1. Income Tax Base and Rates

2. Principles of Sound Tax Policy
Adequacy
Neutrality
Fair or equitable
Horizontal
Vertical
Ease of Administration and Compliance
Accountability
Administration and enforcement should be efficient and fair
Government must enforce the laws
Open, transparent tax policy

3. Tax Base and Rates Tax rates Computation
Statutory
Effective
Computation
Average Effective
Average
Marginal
Tax classifications based on average tax rates relative to gross income
Regressive
Proportional or flat
Progressive

4. Overview of Tax Calculations
The U.S. definition of taxable income
Adjusted gross income (AGI)
Excluded forms of money income
Taxable income (TI)
Exemptions and deductions

5. Adjusted Gross Income (AGI)
AGI = wages + salaries + tips + interest income + dividend income + capital gains + net business/farm income – adjustments.

6. Excluded Forms of Money Income
Interest earnings on municipal bonds.
Employer contributions to benefit plans, e.g. medical/dental/vision insurance.
Contributions to retirement savings plans, e.g. pension contributions, IRA contributions, KEOGH contributions.

7. Taxable Income (TI) TI = AGI – personal exemptions – deductions.
Deductions may be either the standard deduction or itemized deductions.

8. Deductions are permitted for:
Medical and dental care--expenditures in excess of 7.5% of AGI may be deducted
Taxes paid, including state and local income taxes, real estate taxes, and personal property taxes (sales tax ?)
Interest paid, including home mortgage interest and investment interest
Gifts to charity, including cash gifts and other than cash gifts
Casualty or theft loss
Job expenses, including un-reimbursed employee expenses, job travel, union dues, and job educational expenses
Other miscellaneous expenses (including tax preparation fees

9. APPLICATION: What Are Appropriate Business Deductions?
Hard to determine appropriate business deductions:
A rabbi claimed as a business expense the $4,031 he spent on 700 guests who attended his son’s bar mitzvah.
Tax court found the Rabbi “was not required to invite the entire…congregation…as a condition of his employment.”
The entertainer Dinah Shore claimed several dresses as business expenses, prompting an investigation by the IRS.
“Dinah Shore ruling”: A dress may be deducted as a business expense only if it is too tight to sit in.

10. APPLICATION: What Are Appropriate Business Deductions?
A man tried to deduct $30,000 in expenses on illegal drugs.
Allowed to claim deductions, he was sentenced for criminal charges.
Many OECD countries have traditionally allowed/ treated foreign bribes as business expenses.

11. Income Tax Rate Structures
The U.S. income tax has a progressive rate structure.
Current tax rates range from 10% to 39.6%.
Table of personal income tax brackets
Source: Urban Institute and Brookings Institute

12. Figure 13.1: Tax Rates for a Single Filers, 2001

13. Figure 13.2: Tax Rates for Married Couples Filing Jointly, 2001
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14. U.S. Federal Income Tax Rate Schedule, 2012
18.2
U.S. Federal Income Tax Rate Schedule, 2012