This course is the first course in a five-course US Federal Tax Specialization. It covers and focuses on the U.S. federal tax system as it relates to individuals, employees, and sole proprietors. Key concepts covered include gross income and items that are statutorily included or excluded in it, personal and business expenses that qualify as tax deductions, and the differing tax treatments for employees versus self-employed taxpayers. Unlike many other introductory courses in tax and as part of this course’s comprehensive wrap-up, learners will be provided with practical and tangible experience reporting both income and expenses on the main individual tax return used in the US, Form 1040. If you have enjoyed this course, consider enrolling in our online graduate Accounting program. The University of Illinois at Urbana-Champaign, consistently ranked as one of the nation's top three accounting programs, now offers a master’s in accounting at a very affordable tuition rate and is completely online. The iMSA is a full Master of Accountancy program and students graduate with an MS that is highly recognized. Try an open course or two, then apply for admission into the credit-bearing version as you may be eligible to take credit-bearing courses during the application process. If you are missing any prerequisites for the full degree, you can complete Coursera courses to demonstrate readiness and strengthen your application for the iMSA. For more information on this exciting iMSA online program, refer to this link: https://www.coursera.org/degrees/imsa
Taxes: An Introduction
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Do curso por University of Illinois at Urbana-Champaign
Federal Taxation I: Individuals, Employees, and Sole Proprietors
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University of Illinois at Urbana-Champaign
56 ratings
Curso 1 de 5 em Specialization U.S. Federal Taxation
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MODULE 1: AN INTRODUCTION TO TAXATION
In this module, you will be introduced to the different kinds of taxes faced by U.S. Taxpayers and the U.S. Federal income tax structure. The origin of tax law and its constitutionality is discussed along with a brief history of the different changes in rates that have occurred since the 16th amendment was passed. Finally, we will discover what the three different sources of new tax laws are.
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Petro Lisowsky, PhD, CPAAssociate Professor of Accountancy
College of Business: Department of Accountancy
Welcome to the IMSA course on federal taxation.
What better place to start a course on taxation than to first define what a tax is.
So according to the IRS,
the tax is defined as an enforced contribution
exacted pursuant to legislative authority in the exercise of
the taxing power and imposed and collected for the purpose of raising revenue to
be used for public or governmental purposes and not as a privilege granted or rendered.
Okay, so what does that mean?
How can we unpackage this definition?
Well, there are three components to this definition of a tax.
First, a payment is required; that is,
a tax payment is mandatory as required by law.
Second, the payment is imposed and collected by a government agency.
So in the US, the Internal Revenue Service or IRS
administers the federal income tax law and collects tax payments.
Third, the payment is not directly tied to any benefits received by the taxpayer.
For example, the income taxes one pays do not
directly cover any benefits the citizens enjoy.
The taxes go into a pool of funds that then provides for
communal benefits such as defense, welfare and infrastructure.
Why do taxes exist?
Well, prior to the 1900's income taxes financed wartime activities.
In 1861, the first federal individual income tax was enacted to pay for the civil war.
But it was repealed after the worst conclusion.
In 1894, a new federal individual income tax was enacted.
But this tax was found to be unconstitutional
after it was challenged and thus it was abolished.
In 1909, the first federal corporate income tax was enacted,
and here it was actually found to be constitutional because it was considered an
excise tax or a tax on the entity's ability to do business in the US.
In 1913, to allow a federal individual income tax to be constitutional,
the states and Congress ratified the 16th Amendment to the Constitution.
It essentially formally sanctioned
both the federal individual and corporate income tax regimes.
And so, 1913 marks the formal birth of the U.S. individual income tax.
In all, income taxes are used to fund various government expenditures.
So let's take a look at some of these expenditures as well as
the U.S. tax landscape from a very high level.
This slide shows the income and outlays of the U.S. federal
government as reported in the instructions of the Form 1040.
The Form 1040 is the main form the individual income taxpayers file with the IRS.
So let's focus first on the left side of this figure.
As you can see, a huge portion of the U.S.
government's income is from personal income taxes,
far outpacing the share of other sources of income.
The next largest source of income is related to taxes collected to cover Social Security,
Medicare and other employment and retirement benefits.
These taxes are known as payroll or employment taxes.
They're not income taxes.
They're collected on top of income taxes and related to the US's social safety net.
Interestingly, for the next source of income,
the government describes borrowing as income.
In fact, we can actually see that the U.S. government borrows
more than what it collects from corporate income taxes.
Many of the newspaper headlines on taxes we see focus on
corporate income taxes and describe how corporations do or do not pay their fair share.
But in fact, as a group at least,
the individual income taxes are really where the money is at.
Then finally, the smallest piece of income
collected by the government relates to excise taxes,
customs taxes, estate and gift taxes and other types of taxes.
Staying on the income side of the government's ledger,
this figure shows that the individual income tax has actually been
a stable contributor to the government's total income or the government fisc.
Interestingly, the share of the fisc covered by
corporate income taxes has been diminishing over
time while the share of payroll taxes has been dramatically increasing in importance.
Back to our income and outlays figure.
So now let's look at the outlays that
show in which areas the federal government spends its money.
We can see that by far the largest share of
expenditures relates to payments for Social Security,
Medicare and other government sponsored retirement plans.
The second largest outlay relates to payments made for
social programs including Medicaid,
food stamps, helping needy families,
housing assistance and funding research.
The third largest area of expenditure is for
national defense and veterans as well as for foreign affairs.
The remaining categories of expenditures include physical,
human and community development,
interest on the national debt and law enforcement.
Notice that if you add the percentages related to interest on the debt,
Social Security, national defense and social programs,
we're at about 90 percent of federal outlays.
Because of these important commitments and the tax revenues
don't nearly cover the U.S. government's expenditures,
the question becomes "Can the government cut any of this spending?
And if so, where and how?
If it can't, are tax hikes coming or should tax hikes come in the near future?
What are the implications of raising taxes?"
So I call this the wiggle room slide.
How much wiggle room does the government have to cut spending
as opposed to raising taxes or increasing borrowing?
When we look at what the government considers mandatory
spending as well as a net interest on the debt,
the discretionary piece of what the federal government spends on and what
one might consider an area that can be cut as discretionary,
has been significantly shrinking over time.
Clearly, there are becoming fewer and fewer potential opportunities
for the government to cut spending to match the income that's being collected.
Over the past decade,
the U.S. government's annual deficits have been high as one trillion dollars,
meaning that the U.S. government's spending has exceeded
its income by one trillion dollars per year.
So this puts significant pressure on where and how to raise
the funds to pay for these expenses and pay down the national debt.
As our government has already borrowed a record amount and
the wiggle room to cut spending is shrinking by the day,
it remains to be seen whether increased taxes,
in one form or another,
will be the release valve that will cover the government's expenses.
In fact, you may have heard the commentators say that
our tax code is full of giveaways and loopholes.
What are they referring to?
So these commentators are referring to various tax exclusions,
tax deductions, tax credits given to individuals and corporations.
We need the ability for these parties to reduce
their taxable income and their tax liability.
So what individuals call tax benefits
are also known to the government as tax expenditures.
That is, revenues that the government is foregoing
because it's allowing these various exclusions,
deductions and credits to be claimed by individuals and corporations.
We can see that, although individuals contributed
the largest share of tax revenues to the federal government,
individuals also benefit the most from tax deductions.
And these deductions far outweigh the tax expenditures that are available to
corporations and they far outweigh any other single spending category by the government,
such a spending related to each of Social Security,
Medicare, Medicaid or defense and non-defense discretionary spending.
So taxes are important because on the one hand they feed
the government but on the other hand generous provisions related to deductions,
credits and exclusions starve the government.
An example of a large tax expenditure that's
available to individuals is the deduction on home mortgage interest.
It's been argued that this deduction is very expensive and that it's
helping the "wrong" set of taxpayers; that is,
helping taxpayers who can already afford to pay for a home with a larger mortgage,
even absent a tax deduction for the interest on that mortgage.
So this chart shows that taxpayers with incomes above $100000 per
year benefit far more from this tax deduction than taxpayers with less income.
Even though the higher income taxpayers bear far less of the relative housing burden.
In all, this figure shows that the home mortgage interest deduction costs
the U.S. government sixty eight point two billion dollars per year,
meaning that if Congress decided to eliminate the home mortgage interest deduction,
it could add another 68.2 billion dollars to its income.
Of course, whether or not the deduction is "worth it" is a question
that citizens and politicians will debate and decide.
And this brings us to how does one evaluate a tax system.
So the famous economist Adam Smith identified various qualitative criteria,
or canons, that underpin debates on taxation.
The first canon is equality.
How is the tax burden distributed across taxpayers?
Who's bearing the burden of paying taxes in the country?
The second canon here is convenience.
How convenient is it for the system to maintain itself?
Can taxes be collected without undue hardship?
A common example here is convenience,
is that every time an employee is paid a wage by his or her employer,
some portion of this wage is withheld for taxes.
So this means that the employer holds back or withholds some of
the employee's income and remits
the cash taxes of the government on the employee's behalf.
So this reduces the employee's hardship because not
only is it convenient for the employer to remit
these taxes on behalf of the employee as the income
is earned and as the employee has the money to pay the tax,
but also the employee doesn't see the money in the first place.
So there's no temptation or ability to spend money
that in fact needs to be sent to the government in the form of taxes.
So this withholding structure prevents a situation where at the end of the year,
the taxpayer has a nasty surprise of
a very large unpaid tax liability and no money to pay it.
Therefore, withholdings improve the convenience of the tax system.
A third canon here is certainty.
Can taxpayers determine when,
where and how to pay their taxes?
Are there reliable instructions,
guidance or rulings that can provide clarity in terms of
a taxpayer's responsibilities as it relates to
filing their tax return and paying their tax on time,
and how much to pay?
Similarly, is the tax system stable enough that
individuals and businesses can plan for the long term such as that
their investments or business decisions today won't be
adversely affected because of some major tax law change in the future?
Finally, the last candidate of taxation deals with the economy.
Does the tax system minimize the compliance and
administration costs associated with the tax system?
How expensive is it to maintain the tax system to collect
the taxes and for taxpayers to comply with the tax system?
Is the tax system easy to understand or is it difficult and so difficult that there are
major costs incurred by taxpayers to properly follow the tax laws?
Finally, the American Institute for Certified Public Accountants or
AICPA also suggests various good features of a tax system.
This suggests that a tax system should be simple
and neutral in terms of its effects on business.
The neutrality condition is interesting in that the tax system shouldn't
have a large influence on incentivizing businesses to
move into one industry or out of another or into some product
or out of another product or into some investment and out of another investment.
That is, companies should make business decisions based on
pretax or non-tax criteria rather than
designing their business affairs in
an overly complex manner to simply minimize their tax payments.
The tax system should also be clear and readily understandable;
structured to minimize noncompliance and it should
allow the IRS to predict the amount and timing of revenue.
And it should encourage growth and efficiency.
So in other words, taxes should not be so burdensome
that they impede capital formation and economic growth.
Overall, the canon as described by Adam Smith,
as well the suggestions described by the AICPA,
are all qualitative considerations.
And different people have different opinions about whether, for example,
the U.S. tax system exhibits a quality,
convenience, certainty and economy.
The purpose of these canons and criteria are simply to provide
a usable qualitative framework to evaluate tax systems.
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