ACCOUNTING C237 >Taxation Study guide spring 2023

FEDERAL TAXATION 18% (1-12) TOPIC 1: NATURE, PURPOSE, & SCOPE OF CURRENT US TAX SYSTEM CHAPTER 1 – INTRODUCTION TO TAX TAX: is a payment required by a government that is unrelated to any specific benefit or service received from the government. The general purpose of a tax is to fund the operations of the government (to raise revenue) TAX BASE: defines what is actually taxed and is usually expressed in monetary terms, whereas the tax rate determines the level of taxes imposed on the tax base and is usually expressed as a percentage. FLAT TAX: single tax applied to an entire base. GRADUATED TAX: taxes in which the tax base is divided into a series of monetary amounts, or brackets, where each successive bracket is taxed at a different (gradually higher or gradually lower) percentage rate. BRACKETS: base is divided into a series of monetary amounts and each successive bracket is taxed at a different (gradually higher or gradually lower) percentage rate. MARGINAL TAX RATE: applies to the next additional increment of a taxpayer’s taxable income (or deductions). Change in tax/change in taxable income. *Useful in tax planning AVERAGE TAX RATE: represents a taxpayer’s average level of taxation on each dollar of taxable income. EFFECTIVE TAX RATE: represents the taxpayer’s average rate of taxation on each dollar of total income (sometimes referred to as economic income), including taxable and nontaxable income. Tax liability divided by ALL income (taxable and nontaxable) 3 Basic Tax Rate Structures: Proportional, Progressive, Regressive PROPORTIONAL TAX RATE STRUCTURE: AKA flat tax, imposes a constant tax rate throughout the tax base. Tax Base x Tax Rate Example: Corp Income Tax PROGRESSIVE TAX RATE STRUCTURE: imposes an increasing marginal tax rate as the tax base increases. As the tax base increases, both the marginal tax rate and the taxes paid increase. Common examples of progressive tax rate structures include federal and most state income taxes. REGRESSIVE TAX RATE STRUCTURE: imposes a decreasing marginal tax rate as the tax base increases. As the tax base increases, the taxes paid increase, but the marginal tax rate decreases. Regressive tax rate structures are not common. In the United States, the Social Security tax and federal and state unemployment taxes employ a regressive tax rate structure. Employment taxes consist of the Old Age, Survivors, and Disability Insurance (OASDI) tax, commonly called the Social Security tax, and the Medical Health Insurance (MHI) tax, known as the Medicare tax. The Social Security tax pays the monthly retirement, survivor, and disability benefits for qualifying individuals, whereas the Medicare tax pays for medical insurance for individuals who are elderly or disabled. Employers are also required to pay federal and state unemployment taxes, which fund temporary unemployment benefits for individuals terminated from their jobs without cause. EXCISE TAXES (PROPORTIONAL): taxes levied on the retail sale of particular products. Differ from other taxes in that the tax base for an excise tax typically depends on the quantity purchased rather than a monetary amount. TRANSFER TAXES—