Table of Contents introduction & vocabulary 2

INTRODUCTION & VOCABULARY

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  Basis = portion of sales recovered without tax liability
  
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  Adjusted basis = purchase price adjusted to reflect expenditures on or tax benefits of asset
  
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    Adjusted basis > sales price  loss
    
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    Adjusted basis < sales price  gain
    
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    **both of these are recorded on accrual NOT CF method
    

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  Taxation: The process by which the government transfers resources from the private to public sector
  
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  Main purposes:
  
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  Raise revenue—finance public goods; redistribute
  
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  Correct for market failures—finance public goods;
  
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    Externalities. Price that consumers pay does not take into account the cost or benefit to other people—efficiency requires taxing or subsidizing negative and positive externalities
    
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    “Pigovian Tax”—i.e. tax credits for solar panels, hybrid cars, low carbon consumption—social cost (or benefit) of activity not covered in private cost (or benefit)
    
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  What makes a “good” tax? 3 factors:
  
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  Equity
  
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    Vertical equity—more wealthy people should pay more (contra-Thatcher’s head tax)
    
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      Progressive—proportionate tax rate rises as income increases
      
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      Proportionate—proportionate tax rate constant
      
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      Regressive—proportionate tax rate declines as income increases
      
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    Horizontal equity—people with the same ability to pay should be taxed the same
    
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  Efficiency or neutrality
  
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    Tax system should interfere with the system as little as possible and interfere to correct for market failure
    
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    Deadweight loss: how people see their purchasing power declines because of a tax—“the efficiency loss of the tax”
    
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      Elasticity—responsiveness
      
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        Elastic goods (BMW example)—give up the good and don’t respond—bear burden of the tax, but we collect no revenue—only a loss without social benefit
        
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      How high the tax is—deadweight loss rises with the square of the tax rate; for example:
      
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        small car tax—people who give up cars will value their cars little over alternatives
        
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        large car tax—even people who value their car more than what they’re paying will give up car
        
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      Interaction between market failures and the tax
      
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        Pollution tax (general Pigovian taxes or subsidies) vs. taxing volunteer work—if the activity should be subsidized we’re losing double
        
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    inefficient to change behavior with taxes
    
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  Simplicity
  
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    Compliance complexity. The cost of following the Code—less as tax services become cheaper
    
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    Rule complexity. Unclear rules or administrative regulations. Not necessarily reflected in length—vague principles vs. clearly outlined tax liabilities
    
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    Transactional complexity. When taxpayers organize behavior to minimize taxes.
    
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    Often a tradeoff between these three
    

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  District Court or Court of Claims—taxpayer must pay deficiency and then they can file suit to get a refund
  
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  Tax Court—don’t have to pay deficiency—within 90 days you have to file with the tax courts
  
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    Tax court judges have greater expertise
    
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    Appellate process—tax court and DC: goes to Court of Appeals; Court of Claims: federal circuit
    

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  Fundamental Tax Reform—generally refers to consumption tax
  
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  Fair tax—retail sales tax
  
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  Endowment tax—with perfect information, we could tax earning ability—is this equitable?
  
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  **what is the best indicator of ability to pay?
  

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  Taxable income. Term of art—hybrid of economic income tax and consumption tax—hybrid allows for “gaming”
  
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  Economic income. Hague-Simons income—personal consumption plus changes in net worth
  

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  “Capitalize into price”—incidence of the tax or benefit
  
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  Capital value = “present value”
  
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  (Legal term) Recovery of Capital—synonymous with basis—recovery of after-tax asset
  
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  (Legal term) Capitalize an expense—effect of depreciation over time
  
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  (Legal term) Capital assets or gains—subset of capital expenditures—when you sell stock you are taxed on the capital gains and you get to recover your capital asset basis
  

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  Code § 1. Tax imposed
  
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  Code § 61. Gross income defined—“all income from whatever source derived”
  
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  Code § 62. Adjusted gross income defined.
  
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  Code § 63. Taxable income defined.
  
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  Code § 67. 2-percent floor on miscellaneous itemized deductions.