a) State Income – regressive
b) Federal State Tax – Progressive (larger the state; larger the tax) c) Corporate & franchise tax – Progressive
d) Property tax – Proportional (value of property is taxed at flat rate) e) State Sales Tax – Proportional
a) Property Tax – State Local
b) Excise Taxes – All three (State, federal, and local) c) Sales – State and Local
d) Income Tax – Federal, State, Local
e) Employment – Federal, State, and Sometimes Local
* Primary objective of federal income tax is to raise revenues for government operations. * secondary objectives of federal income tax include:
* to stimulate and encourage certain activities by providing tax credits or allowing a deduction to taxable income. These are activities such as: * Encourage research activities that will in turn strengthen the competitiveness of U.S companies (credit provided) * Encourage Venture Capital for small businesses (reduced tax rate) * Stimulate investment (tax deduction for small business equipment) * to encourage or discourage certain socially desirable or undesirable activities, such as: * charitable contributions (deductible)
* claiming of deduction for any activity contrary to public policy is prohibited. Taxpaying entities generally are required to pay income taxes on their taxable income. Flow-through entities, on the other hand, generally do not directly pay income taxes but merely pass the income on to a tax paying entity.Flow-through entity is a legal entity where income “flows through” to investors or owners; that is, the income of the entity is treated as the income of the investors or owners (Taxpaying entities) and is not subject to a double taxation. 20.
“Double taxation” on C Corporations refers to the corporation paying income tax on its taxable income and then shareholders paying income tax on any dividends paid by the corporation or on the sale of their stock. Ex:
A corporation paid dividend to shareholders of $400,000 which causes the shareholder a tax expense of $60,000 on this dividend. Prior to the distribution of dividends, the corporation paid $204,000. The total amount of tax paid for the taxable income of the corporation was $264,000 or 44%.
Partnerships are not subject to double taxation because the partnership entity is not subject to taxation therefore the credits flow through to the partners, who pay taxes on their share of the profit.
Three congressional committee reports that are issued in connection with a new tax bill:
1. House Ways and Means Committee
2. Senate Finance Committee
3. Joint Conference Committee