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Accounting 430: Taxes and Business

Decisions

Welcome
Spring, 2017

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Agenda- January 12, 2017

Discuss homework assignments
Day in the life of Taxpayer: Who is the most impacted by taxes?
What is the average cost for all taxes paid as percent of income?
Review of selected homework problems from Chapter 1

Review sources of tax authority

Chapter 2: Policy standards for a good tax
Sufficiency of taxes
Efficiency and convenience of taxes
Fairness of taxes

Class Activity- Political process:

Revenues and expenditures and the dynamic role of taxes

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Introductions
Class Activity-Personal background (9am class only):
Name:
City, State/Province, & Country:
Certifications, other degrees and programs:
Interesting fact about you:
Share a recent encounter with taxes:
What is your learning goal for this course?
Please complete the blank sheet.. Thank you.

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Homework Assignment- Listing of Taxes

Day in the life of a taxpayer.
Assignment: Please write up a listing of the different taxes you
see and hear during the next several days before class. Which
one of us is impacted by the most different taxes?
What were the different taxes that impacted you during the days between
our class on Tuesday (Day in the life with taxes)?
Federal?
State?
Local?
Foreign?
Who in our class was the most impacted by taxes?

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Homework Assignment- Listing of Taxes

Day in the life of a taxpayer.
How do taxes impact us every day (or week)?
Example:
What are the taxes on your payroll stubs?
How much sales tax did we pay at Starbucks?
Did you fill up your gas tank? What kind of tax did you pay?
Type of tax?
Transaction or activity based tax?
Earmarked tax?
Did anyone avoid coming in contact with taxes?

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Homework Assignments- Listing of Taxes

Federal

State

Local

Foreign

Individual, Corporate, &

Trust, etc. income taxes

Individual, Corporate, &

Trust, income taxes

Individual & Corporate

gross receipts taxes

Individual, Corporate
etc. income taxes, cross
border taxes,
withholding taxes

Employment taxes
FICA/HI (payroll) for
Employer/ Employee &
SET

Sales and Use taxes

Real Estate taxes

Employment related
taxes- Social taxes

Unemployment taxes
FUTA (payroll based)

Unemployment taxes
SUTA (payroll based)

Personal Property taxes

& intangible taxes

Value added taxes

(VAT)

Excise taxes e.g.

gasoline, airline, tires

Excise taxes e.g.

Cigarettes, alcohol, etc.

Entertainment, hotels,
rental cars, etc. taxes

Real property taxes

Transfer taxes
estate and gift taxes

Transfer taxes
Inheritance taxes

Transfer taxes; Court

Fiduciary Account fees

Transfer taxes

What are Other forms of taxes? State Lotteries, legalized gaming?

What about a national sales tax or VAT versus higher income tax?

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Homework Assignment- Listing of Taxes

Two Volunteers: What we find?
What is the average cost per person of all taxes paid as a
percent of income over the year?
What makes up this amount or what is included (e.g. federal and
state income taxes or other taxes)?
What other taxes are missing?
Why is this so hard?

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Homework Assignments- Listing of Taxes

Federal

State

Local

Foreign

Individual, Corporate, &

Trust, etc. income taxes

Individual, Corporate, &

Trust, income taxes

Individual & Corporate

gross receipts taxes

Individual, Corporate
etc. income taxes, cross
border taxes,
withholding taxes

Employment taxes
FICA/HI (payroll) & SET

Sales and Use taxes

Real Estate taxes

Employment related
taxes- Social taxes

Unemployment taxes
FUTA (payroll based)

Unemployment taxes
SUTA (payroll based)

Personal Property taxes

& intangible taxes

Value added taxes

(VAT)

Excise taxes e.g.

gasoline, airline, tires

Excise taxes e.g.

Cigarettes, alcohol, etc.

Entertainment, hotels,
rental cars, etc. taxes

Real property taxes

Transfer taxes
estate and gift taxes

Transfer taxes
Inheritance taxes

Transfer taxes; Court

Fiduciary Account fees

Transfer taxes

What are Other forms of taxes? State Lotteries, legalized gaming?

What about a national sales tax or VAT versus higher income tax?

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Homework Assignments- Listing of Taxes

What did we learn?
How pervasive are taxes- Federal, state, local and even foreign taxes?
Individual or personal decisions?
Businesses?
Local, national or global?

How would you describe the jurisdictional competition for dollars?

What is the impact of this competition?

Taxes impact us everyday across our personal and business

decisions and activities

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Homework Assignments
Selected Homework Problems:
Connects.. Non textbox problems You have until 11:59pm to
finalize your homework.
Question & Problems for Discussion (D):
1-5 & 1-12

Application Problems (A):

1-3, 1-7 & 1-9

Issues Recognition Problems (I):

1-7

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What are the Sources of Tax Law Guidance?

Here are the primary sources of tax law.. (differ secondary
sources)
Statutory authority
Internal Revenue Code
Committee Reports and Blue Book (Background)
Administrative interpretations
Treasury regulations
IRS Revenue Rulings. Revenue Procedures, Notices, Private Letter
Rulings etc.
Judicial authority & interpretations
Supreme Court
Appellate courts
Other courts
Tax, District, bankruptcy, and Claims Courts

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Chapter 2
Policy Standards for a Good Tax

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Good Tax Policy

What is meant by Tax Policy?

What is a good tax- Is there ever a good tax?

Why is good tax policy so important?

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Good Tax Policy

What are the Standards of a Good Tax?
Taxes should be sufficient!
Taxes should be efficient & convenient!
Taxes should be fair!

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Good Tax Policy

What is sufficient for tax purposes?
Gross Receipts- taxes, user fees, penalties, interest, etc.
Less: outlays for public goods, services, subsidies, etc.
Yields an operating surpluses or deficits

Do you balance your budget?

How many of us use credit cards and dont pay them off at the end
of the month?

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Good Tax Policy

What is sufficient for tax purposes?
Budgeted expenditures? Earmarked amounts? Mandatory expenses?
Contingencies-Economic downturns, military action, etc.?
Interest cost? Debt reduction?
Other sources of revenues- new taxes, user fees and alternative sources
Remember the tax formula: Tax = Tax base x Tax Rate

What are the consequences if the taxes are not sufficient?

1970 national debt was 380 Billion with interest of 14 Billion
2015 when national debt was 18.4 Trillion and interest of 402 Billion
Social security surplus for last 30 years impacted overall deficit due to baby boomers

Why is balanced approach to budget & taxes so important to

business people and consumers?

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Good Tax Policy

What are convenient and efficient taxes?

What are fair and equitable taxes?

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Good Tax Policy

Convenient & Efficient

Fair and Equitable

Ease of understanding by
taxpayers
Compute with certainity
Minimize noncompliance
Minimal administrative costs
for the government
Convenient payment options
and alternatives
Eliminates loop-holes
Economic efficiency

Tax the other person

Ability to pay principle

Neutral impact
Influence behavior

Horizontal (Equal base) &

vertical equity (Fair rate)

Rate structure

Progressive ?
Proportionate?
Regressive ?

Redistribution of wealth
through the use of taxes
Perception of equity is in
the eyes of the beholder

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Good Tax Policy

Forecasting Tax Impact

Behaviors Impact on Taxes

Static forecasts

Income effect

Base x Rate = Revenues

Movement the same

Net take home remains same

Substitution effect
Adjusts where you invest

Dynamic forecasts
Base x Rate= Revenues
Considers multiple variables
Example of variables?

Supply-side economics
Tax reduction increases supply of
money to stimulate economyEarly 80s

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Good Tax Policy

Should we consider preferences, behaviors, equity, socialeconomic matters in determining tax policy or is it to late?

Business and consumers generally want stability &

predictability

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Good Tax Policy

What is meant by marginal versus average income tax
rates?
(See the rate schedule in Appendix C p.614 for single taxpayer)
Marginal rate- What is the next dollar taxed at?
$37,000 of income is taxed at the marginal rate of 15% for a single
taxpayer- Rate of tax on the next dollar earned is 15%.
What if it was 38,000?

Average rate- What is the average of taxes paid over total

income earned?
$38,000 of income would have tax of $5271.25 or an average tax rate of
13.87% for a single taxpayer ($5271.25/ 38,000).

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Political Process of Federal Tax- Background

Various Branches of Government involved in Tax matters:
Legislative Branch- Senate and House of Representatives (Congress)
House Ways and Means Committee
Senate Finance Committee
Joint Conference Committee
Other groups supporting the legislative branch or Congress:
Joint Committee on Taxation (JCT)
Congressional Budget Office (CBO)

Executive Branch- President

Office of Management and Budget, Cabinet- Secretary & deputy secretary of
Treasury, and Internal Revenue Service
Council of Economic Advisors, and
Whitehouse staff

Judicial Branch- Supreme Court

Lower courts

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Political Process of Federal Tax- Background

Various Branches of Government involved in Tax matters:

Constituents- The People

(and the Lobbyists)

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Political Process Federal Tax -Background

The Joint Committee on Taxation is a nonpartisan committee of
the United States Congress, originally established under the
Revenue Act of 1926. The Joint Committee operates with an
experienced professional staff of Ph.D economists, attorneys, and
accountants, who assist Members of the majority and minority
parties in both houses of Congress on tax legislation.
https://www.jct.gov/about-us/overview.html

Political Process Federal Tax -Background

Who writes the tax laws?

What is the role of the congressional committees?

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Political Process Federal Taxes

Who writes the tax laws?
It is part of a democratic process with elected officials with a pull
from political parties, lobbyists, and constituents.
Congress does; the House of Representatives initiates the bills
involving revenues (except when Senate attaches tax legislation to
an existing bill):
House Ways and Means Committee
Considers any tax bills before they are presented to the full House of
Representatives

Senate Finance Committee

Receives the bill from the House and considers its desired changes and its own
version of a tax bill
It is common to have a Senate and House version

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Political Process Federal Taxes

What if the Senate and House Bills differ?
Joint Conference Committee is temporary, ad hoc panel composed of
House and Senate conferees which is formed for the purpose of
reconciling differences in legislation that has passed both chambers.
Conference committees are usually convened to resolve differences on
major and controversial legislation. Such as tax legislation.
https://www.senate.gov/reference/glossary_term/conference_committee.htm

Overview of Taxes

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Homework Assignments- Listing of Taxes

Federal

State

Local

Foreign

Individual, Corporate, &

Trust, etc. income taxes

Individual, Corporate, &

Trust, income taxes

Individual & Corporate

gross receipts taxes

Individual, Corporate
etc. income taxes, cross
border taxes,
withholding taxes

Employment taxes
FICA/HI (payroll) & SET

Sales and Use taxes

Real Estate taxes

Employment related
taxes- Social taxes

Unemployment taxes
FUTA (payroll based)

Unemployment taxes
SUTA (payroll based)

Personal Property taxes

& intangible taxes

Value added taxes

(VAT)

Excise taxes e.g.

gasoline, airline, tires

Excise taxes e.g.

Cigarettes, alcohol, etc.

Entertainment, hotels,
rental cars, etc. taxes

Real property taxes

Transfer taxes
estate and gift taxes

Transfer taxes
Inheritance taxes

Transfer taxes; Court

Fiduciary Account fees

Transfer taxes

What are Other forms of taxes? State Lotteries, legalized gaming?

What about a national sales tax or VAT versus higher income tax?

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Class Activity
What is the political process for Federal taxes?
Class Activity: 10-15 minute discussion & present back to class
Lets discuss the Social/Economic/Political process and impact of
taxes on budgets and spending as well as overall economy
Divide into 3 Groups:
Ways and Means Committee ( House of Representatives)
Senate Finance Committee (Senate)
President, Staff, Office of Budget & Management, and Secretary & Deputy
Secretaries of the Treasury (Executive Branch)

Group activity: How do we solve the challenges of tax revenues, spending

and deficits without just kicking the can down the road? What are
principles of a good tax policy? What does your group think is possible?

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Class Activity
Group Questions:
What is your teams solution?
Eliminate expenditures? Increase taxes? Borrow more money? Is there
one solution? Was there consensus on your team?

What are Social-Economic-Political Consequences?

If increasing taxes; How would you evaluate your tax proposal? Was it
sufficient? Fair? Efficient? What behavior changes do you want or might
occur?
If cutting expenses; what discretionary programs?

Did we just kick the can down the road? It is tough task
given complexity and its dynamic

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Homework for next class

Homework:
Read Chapter 3 (finish reading chapters 1 & 2)
Please use online connects numbered 1, 2, 3,.7
Problems for Discussions:
2-9, 2-13, & 2-15 (textbox problems)

Application Problems:
2-3, 2-7 & 2-8

Issue Recognition Problems:

2-5 (textbox problems)

Quiz #1 on Tuesday on Chapters 1 & 2

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Have a great day! See you Tuesday.