Federal Income Tax Course Essay

CHAPTER 1

FEDERAL INCOME TAXATION - AN OVERVIEW

____________________________________________________________

__________

DISCUSSION QUESTIONS

1. Briefly state Adam Smith's four requirements for a good tax system.

a. Equality - A tax should be imposed based on the taxpayer's ability to pay.

b. Certainty - The taxpayer should be able to determine the amount of tax and how to make the required payment.

c. Convenience - The tax should be levied as close as possible to the time the taxpayer receives the amount subject to tax.

d. Economy - The cost of taxpayer compliance and administering the tax system should be small in relation to the revenue generated.

4. Based solely on the definitions in the chapter, is the sales tax a proportional, regressive, or progressive tax? Explain and state how the tax might be viewed differently.

Strictly speaking, the sales tax is a proportional tax because it is applied at a constant rate to all levels of the tax base. Using the tax base, goods and services purchased, the marginal tax rate is always equal to the average tax rate, which is indicative of a proportional tax.

When another base is used to calculate marginal and average tax rates, the tax appears to be regressive. For example, if total economic income is used as the base, lower income taxpayers will spend a higher percentage of their income on items subject to the sales tax when compared to higher income taxpayers. Thus, the marginal tax rate will be less than the average tax rate, which is indicative of a regressive tax.

10. The gift tax is supposed to tax the transfer of wealth from one taxpayer to another. However, the payment of gift tax on a transfer of property is relatively rare. Why is gift tax not paid on most gifts?

Gift tax payments are rare due to the exclusions from the tax. The basic exclusion is $13,000 per donee per year. This would allow a married couple to make tax-free...