3.
C onvenience of Payment:A tax should be due at a time and manner that is most
convenient for the taxpayer.
4. Effective Tax Administration:Tax compliance and administrativecosts should be
kept to a minimum.
5. Information Security:Taxpayer information must beprotected from improper
disclosure.
6. Simplicity:Tax rules should be simple so that taxpayersunderstand them and can
follow them in a cost-efficient manner.
7. Neutrality:The effect of tax rules on taxpayer decisionmaking should be kept to
a minimum.
8. Economic Growth and Efficiency:The tax system shouldnot harm economic
growth or distort economic effects among different activities and investments.
9. Transparency and Visibility:Taxpayers should knowthat a tax exists and how and
when it applies to them.
10. Minimum Tax Gap:A tax should be structured to minimizenoncompliance.
11. Accountability to Taxpayers:Taxpayers should haveaccess to information on
taxes, as well as proposed law changes and their rationale.
12. Appropriate Government Revenues:Tax rules shouldenable the government to
predict the amount and timing of revenue production.
ypes of Tax:
T
Property Taxes:a tax on wealth or capital
● Considered asAd Valorem Taxes:based on value
● Doesnt tax income but the income is determined from property (or potential of income)
can affect the value of the taxed property
● Sorted into Two Categories:
○ Real Property (Realty):land & buildings (real estate& fixtures)
■ Used only by states & its local subdivisions
■ a major revenue for local govt
■ Fixture: something so permanently attached to the real estate that its
removal will cause irreparable damage
● ex/built-in bookcase vs moveable bookcase; electrical wiring &
plumbing
■ Characteristics of Ad Valorem Taxes on Real Property:
● Property of fed, state & local govt, charitable organizations are
exempt from tax
● Some states provide for lower valuations on property used for
agriculture or other special uses (e.g., wildlife sanctuaries)
● States may have a homestead exemption, which makes some portion
of the value of a personal residence exempt from tax
● Lower taxes may apply to a residence owned by a taxpayer aged 65
or older
● When non-income-producing property (e.g., a personal residence) is
converted to income-producing property (e.g., a rental house), the
appraised value may be increased.
○ Personal Property (Personalty):assets other thanland & buildings (all property
that are not realty)
■ Classified as tangible or intangible property
● intangible property: stocks, bonds, and various other securities
(ex/bank shares)
■ Rules of Ad Valorem Taxes on Personalty property:
● Vehicles are the only non-realty personal use assets subject to
property tax; vehicle property tax is assessed & collected w/ vehicle
lisense/registration fees
● businesses are assessed property taxes on equipment and other
tangible property, although many states do not tax inventory
● A few states levy an ad valorem tax on intangibles such as stocks
and bonds
○ difference between how property is classified (realty or personalty) and how it is
used
Both realty and personalty can be either business use or personal use property
○
■ residence (realty that is for personal use)
■ an office building (realty that is for business use)
■ surgical instruments (personalty that is for business use)
■ home furniture (personalty that is for personal use)
Transaction Taxes:
● taxes that cover transfers of property and normally are determined by multiplying the
value by a percentage rate
● Federal Excise Taxes:
○ Excise Tax:tax on the manufacture, sale, or use ofgoods; on the carrying on of an
occupation or activity; or on the transfer of property. Thus, the Federal estate
and gift taxes are, theoretically, excise taxes
○ Has increased in amount of eligible items: tobacco, fuel, air travel
○ Includes:
■ Manufacturers’ excise taxes on trucks, trailers, tires, firearms, sporting
equipment, and coal and the gas guzzler tax on automobiles.
■ A 1 percent excise tax imposed on a corporation buying back its stock. The
tax is assessed on the fair market value of the stock when repurchased.
■ Alcohol taxes.
■ Miscellaneous taxes (e.g., the tax on wagering and the tax on investment
income of certain private colleges and universities)
● State & Local Excise Taxes
○ Generally has the same items taxed as federal excise taxes (ex/gas, alcohol,
tobacco)
○ Varies significantly b/w states in tax amt
○ Some states hase excise tax on admission to amusement facilities, on the sale of
playing cards, and on prepared foods
○ Rising Popular Types of Excise Taxes at Local lvl:
■ hotel occupancy tax / transient occupancy tax (TOT)
● apply to short-term rentals of one’s home or a room in the home
(such as via Airbnb)
■ rental car “surcharge.”
● General Sales Tax:
○ Fed excise tax restricted to specific transaction VS general sales tax covers a wide
range of transactions
○ Some states exempt certain items from the general sales taxes
■ ex/ groceries, medicines, and drugs
○ Sales Tax rates can vary depending on the state & type of transaction
○ L ocal sales tax being ruled over state tax is common (ppl can get charged
different tax based on their local residency rather than state)
○ Use Tax:is owed on property purchased outside thestate but used in the state
■ Used to prevent the avoidance of a sales tax
■ ex/ if you purchase clothes online and are not charged sales tax but
clothes are subject to sales tax in your state, you owe use tax on the
purchase
■ The collection of use tax is different b/w states (some are paid w/ state
income tax or some don't impose sales or use tax)
○ Some states have a “sales tax holiday” to encourage consumerism (no tax)
Severance Taxes:transaction taxes that are basedon the notion that the state has an
●
interest in its natural resources (oil, gas, iron, coal)
○ Tax imposed when resource is extracted
○ Could be a major source of income for some states
Tax on Transfers at Death: Two types
● The right to transfer property or to receive property upon the death of the owner may
be subject to estate and/or inheritance taxes
● Estate Tax:levied on the estate of the decedent (itis a tax on the right to pass property
at death); progressive tax
● Inheritance tax:levied on the person receiving theproperty (the heir).
● Value of the property transferred provides the base for determining the amt of the tax
● Fed only imposes estate tax; Some state govt levy inheritance taxes, estate taxes or
both or none (Florida & Texas)
● Federal Estate Tax:
○ Revenue Act of 1916:inclusion of estate tax intotax law
■ Used to prevent large wealth from being kept in the family
○ Gross estate includes property the decedent owned at time of death & property
interests which is valued at the date of death or at an alt valuation date of 6
months after
○ Deductions of gross estate: funeral & administration expenses; certain taxes;
debts of the decedent; casualty losses incurred during the administration of the
estate; transfers to charitable organizations; marital deduction
○ Credits are subtracted to arrive at the tax (if applicable)
■ Unified Transfer Tax Credit:used to eliminate/reducethe estate tax liability
for certain estates
● bc tax base is up to 13 mil, most estates are passed tax free to heirs
● State Taxes on Transfers at Death:
○ Inheritance tax rate depends on the relationship b/w heir & decedent
■ closely related the heir, the lower the rates imposed and/or the greater the
exemption allowed
Gift Taxes: Form 709 (Gift Tax Return) ; progressive tax
● excise tax levied on property transfers made during the owner’s life & not at death
● If the recipient pays the donor for the property (but at an amount less than its fair
market value), the difference is a gift
● Gift Tax is paid by the donor NOT donee
● Federal Gift Tax 1932: used to complement the estate tax
○ If lifetime transfers by gift were not taxed, it would be possible to avoid the estate
tax and escape taxation entirely