Principles of Taxation for

Principles of Taxation for Business and Investment Planning 2023 Edition, 26e By Sally Jones, Shelley Rhoades-Catanach, Sandra Callaghan, Thomas Kubick

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Questions and Problems for Discussion

• Tax payments differ from government fines and penalties because they aren’t intended to deter

or punish unacceptable behavior. Tax payments differ from fees or user charges because they don’t entitle the payer to a specific government good or service, such as a postage stamp or a driver’s license. Tax payments also differ from fees or user charges because they are compulsory.

• This payment has characteristics of a tax, a penalty, and a user fee. The compulsory payment is

not specifically punitive but does apply selectively to those companies most likely responsible for the polluted condition of Green River. However, these same companies may be the entities that benefit most from the environmental clean-up.

• This payment more closely resembles a fee for a government service than a transaction-based

tax because the transaction occurs between a private party and the jurisdiction itself, rather than between private parties engaging in a market transaction. The payment also entitles the payer to a specific benefit (the right to marry under law).

• To the extent that the decline in exterior maintenance reduces the value of Mr. Powell’s

apartment complex, he bears the incidence of the increased property tax. To the extent that the decline reduces the value of adjoining properties or makes the neighborhood less attractive, the owners of the adjoining properties and the neighborhood residents share the incidence of the tax increase.

• People who don’t directly use public schools (such as Mr. and Mrs. Ahern or people who don’t

have children) indirectly benefit from a public education system for the general population.Arguably, public education contributes to a skilled workforce and improves the cultural and social environment in which Mr. and Mrs. Ahern live. Based on this argument, Mr. and Mrs. Ahern should not be exempt from the local property tax.

• The consumers who pay the same price for a smaller bar of soap of lesser quality bear the

incidence of the new gross receipts tax.

• Real property can’t be hidden or moved, and its ownership (legal title) is a matter of public

record. In contrast, personal property is mobile and may be easily concealed. Moreover, jurisdictions may not have an effective means to discover or trace ownership of personal property.

• Arguably, private golf courses beautify the locality and are environmentally more desirable than

other commercial activities. They also may require more acreage than other businesses and, therefore, would be at a competitive disadvantage without a preferential real property tax rate.

• Many jurisdictions that levy property taxes provide an exemption for public institutions, such as

state universities or private colleges. If University K is entitled to such an exemption, every commercial building or residence acquired by the University reduces the local jurisdiction’s property tax base.

• Excise taxes are imposed on a much narrower range of consumer goods and services than

sales taxes. Consequently, people can more readily avoid purchasing the specific good or service subject to excise tax.

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• The tax increase may have reduced the aggregate demand for consumer goods and,

consequently, municipal residents are buying fewer goods. A second possibility is that municipal residents are traveling to other jurisdictions with lower tax rates or making more purchases through mail order catalogs or on-line.

• From a political perspective, liquor and cigarettes sales make an excellent tax base because

consumption of the two products is purely discretionary, and any decline in consumption because of the tax is socially desirable. From an economic perspective, these sales are a good tax base because the demand for liquor and cigarettes is relatively price inelastic. In other words, people who drink and smoke on a regular basis buy these products regardless of a heavy excise tax.

• The federal income tax has the broader base. The federal payroll tax is imposed on wages,

salaries, and other forms of compensation earned by employees. The federal income tax is imposed on all types of compensation as well as net business profit, investment income, and any other income item from whatever source derived.

• A property tax is a periodic (usually annual) tax levied on the ownership of property and based

on the value of the property on a particular assessment date. A transfer tax is a transaction- based tax levied on the transfer of property from one party to another. A transfer tax is based on the value of the property at date of transfer.

• If the federal government could “piggy back” a national sales tax on existing state sales tax

collection systems, the federal government could avoid creating a new federal agency for collecting the tax. In contrast, the federal government would have to create a new collection system for a national VAT. However, a national VAT would be less likely to cause jurisdictional conflict between the federal government and the states because states don’t depend on VATs as a source of revenue.

• The Internal Revenue Code is federal statutory law, enacted by Congress and signed by the

President. Technically, Treasury regulations only interpret and explain the statute and aren’t laws in their own right. Thus, regulations are less authoritative than the Code itself. However, because Congress authorized the Treasury to write regulations, they are the government’s official interpretation of statutory law. Practically, the regulations carry considerable authoritative weight.

Application Problems

• The statement of facts identifies three taxpayers: Mr. Josh Kenney, JK Services, and JK

Realty.

• The government of the locality in which Mr. Kenney resides, the state government of

Vermont, and the U.S. government have jurisdiction to tax Mr. Kenney. The local governments of the four counties in which JK Services conducts business, the state government of Vermont, and the U.S. government have jurisdiction to tax JK Services. The city of Boston, the state government of Massachusetts, and the U.S. government have jurisdiction to tax JK Realty.

• The United States has jurisdiction to tax Mrs. May because she is a permanent resident.

• The United States has jurisdiction to tax Mrs. May only on the U.S. source rental income

generated by the Manhattan real estate.

• The United States does not have jurisdiction to tax Mrs. May.

• The United States has jurisdiction to tax Mrs. May because she is a U.S. citizen. 3 / 4

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• The United States has jurisdiction to tax Mr. Tompkin because he is a U.S citizen.

• The United States has jurisdiction to tax Mr. Tompkin only on the U.S. source rental income

generated by the Buffalo real estate.

• The United States has jurisdiction to tax Mr. Tompkin because he is a permanent resident.

• The United States has jurisdiction to tax Mr. Tompkin on his share of the U.S. source

business income generated by Sophic Partnership.

4. State A:

Volume of sales before rate increase $800,000,000 Original tax rate .05 Revenue before rate increase $40,000,000

Volume of sales after rate increase $710,000,000 New tax rate .06 Revenue after rate increase $42,600,000

Additional revenue ($42,600,000 − $40,000,000) $2,600,000

State Z:

Volume of sales added to tax base $50,000,000 Tax rate .05 Additional revenue $2,500,000

• The property tax is $8,300 ($415,000  2%).

• The property tax is $19,000 ([$500,000  2%] + [$225,000  4%]).

• The property tax is $39,000 ($1.3 million  3%).

• The property tax is $85,000 ([$2 million  3%] + [$2.5 million  1%]).

• Increase in County G’s aggregate assessed property tax value $23,000,000

Assessed value of Lexon’s new facility (20,000,000) Net increase in County G’s tax base $3,000,000 Tax rate .04 Net effect on County G’s current year revenue $120,000

• Value of property purchased in State K $600,000

Use tax rate in State H .06 Pre credit use tax $36,000 Sales tax paid to State K (18,000) Use tax owed to State H $18,000

• Value of property purchased in State L $750,000

Use tax rate in State H .06 Pre credit use tax $45,000 Sales tax paid to State L (48,750) Use tax owed to State H -0-

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