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
The Tax Structure
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Do curso por University of Illinois at Urbana-Champaign
Federal Taxation I: Individuals, Employees, and Sole Proprietors
114 classificações
University of Illinois at Urbana-Champaign
114 classificações
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 the three different sources of new tax laws and rules.
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Matthew HutchensLecturer of Accountancy
Department of Accountancy
Petro Lisowsky, PhD, CPAAssociate Professor of Accountancy
College of Business: Department of Accountancy
Welcome back. In this video
we'll discuss the US tax structure.
First of all, how do taxpayers calculate the tax liability?
To do so they need to know two things:
the applicable tax rate,
usually expressed as a percentage of income, as well as the tax base,
which is the thing that gets taxed and is usually expressed in monetary terms.
Thus, the tax liability is simply the product of the tax base and the tax rate.
This seems simple, but of course there are
many, many complex rules that underlie this calculation.
For example, which tax rate is the appropriate tax rate?
How do I calculate the tax base exactly, and are there any adjustments
that I can make to the tax liability after it's been calculated to reduce it?
What is the tax base for the federal income tax?
Well the tax base for US federal income tax purposes is US federal taxable income.
What are the tax rates for the federal income tax?
Well, over time they fluctuated dramatically.
The top federal income tax rates have seesawed as high as 94% during World War II
to help fund the war, as well as stayed at 91% during 1954 to 1963.
Although this applied only if taxable income was over $400,000,
a huge sum in those days.
The Kennedy tax cut slashed rates by about 70% by 1965, where they stayed
by and large until 1982, when the top rate was cut to 50% under Reagan.
Rates were cut again in 1987 and 1988 to be as low as 28%.
Then, under George Bush Senior,
rates crept back up to 31%.
And this was his famous broken pledge of
"read my lips, no new taxes."
And under Bill Clinton, rates went up to 39.6%.
George W. Bush brought rates down to 35%, while
Barack Obama brought rates back up to 39.6%.
Most recently, under President Donald Trump,
the top individual tax rate has been cut to 37%, starting in tax year 2018.
Therefore for the past 25 years,
the top individual tax rate has been rather
steady, between about 35% and 40%.
An important concept to be aware of is known as tax incidence.
This is the degree to which the tax burden is shared by taxpayers.
In other words, who bears the burden of a particular tax when it's imposed?
We usually think of the party that actually signs
the check to the IRS as the party that bears the burden.
Signing the check and sending in the tax payment is known as a remittance.
However, the party that sends in the tax payment to the IRS may not
actually be the party that bears the economic burden or incidence of that tax.
An example here is the Gas Guzzler Tax.
Yes, this is a real tax. And here's the tax form, form 6197.
The Gas Guzzler Tax is imposed on the sale or lease by the manufacturer or
importer of an automobile of the type that
does not meet certain standards for fuel economy.
In other words, if a car manufacturer sells vehicles
whose miles-per-gallon fuel efficiency is relatively low,
then the US government imposes the Gas Guzzler Tax on the sale of each
of those vehicles, up to an additional $7,700 per vehicle.
So for example, if the miles per gallon are between 14.5 and 15.5,
a $4,500 Gas Guzzler Tax is imposed on the vehicle.
Technically, the manufacturer or importer is the one
that writes the check and remits the tax payment to the government.
However, knowing that the car company itself is the one manufacturing the gas-guzzling
vehicle and knowing that the company itself will remit the Gas Guzzler Tax payment,
what will the car company likely do to the price of its gas-guzzling vehicles?
Well, they'll simply raise the price on
those vehicles, perhaps by the Gas Guzzler Tax amount.
So what happens now is that the manufacturer is just
passing the cost of the tax to the customer.
Thus, it's the customer,
not the manufacturer, who's really bearing the burden or incidence of the Gas Guzzler Tax.
Why does the government do this?
The government uses the tax code to encourage or discourage certain behavior,
whether it relates to environmental policy,
social policy, or economic policy.
Clearly the Gas Guzzler Tax is designed to discourage
customers from buying fuel-inefficient vehicles to reduce pollution.
Other examples related to environmental policy
include tax credits for green energy or green technology.
The tax code also encourages, or at least reflects, social policy. For
example, through exemptions and tax credits for families that have dependent children.
Here the amount of the exemptions and tax credits will
be higher the more children are in the family.
Related to economic policy,
the IRS provides for generous depreciation provisions,
including what is known as Section 179, bonus,
and accelerated depreciation to encourage companies to purchase capital assets by
expensing the entire asset purchase price, or a large part of it, sooner rather than later.
By generating a large expense through capital purchases,
the deductions lower current year taxable income and reduce the tax liability, while
presumably increasing productivity because
newer machines are more productive than older machines.
Another important consideration relates to revenue neutrality.
This idea says that any new tax law that lowers tax rates or tax revenues to
the government must include appropriate offsets to make up for the lost revenue.
Therefore, if the government is going to cut individual income taxes,
then the government either needs to raise corporate taxes
or other types of taxes elsewhere, or cut spending elsewhere.
The idea is that the income and outlays should be
balanced, or neutral, to prevent large deficits.
Of course, the US government has not followed the concept of
revenue neutrality, since its spending far outweighs the income that it receives.
So what tax levers can the government pull?
Can it somehow structure its tax rates to minimize
the pain on its citizens as they pay their taxes?
Here policymakers broadly consider three types of income tax rate structures.
The first is a proportional tax rate structure
that imposes a constant tax rate throughout the tax base.
That is no matter the income a taxpayer produces,
the tax rate on that income is the same.
Second is a progressive tax rate structure.
Here the tax rate increases as the tax base increases.
Finally, a regressive tax rate structure imposes a decreasing tax rate as
the tax base increases, or an increasing tax rate as the tax base decreases.
An example of a regressive tax is the Social Security Tax.
Technically, the Social Security Tax is only imposed on wages up to a certain level.
But if your wages exceed the threshold,
the Social Security Tax actually does not apply anymore.
In effect, as the tax base increases,
the tax rate on the tax base decreases.
Here's a very simplified example of how these three structures affect
the calculation of a tax liability at different income levels.
Here we have three income levels: $10, $20, and $30.
Under a proportional structure,
a 30% tax rate is applied regardless of the income level.
Therefore, at $10 of income,
the tax would produce $3.
At $20 of income, the tax would produce $6, and at $30 of income, the tax would be $9.
Income at every level is subject to the flat 30 percent tax rate.
Contrast this with a progressive tax rate structure.
Very broadly, here at $10 of income the tax rate could be 30%,
so the liability is $3.
However, at $20 of income,
the tax rate could rise to 35%.
And at $30 of income,
the tax rate rises again to 40%.
Under the progressive structure,
the greater the income is generated,
the greater of a burden the high-income individual will
bear relative to the low-income individual.
Many countries, including the US, use a progressive income tax rate structure to minimize
the burden on low-income individuals and shift the burden to higher-income individuals
that have a greater capacity to pay.
Let's put some numbers on the progressive income tax system in the US using
2013 aggregate statistics published by the IRS.
Here we'll see how the income tax burden is spread
across the highest-income earners and the lowest-income earners.
It'd be interesting to know what you think these values are.
In particular in 2013, the top
1% of income earners earned how much of the total income that year?
Also how much of the total individual income taxes did they pay?
What about the top 10%?
And what about the bottom 50%?
How much of the share of total income do these groups
earn and what share of the total income taxes did they pay?
So here we see that the top 1% of income earners
earned 19% of all the income reported by individuals in
2013, but they paid almost 38% of all the income taxes collected from individuals by the IRS.
The top 10% of income earners earned
almost half of the income earned by individuals in the US in
2013, but they paid almost 70% of all individual income taxes.
In contrast, the bottom 50% of income earners earned
less than 12% of all the individual income,
and they paid less than 3% of
total individual income taxes collected by the US government.
Clearly you can see the impact of the US progressive tax rate structure as
the top earners pay far more in taxes than the share of income they report.
Finally, let's look at three types of tax rates.
The first is the marginal tax rate,
which is the tax rate that applies to
the next additional increment of a taxpayer's taxable income.
That is if I earn another dollar of income,
what tax rate applies to that dollar?
Perhaps it's 30% or 40%.
Notice that under a progressive tax rate structure,
the more dollars I earn, the higher
the marginal tax rate will apply as I moved through to higher tax rates.
Next is the average tax rate.
This is the average rate of tax paid on each dollar of taxable income.
Here, it's simply dividing the total tax liability by the taxable income.
Finally, the effective tax rate is the taxpayer's average tax rate on
each dollar of total income, whether that income is taxable or non-taxable.
We'll see that some types of income are non-taxable.
So this metric might provide
a somewhat different perspective as to a person's tax burden.
Note that during the course,
we'll be using the tax rate tables provided with the materials.
The tax rate tables are classified by filing
status, which we'll talk about later in the course.
In brief, the tax tables follow whether a person is filing is
a single taxpayer, or filing a joint return with a spouse, for example.
With these various filing statuses,
you'll see different income bands or income intervals.
Each income interval is subject to a different tax rate.
These are referred to as tax brackets.
As you will see, under
the US progressive income tax rate structure, as taxable income rises,
the tax rate that applies to that income interval also rises.
That is, the income intervals are layered on top of each
other so that the more income a taxpayer generates,
the higher is the marginal tax rate on that additional dollar of income.
So put differently, if you have a friend that complains that
they're in the 35% tax bracket,
it doesn't mean that all of their income is taxed at 35%.
It only means that they've earned enough income so that
their final highest layer of income is taxed at a marginal rate of 35%.
So if they were to earn one more dollar of
income, that dollar would be taxed at 35%.
In all, these important concepts of tax rates structures and
tax rates underpinned the current US individual income tax system.
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