return, a partnership is not
a separate taxable entity and is not subject to
taxation.
- The financial results of the partnership
flow-through to the partners and are reported on
their tax returns.

• Limited Liability Companies & Partnerships

• These entities follow the same tax rules as partnership 14

End of Chapter 1