Transcript Criteria for a ‘Good’ Tax

Tax Policy
 A broad definition: government’s attitude,
objectives, and actions with respect to its
tax system
 The details of the tax system should be
consistent with overall tax policy
 Tax policy should reflect the normative
standards government deems important
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Criteria for a ‘Good’ Tax
 Convenient
 Sufficient
 Fair (equitable)
 Efficient
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Sufficient Revenue Collections
 Recall: T = r B
 How to increase tax revenues (T):
Enact a new tax on a base not currently taxed
Increase the tax rate (r)
Increase (expand) the tax base (B)
 The politics of tax increases
 Why is it not simple to determine the
impact of such changes?
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Behavioral Response to Tax
Changes
 Income effect - taxpayers respond to an
increase in tax burden by earning more
before-tax income, so is to maintain their
pre-change after-tax earnings
 Substitution effect - taxpayers respond to an
increase in tax burden by earning less labor/leisure trade-off
 Both types of responses complicate
forecasting
Static
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versus dynamic forecasting
Tax Fairness/Equity
 T = function(ability to pay)
 Horizontal equity - taxpayers with the same
ability to pay should pay the same amount
of tax
 Vertical equity - taxpayers with greater
ability to pay should pay a greater amount
of tax
 Redistribution of wealth
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Tax Rate Structures and
Vertical Equity
 Progressive rates
Tax rates increase as base increases
Used to promote vertical equity, based on the
theory of declining marginal utility of income
 Regressive rates
Tax rates decrease as base increases
Regarded as unfair to lower income taxpayers
 Proportional (flat) rates
Often regarded as implicitly regressive
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Tax Rate Comparisons
 Average tax rate - the explicit tax paid
divided by the tax base
 Marginal tax rate - the rate that applies to
any incremental increase in tax base
 Will the average tax rate be >, =, or < the
marginal tax rate when rates are
progressive, regressive, or proportional?
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Efficiency
 Tax neutrality
 Taxes as an instrument of fiscal policy
macroeconomic effects
behavior modification
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Evaluating the US Income Tax
 Is the US income tax system:
Convenient?
Sufficient?
Fair?
Efficient?
 Which of these goals might motivate recent
proposals to change the system?
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The Source of Federal Tax Law
 Legislative process:
Any new tax bill is first introduced in the
House of Representatives, and referred to the
Ways and Means Committee
A bill approved by Ways and Means is sent
back to the full House for approval
A bill approved by the House is sent to the
Senate, where the Finance Committee has
jurisdiction
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Source of Tax Law continued
The
Senate Finance Committee may amend the
House bill, and send to the full Senate for
approval
If the House and Senate approved versions of
the bill differ, a Joint Conference Committee
must resolve differences
The final bill must be approved by both House
and Senate, before being sent to the President
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Structure of the Federal Tax
Law
 Primary authority – three types
Statutory authority - Internal Revenue Code of
1986
Administrative authority
 Treasury
Regulations - have authoritative weight
similar to the Code
 IRS Rulings
– Revenue Rulings - guidance published by the IRS for
ambiguous or contentious situations. Not binding
authority unless the facts are the same.
– Revenue Procedures - explain procedures and other
taxpayer duties
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Structure of the Tax Law
continued
 IRS
Rulings continued
– Private Letter Rulings - the IRS makes an advanced ruling
on a specific transaction at the request of a taxpayer.
Represents authority only for that transaction and that
taxpayer!
Judicial authority
 Court
Decisions - establish precedent on
interpretation of the tax law
– Trial Courts: Tax Court, District Courts, Federal Claims
Court
– Appeals Courts: Circuit Courts of Appeal, US Supreme
Court
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Structure of the Tax Law
continued
 Congressional intent - Committee reports
of:
House Ways
and Means Committee
Senate Finance Committee
Joint Conference Committee
 Secondary authority
Textbooks, editorial materials in commercial
tax services, professional journals
Useful for understanding primary sources, but
not authoritative. Should not be cited!
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The Tax Research Process
 Step 1: Understand the client’s transaction
and ascertain the facts.
 Step 2: Identify the tax issues, problems, or
opportunities suggested by the facts and
formulate specific research questions.
 Step 3: Locate relevant tax law authority.
 Step 4: Analyze relevant authority and
answer the research questions.
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The Tax Research Process
continued
 Step 5: Repeat steps 1 through 4 as many
times as necessary.
 Step 6: Document your research and
communicate your conclusions.
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