Introduction to Federal Taxation and Understanding the Federal Tax Law

Chapter One: Introduction to Federal Taxation and Understanding the Federal Tax Law

I Fundamental Aspects of Federal Taxation

A. Sources of Revenue

1. Types of taxes: There are four types of taxes income (corporation, individuals, and fiduciaries), employment, estate and gift and excise and taxes. Individuals make up 50.19 percent of total tax collection while corporate income tax is 10.86 percent. America has one of the highest participation and compliance with federal taxes in the world

2. Individual income taxes: The government taxes income, transfers, and different transaction types. The main source of revenue is the tax on the individual. Since 1943 the US is on a pay as you go system.

3. Corporate income taxes: The top corporate income tax rate dropped from 46 to 34 percent in 1986 because of the tax reformed act. But in 1993 the revenue reconciliation act raised the percent to 35 percent. The rate has been as low as 1 percent in 1913 and as high as 52 percent in 1952-1962. The corporations re taxed based on their net income and disregard dividends paid to shareholders.

4. Estate and gift taxes: accounts for .75 percent of the total revenue collected through estate and gift tax. The estate tax was created in 1916 and the gift tax was created in 1924, repealed in 1926 and then in 1932 the gift tax was restored.

5. Excise and customs taxes: 2.4 percent of total revenue is collected through excise and customs tax. Income and wealth are not taxed instead transaction are. The bill is collected by the government in the early stages of production. Customs tax is for the goods entering the country. This way US industry is protected from forging industries.

6. State and local taxes : States make most of their money through income and sales tax. For the local taxes, money s made through property taxes. The more populated the state the more they make in state tax.

7. Value added tax (VAT): More popular overseas than in the US. Vat was thought up by Dr. Wilhelm von Siems in 1918 and for the next 30 years, Vat was discussed. France was the first large country to implant the idea in 1919 and was in effect until 1948 when production was taxed at each stage of manufacturing. Vat is on products and not entities. The drawback is that vat is regressive

8. Flat tax: The same tax would apply to all individuals and no deductions. In the past, there were been proposals to implant flat tax but none have been successful.

9. Fair tax: It is a consumption tax. The internal revenue code would be replaced by the consumption tax.

B. Tax Collection and Penalties

1. Returns: Tax returns have increased a little since 1980 only increasing by 100 million returns.

2. Tax collection: Since the

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