MAC 740 - Week 1: Tax Basics, Rate Structures, Dependents, and Federal Tax Authority

Vocabulary flashcards covering core tax concepts, jurisdiction, rate structures, dependency criteria, individual tax formulas, history, and standards of a good tax from MAC 740 Week 1.

What is tax jurisdiction?

A government’s right to levy a tax on a specific person or organization. It requires a rational link between the government and the taxpayer: citizenship, residence, or income earned inside its borders.

Who does the U.S. tax on their worldwide income, no matter where they live?

U.S. citizens (even living abroad) and permanent residents (green card holders). A U.S. citizen living permanently in Medellín is still taxed by the U.S. on all of her income.

When can the U.S. tax a nonresident alien (a foreign citizen living abroad)?

Only on income from U.S. sources: rent from U.S. real estate, a share of a U.S. business, and so on. With no U.S. property, business, or income there is no link, so no jurisdiction.

Practice problem: Does the U.S. have jurisdiction to tax Mrs. Mendez? (a) Colombian citizen, permanent resident of Orlando. (b) Colombian citizen and resident who owns Manhattan real estate earning $100,000 net rent. (c) Colombian citizen and resident with no U.S. property or business. (d) U.S. citizen, permanent resident of Medellín.

(a) Yes. Permanent residents are taxed on worldwide income. • (b) Yes, but only on the U.S.-source rental income. • (c) No. No rational link to the U.S. • (d) Yes. Citizens are taxed on worldwide income wherever they live.

What is the basic tax formula, and what does the result mean to each side?

Tax (T) = Rate (r) × Base (B). The result is the cost to the taxpayer and the revenue to the government. Revenue rises if you raise the rate or enlarge the base.

What are the three ways a government can increase tax revenue, and which one draws the least political attention?

(1) Tax a new base (a state with no income tax enacts one). Most radical and politically sensitive. (2) Raise the rate on an existing tax. Very visible; angers the most voters. (3) Enlarge the base of an existing tax (extend sales tax to haircuts or dry cleaning; remove a property-tax exemption). Subtle, draws the least attention; most recent significant increases used this.

Why can raising a tax rate bring in less extra revenue than the rate increase suggests?

Because the base can shrink in response: people buy less, move, or avoid the taxed activity. Revenue = rate × base, so a higher rate on a smaller base disappoints. Expanding the base to new items has no such offset. In the problem, State Z’s base expansion raised more than State A’s rate hike.

Practice problem: State A raised its sales tax from 5% to 6%, and taxable sales fell from $822 million to $737 million. State Z kept 5% but added $139 million of retail services to its base. How much additional revenue did each raise?

State A: old 5% × $822M = $41.10M; new 6% × $737M = $44.22M → +$3.12 million. State Z: 5% × $139M = +$6.95 million.

Flat rate vs. graduated rate: what is the difference?

Flat: one percentage applied to the entire base. Graduated: multiple percentages, each applied only to a specified portion (bracket) of the base. The layers stack: tax each layer at its own rate, then add them up.

Under graduated rates, how do you compute the tax on a base that reaches into a higher bracket?

Tax each bracket layer separately and sum them. Never apply the top rate to the whole base. Example: 2% up to $500,000 plus 4% on the excess. A $910,000 property pays 2% × $500,000 + 4% × $410,000 = $10,000 + $16,400 = $26,400.

Practice problem: Springvale taxes real property at 2% of assessed value up to $500,000 plus 4% of the value above $500,000. Compute the tax on (a) $427,000 and (b) $910,000.

(a) $427,000 × 2% = $8,540. It never reaches the 4% layer. (b) $500,000 × 2% = $10,000, plus $410,000 × 4% = $16,400 → $26,400.

Define the average tax rate. What question does it answer?

ATR = total tax ÷ total tax base (taxable income). It measures the taxpayer’s overall tax burden relative to ability to pay.

Define the marginal tax rate. What question does it answer?

MTR = the rate on the next $1 of income: the rate of the bracket your last dollar falls in. It is the decision-making rate: use it to measure the after-tax income or after-tax cost of a future item of income or deductible expense.

How do ATR and MTR relate under a proportionate (flat) structure versus a progressive one?

Proportionate: MTR = ATR at every income level. Progressive: once income passes the first bracket, MTR > ATR, because the earlier dollars were taxed at lower rates and pull the average down.

A jurisdiction taxes only income above an exemption (say $35,000) at one flat rate. What type of rate structure is that?

Progressive. The exemption creates an effective 0% bracket, so the average rate rises with income (0% at $35,000, climbing toward the flat rate at high incomes) even though the stated rate is flat.

Someone earns less than the exemption threshold and pays no tax. What are their average and marginal rates?

Both 0%. ATR = $0 ÷ income = 0%, and the next dollar is still under the threshold, so it is taxed at 0% too.

Practice problem: Jurisdiction X: flat 13% on income over $35,000; $35,000 or less pays nothing. (a) Mr. Hill earned $90,500. (b) Ms. Lui earned $42,800. (c) Ms. Archer earned $31,200. Give tax, ATR, and MTR for each, and (d) name the rate structure.

(a) ($90,500 − $35,000) × 13% = $7,215. ATR $7,215 ÷ $90,500 = 8.0%. MTR 13%. • (b) ($42,800 − $35,000) × 13% = $1,014. ATR 2.4%. MTR 13%. • (c) Tax $0. ATR 0%, MTR 0%. • (d) Progressive: the average rate increases as income increases.

Practice problem: Country A brackets: 10% to $20,000; 15% from $20,001 to $75,000; 25% from $75,001 to $160,000; 30% over $160,000. Mr. Levi’s taxable income is $58,800. Tax, ATR, MTR?

10% × $20,000 = $2,000, plus 15% × $38,800 = $5,820 → tax $7,820. ATR $7,820 ÷ $58,800 = 13.30%. MTR 15% (his last dollar sits in the 15% bracket).

Practice problem: Same Country A brackets (10 / 15 / 25 / 30%). Ms. Jinn’s taxable income is $313,600. Tax, ATR, MTR?

Brackets: 10% on $0 – $20,000; 15% on $20,001 – $75,000; 25% on $75,001 – $160,000; 30% over $160,000. $2,000 (10% layer) + $8,250 (15% × $55,000) + $21,250 (25% × $85,000) + $46,080 (30% × $153,600) → tax $77,580. ATR $77,580 ÷ $313,600 = 24.74%. MTR 30%.

How do you compute an average tax rate over a multi-year period?

Total tax paid over the period ÷ total income over the period. Do not average the yearly rates. Compute each year’s tax from the bracket table, add the years up, then divide by total income.

Two taxpayers earn the same total income over several years. One earns it evenly; the other earns it in a spike. Under progressive rates, who pays more, and why?

The one with the fluctuating income pays more tax and a higher average rate. In the spike year, income is pushed into high brackets; in the low years, the low brackets go partly unused. Progressive rates penalize unstable income, a horizontal-equity problem of measuring ability to pay annually rather than over a lifetime (the lottery winner vs. the wealthy heir).

Practice problem: Government G brackets: 6% to $30,000; 10% from $30,001 to $70,000; 20% from $70,001 to $200,000; 28% over $200,000. Taxpayer O earns $66,500 every year for 10 years. Taxpayer P earns $25,500 in years 1–5 and $107,500 in years 6–10. Total income and 10-year ATR for each?

Both earn $665,000 over the 10 years. O: yearly tax $1,800 + $3,650 = $5,450 → $54,500 total → ATR 8.20%. P: years 1–5: $1,530 each ($7,650). Years 6–10: $1,800 + $4,000 + $7,500 = $13,300 each ($66,500). Total $74,150 → ATR 11.15%. Same income; P pays $19,650 more.

Practice problem: Country A brackets (10 / 15 / 25 / 30%). Ms. Slattery earns $79,400 a year for 5 years. Ms. Ochoa earns $8,000 in years 1–4 and wins a lottery for $365,000 of taxable income in year 5. Total income and 5-year ATR for each?

Brackets: 10% on $0 – $20,000; 15% on $20,001 – $75,000; 25% on $75,001 – $160,000; 30% over $160,000. Both earn $397,000 over the 5 years. Slattery: $2,000 + $8,250 + $1,100 = $11,350 a year → $56,750 → ATR 14.29%. Ochoa: $800 × 4 = $3,200, plus year 5: $2,000 + $8,250 + $21,250 + $61,500 = $93,000. Total $96,200 → ATR 24.23%.

A dependent must fit one of two categories. What are they, and in what order do you test them? (The test tables are on your reference sheet.)

Qualifying child: relationship, age, residency, support. Qualifying relative: not a qualifying child, relationship, gross income, support. Test qualifying child first. Once any test fails, that category is out; move to the next one or answer “neither.”

The support test is different for a qualifying child and a qualifying relative. How?

Qualifying child: the child must not have provided more than half of their own support. It doesn’t matter who else did. Qualifying relative: the taxpayer must have provided more than half of the person’s support.

Does a qualifying child have to pass a gross income test?

No. There is no income limit for a qualifying child. A 16-year-old who earns $6,690 but saves it while the household provides 100% of his support is still a qualifying child. The gross income test (under $5,300 for 2026) applies only to qualifying relatives.

Your 20-year-old child lives at home, works full time, is not a student, and is self-supporting. Qualifying child, qualifying relative, or neither?

Neither. Qualifying child fails the age test (not under 19, and not a student under 24) and the support test (self-supporting). Qualifying relative: the relationship is fine, but full-time wages fail the gross income limit and the parents don’t provide more than half of support.

Does a college student who lives in a dorm most of the year fail the residency test?

No. Time away at school is a temporary absence and counts as living at home. A 22-year-old full-time student fully supported by her parents is a qualifying child.

Can a nephew be a qualifying child?

Yes. The relationship test covers your child, stepchild, foster child, sibling, half- or step-sibling, or a descendant of any of them. A nephew is a sibling’s descendant.

A parent lives in a retirement community, not with you. Can they be your dependent, and what usually decides it?

Possibly, as a qualifying relative: a parent satisfies the relationship test by relation alone, so living apart is fine. It comes down to the gross income test (under $5,300 for 2026) and the support test (you provide more than half). A parent earning $5,650 fails the income test → neither.

A parent lives in your home, but you provide only 30% of their support; Social Security covers the rest. Dependent?

No. Fails the qualifying-relative support test: you must provide more than half. Living with you and the family relationship don’t rescue it → neither.

Practice problem: Mr. and Mrs. Nguyen file jointly. Classify each as qualifying child, qualifying relative, or neither: (a) Jinn, 20, lives at home, full-time mechanic, self-supporting. (b) Beth, 22, full-time student in a dorm, 100% supported. (c) Ezra, 16, their nephew, lived with them since 2019, high-school student, earned $6,690, 100% supported. (d) Minnie, 64, Mr. Nguyen’s parent, lives in a retirement community, earned $5,650, 65% supported. (e) Bao, 76, Ms. Nguyen’s parent, lives with them since 2021, 30% supported (rest from Social Security).

(a) Neither. Fails age (20, not a student) and support; too much income to be a qualifying relative. • (b) Qualifying child. Under 24 and a student; dorm time is a temporary absence; didn’t provide over half her own support. • (c) Qualifying child. Nephew passes relationship; under 19; lives there; no income test for a qualifying child. • (d) Neither. Gross income $5,650 is not under $5,300. • (e) Neither. The Nguyens provide only 30% of support, not more than half.

The slides give three reasons taxes matter beyond filling out forms. What are they?

(1) They raise the money governments need to operate. (2) They encourage or discourage behavior (economic and social policy goals). (3) They change what choices cost for individuals and businesses (work or play, save or spend, rent or buy, where to build).

What four questions does the course use to understand any tax at a high level?

(1) What is being taxed? (the base) (2) At what rate? (the rate structure) (3) Who is imposing it? (jurisdiction) (4) Why is it imposed? (general fund or earmarked)

Match each tax to its base: income, sales, property, payroll, excise, transfer.

Income → taxable income • Sales → price the consumer paid • Property → value of property owned • Payroll → wages paid to the employee (up to a cap) • Excise → price paid for a specific item • Transfer → value of a gift or bequest (over a floor)

What is an earmarked tax? Give the slide examples.

A tax allocated to fund a specific government activity instead of the general fund. • Real property taxes → local schools • Payroll taxes → current Social Security and Medicare benefits • Gas excise → Highway Trust Fund • Air travel excise → Airport and Airway Trust Fund • White goods disposal taxes → managing discarded appliances

What are the four kinds of taxing jurisdiction?

Federal, state, local, and foreign. The federal government taxes the worldwide income of U.S. citizens, residents, and companies (Krispy Kreme), and only the U.S. income of everyone else (Tim Hortons).

Which rate structure does each U.S. tax generally use: income, sales, property, payroll, excise, transfer?

Income → progressive (lower rates for special income, e.g., certain gains) • Sales → flat (lower or no tax on items like food) • Property → flat (varies by property type, taxpayer, authority) • Payroll → flat up to a cap (regressive) plus a surtax over a threshold (progressive) • Excise → flat • Transfer → flat rate on amounts over a floor (progressive in effect)

Why is the Social Security payroll tax regressive? Use the slide example: 6.2% with a $100,000 wage cap.

Wages above the cap aren’t taxed, so the rate falls as income rises. • Taxpayer A, $20,000: tax $1,240. ATR 6.2%, MTR 6.2%. • Taxpayer B, $500,000: tax $6,200 (cap × 6.2%). ATR 1.24%, MTR 0%.

Are sales taxes proportionate or regressive?

Both, depending on the measure. Against the tax base (tax ÷ sales price) they are proportionate: a flat 7% is 7% for everyone. Against ability to pay (tax ÷ income) they are regressive, because lower-income people spend a larger share of income on taxed goods: A earns $20,000 and spends $10,000 → $700 = 3.5% of income; B earns $500,000 and spends $100,000 → $7,000 = 1.4%.

Taxpayer C has $39,000 of taxable income under brackets of 10% (to $10,000), 15% ($10,001–$30,000), and 25% (over $30,000). C is deciding whether to take a second job paying $10,000. Which rate matters?

The 25% marginal rate. Every dollar of the extra $10,000 would be taxed at 25%, so the after-tax pay is $7,500. The 16% ATR ($6,250 ÷ $39,000) describes C’s overall burden, not the effect of a new decision. ATR measures burden; MTR informs decisions.

Timeline: what happened in 1765, 1787, 1861, and 1894?

1765 – Stamp Act, a major force inciting the Revolution. • 1787 – Constitution gives Congress the power to tax. • 1861 – First income tax, enacted as a temporary tax. • 1894 – First “permanent” income tax enacted by Congress (the Supreme Court then held a national income tax unconstitutional in Pollock).

Timeline: 1913, 1939, 1954, 1986. And what is the official title of today’s tax code?

1913 – Sixteenth Amendment ratified; Congress passes the Tax Act of 1913. • 1939 – First Internal Revenue Code. • 1954 and 1986 – Subsequent enactments of the Code. Official title: “Internal Revenue Code of 1986, as amended.” It has been revised many times since 1986, so don’t let the title fool you.

What are the three sources of tax authority, and who produces each?

Legislative – the Internal Revenue Code (the statute), written by Congress. • Administrative – Treasury regulations and IRS guidance; the IRS administers the law and, with others in Treasury, creates interpretive guidance. • Judicial – court decisions from IRS–taxpayer litigation, which give guidance and precedent for similar situations.

Trace the three branches of government down to the tax players (the slide org chart).

Constitution (16th Amendment) at the top. • Legislative: Senate → Senate Finance Committee; House of Representatives → House Ways and Means Committee. • Executive: President → Treasury Department (Treasury Secretary) → Internal Revenue Service. • Judicial: Supreme Court → U.S. Court of Appeals → trial courts (Tax Court, U.S. District Courts).

Basic hierarchy of tax authority: what is “the law of the land,” and how does everything else rank?

The Internal Revenue Code and Supreme Court decisions are the law of the land. Judicial, descending: appellate court decisions → lower court decisions in your district → lower court decisions outside your district. Administrative, descending: Treasury regulations → Revenue Rulings and Procedures → Private Letter Rulings.

Why isn’t the Internal Revenue Code alone enough to apply the tax law?

The rules and the situations they apply to are complex, so interpretation and guidance are needed. The IRS and Treasury issue interpretive guidance, and court decisions from disputes provide precedent for taxpayers in similar situations.

What made Turkey’s 1942 wealth tax a “bad tax”?

Assessments with no explanation of rate or base; authorities had no data on income or property values, so assessments were arbitrary. • Two weeks to pay, no right to appeal. • Discriminatory: assessments and penalties varied by ethnicity. • Economic drain: assessments sometimes exceeded the property’s value, and the government ended up holding assets it couldn’t use. Bad design produces real injustice and real economic harm.

Name the four characteristics of a good tax and what each means (slide version).

Sufficient – raises enough revenue to help fund the government’s needs. • Convenient – taxpayers can understand when it applies, how it is measured, and how and when to pay. • Efficient – definitions differ: taxes should be neutral (not affect behavior or investment choices) vs. taxes should not be neutral (a strategic fiscal tool). • Fair – opinions vary; ideally burden aligns with ability to pay.

Two taxpayers each have $100,000 of wages taxed at a flat 25%, but A supports three children and B supports none. How does a $1,000-per-child tax reduction change the equity analysis?

On income alone the system already meets horizontal equity ($25,000 each). With the reduction, A pays $22,000 and B $25,000: B, with the greater ability to pay, pays more, so the system better reflects vertical equity. The U.S. system has numerous tax benefits for having children.

Wages are taxed at 25%, dividends at 15%. A has $100,000 of wages; B has $100,000 of dividends; no difference in ability to pay. Does this violate horizontal equity?

Yes. Same ability to pay, different burdens: $25,000 vs. $15,000. There may be important policy reasons for preferential dividend and capital-gain rates, but it still violates horizontal equity.

Same preferential rates. A: $100,000 of wages → $25,000 tax. B: $1,000,000 of dividends → $150,000 tax. Is vertical equity violated?

The answer can vary. B pays more dollars ($150,000 vs. $25,000) but at a lower rate (15% vs. 25%). Whether that is fair depends on whether you weigh total tax or the rate.

Slide takeaway: why does the U.S. system have so many complex rules, and what is the equity cost?

Many rules exist to better align tax burden with ability to pay. Many tax preferences exist to reach an economic or social goal. Some of those preferences violate horizontal and/or vertical equity.

Write out the individual income tax formula from taxable income to the amount owed or refunded.

Taxable income × applicable tax rates = Tax before credits − Tax credits = Tax after credits − Tax payments made (e.g., wage withholding) = Tax owed / (refund due)

When computing tax before credits, what three things can affect the rate applied?

Preferential rates may apply to a portion of taxable income. • Ordinary rates apply to the rest. • Other special taxes may apply (e.g., the Alternative Minimum Tax).

What is a tax credit, and how is it different from a deduction?

A credit is a $1-for-$1 reduction in tax, providing targeted benefits for specific scenarios (e.g., paying for childcare). A deduction reduces the base (taxable income), so its value depends on your tax rate.

What does “above the line” mean, and what is “the line”?

The line is AGI. Above-the-line (“for AGI”) deductions are subtracted from total income to reach AGI. Examples: the IRA deduction and the self-employment tax deduction.

Why is AGI an important checkpoint if it isn’t the tax base?

Many later tax benefits are limited by reference to AGI. The final tax base is taxable income: AGI minus below-the-line deductions.

What are below-the-line (“from AGI”) deductions?

Deductions subtracted from AGI to reach taxable income: • The standard deduction (a set dollar amount that varies by taxpayer type) or itemized deductions (the sum of eligible expenses). Every individual claims one or the other. • Other below-the-line deductions some taxpayers are eligible for.

What goes into total income (Step 1)?

Compensation income, net business income, investment income, certain retirement income, and more. Numerous exceptions can apply.

What is the gating issue for filing status, and when is it measured?

Marital status, as of the end of the year (December 31). • Married on September 19 → married for the whole year. • Divorced in October → unmarried for the whole year. • Exception: a widow(er) is considered married in the year the spouse dies.

Married filing jointly vs. married filing separately: compare them.

Joint: one return combining both spouses’ income, deductions, and credits; joint and several liability; usually the more favorable outcome. Separate: each spouse reports only their own items; no joint and several liability; usually less favorable.

An unmarried taxpayer has three possible statuses. What are they, and which is the default?

Single – the default when no more favorable unmarried status applies. • Head of household – favorable status for maintaining a home for a qualifying person. • Surviving spouse / qualifying widow(er) – temporary post-death status that preserves joint-like treatment for a limited period.

Surviving spouse (qualifying widow(er)): what are the three requirements?

(1) Unmarried at the end of the year. (2) Spouse died in either of the last two years. (3) Pay more than half the cost of maintaining a home shared all year with your dependent (actual) child.

Head of household: the requirements and the two footnotes?

Unmarried at year end; not a surviving spouse; pay more than half the cost of a home shared for more than half the year with your qualifying child or your dependent qualifying relative who meets the relationship test by actual relationship. • * A dependent parent may live in a separate home you maintain. • ** The “lived with you all year” route to qualifying relative does not count for head of household.

Leslie fully supports her best friend Sarah and Sarah’s son Drew, who lived with her all year, and both are her dependents. What is Leslie’s filing status?

Single. Sarah and Drew are qualifying relatives only because they lived with her all year, not by actual relationship, so they don’t make Leslie head of household.

Ariel, 13, lived with her aunt and uncle all year and earned $240,000 on a TV show, all invested. Her aunt and uncle provided 40% of her support, her grandparents 60%. What is Ariel’s filing status?

Single. She is unmarried and no other status applies. Her own filing status is a separate question from whether anyone can claim her as a dependent.

Ann is single and paid all the costs of the apartment where she lived all year with her daughters, ages 17 and 15. Filing status?

Head of household. Unmarried, not a surviving spouse, and she maintains the home for her qualifying children.

What general requirements apply before anyone can be your dependent?

You can’t claim any dependents if you could be claimed as someone else’s dependent. • The person can’t file a joint return (limited exception). • They must be a U.S. citizen, resident alien, or national, or a resident of Canada or Mexico. • They must be your qualifying child or qualifying relative.

Jefferson, 23, single, full-time student, earned $13,000 bartending and paid 25% of his own support; he lived at college or with his parents. Can his parents claim him?

Yes, as a qualifying child. Son; under 24 and a student; time at college counts as living at home; he provided only 25% of his own support. His $13,000 of income is irrelevant for a qualifying child.

Parker, 18, moved in with his grandparents in August, attends community college part time, and earned $15,200. The grandparents provided 80% of his support. Dependent?

No, neither. Qualifying child fails residency (only 5 months). Qualifying relative fails the gross income test ($15,200 is far over the limit). Once a test fails, stop.

Sarah (30, $385 of interest income) and her son Drew (13, no income) lived with Sarah’s friend Leslie all year, fully supported by her. Can Leslie claim them?

Yes, both as qualifying relatives. Not Leslie’s qualifying children (unrelated); relationship test met by living with her all year; income below the limit; Leslie provides more than half their support.

Define “tax.” What two things is a tax not?

A compulsory payment to support the cost of government. • Not a fine or penalty: it isn’t meant to punish or deter behavior. • Not a user fee: paying it doesn’t entitle you to a specific good or service. Supreme Court: “A tax is not an assessment of benefits.”

Who counts as a “taxpayer,” and why does it matter that corporations are included?

Any person or organization required by law to pay a tax; “person” includes individuals and corporations. A corporation is separate from its shareholders, so it is a taxpayer in its own right.

What is the incidence of a tax?

Who bears the ultimate economic burden. The payer can sometimes shift it: a monopoly passes a new corporate tax to customers through higher prices; a landlord passes a property-tax increase to tenants through higher rent.

What is a tax base, and what makes a good one?

The item, occurrence, transaction, or activity on which a tax is levied, usually measured in dollars. Good bases are hard to avoid or hide. Real property is ideal: it can’t be moved and ownership is public record.

What taxes do local governments rely on, and how big a share of local tax revenue are they?

Real and personal property taxes, together called ad valorem taxes. They are more than 70% of local tax revenue.

What is real property (realty)?

Land plus anything built on it, growing on it, or permanently attached to it, including subsurface features like mineral deposits. Personal property (personalty) is any asset that isn’t realty.

How is the real property tax levied, and how is the rate set?

Levied annually on market value as determined by the local government’s tax assessors, who notify owners. Owners can challenge the assessment administratively or in court. The rate is set each year from the jurisdiction’s revenue need: Springfield needs $12M on a $230M base → 5.22%.

What happened to the federal income tax in 1861, 1872, and the 1894 Act?

1861 – first federal personal income tax, to fund the Civil War. • 1872 – it was allowed to expire. • 1894 Act – struck down in Pollock v. Farmers’ Loan and Trust Co.: the Supreme Court ruled the Constitution did not allow a national income tax.

What did the Sixteenth Amendment do, and when?

Ratified February 25, 1913: Congress may tax incomes “from whatever source derived.” The Revenue Act of 1913 then made the income tax permanent.

TCJA and OBBBA: dates and what each did?

Tax Cuts and Jobs Act, December 22, 2017: individual changes were temporary (2018–2025); corporate changes were permanent. One Big Beautiful Bill Act, July 4, 2025: made many TCJA individual provisions permanent. Some changes apply to 2025, others start in 2026.

How are Social Security and Medicare funded?

Not by the income tax. They are funded by federal employment taxes, earmarked for them, based on wages paid to employees and on self-employment net income.

What is the statutory source of federal tax law, how often does it change, and how do the three sources rank in authority?

The Internal Revenue Code of 1986, enacted by Congress, which adds to, deletes from, or modifies it at least once a year. • Statutory: the Code is the law. • Administrative: regulations are the government’s official interpretation but not law; rulings and procedures carry less authority than the Code and regulations. • Judicial: trial court < appellate court < Supreme Court (final word).

Where do the four standards for a good tax come from, and what are they?

Adam Smith. A good tax is: (1) Sufficient to raise the revenue the government needs, (2) Convenient for the government to administer and for people to pay, (3) Efficient in economic terms, and (4) Fair.

When is a tax “sufficient,” and what follows when the system is?

When it raises enough money to pay for the public goods and services the government provides. Then revenues equal spending, the budget balances, and the government needs no other funds (no borrowing, no nontax revenue like gambling or asset sales).

Convenience from the government’s view: what makes a tax convenient to administer? Which tax does well and which does poorly?

A collection method most taxpayers understand and cooperate with, that doesn’t overly intrude on privacy, and that leaves little chance for noncompliance. • Sales tax does well: sellers collect at the point of sale, buyers can’t evade it, and states only need to audit retailers. • Use tax does poorly: states have no workable way to collect it, so it raises almost no revenue.

Convenience from the taxpayer’s view: what does it mean, and how does the federal income tax score?

People can compute their tax with reasonable certainty, without undue time or cost. The federal income tax scores badly: it is uncertain and costly, complex and often changed, so most people pay a preparer. Compliance takes over 8.9 billion hours a year (2.6 billion for individual returns), about 3.8 million full-time workers. TCJA likely simplified filing for many but added complexity for others, such as pass-through owners.

What does “ability to pay” mean, and what dimension of it does each major tax measure?

The economic resources under a person’s control. • Income tax → inflow of resources during the year • Sales and excise taxes → consumption • Real and personal property taxes → accumulation held as property • Transfer taxes (gift, estate) → accumulated wealth given to others during life or at death

Horizontal equity: definition, its constitutional root, and the condition for the income tax to meet it.

People with the same ability to pay (as measured by the tax base) owe the same tax. It reflects the Constitution’s equal-protection principle. For the income tax the base is annual taxable income, so it is horizontally equitable only if taxable income accurately reflects ability to pay (should $7,000 of uninsured medical bills, or supporting two children, count?).

Horizontal vs. vertical equity: which is about the base and which is about the rate structure?

Horizontal equity is about measuring the base fairly: equal bases pay equal tax. Vertical equity is about a fair rate structure: people with greater ability to pay owe more tax.

A property tax charges 2% on the first $1M of value and 1% above that. Foley ($500,000) pays $10,000; Mugabi ($1.5M) pays $25,000. Vertically equitable? Regressive?

It meets a strict definition of vertical equity (Mugabi pays more dollars), but it is regressive: Foley’s average rate is 2.0% while Mugabi’s is 1.667%. Policymakers agree regressive rates are inequitable: a proportionally greater burden on people with smaller bases.

Why does the book call retail sales taxes “implicitly regressive”?

They use one rate, so they aren’t explicitly regressive, but they fall hardest on people with the least resources. James earns $20,000 and spends it all: $1,000 of tax at 5% = 5% of income. Kim earns $100,000 and spends $75,000: $3,750 = 3.75% of income.

What theory supports progressive rates, and what goal do they aim at?

Declining marginal utility of income: each extra dollar matters less as income rises; money for necessities is valued more than money for luxuries. Progressive rates aim for equality of sacrifice. Critics of flat rates say equal rates produce unequal sacrifice. How progressive is “fair” can’t be tested empirically; it is a matter of opinion.

What is distributive justice as a standard of fairness, and which taxes are the prime examples?

A tax is socially equitable if it corrects inequities in a capitalist system, such as extremes of poverty and wealth. Taxes take private wealth for public use and take more from the rich, so they redistribute wealth. Estate and gift (transfer) taxes are the prime examples, enacted early in the 20th century to reach “gilded age” fortunes. Some policymakers justify a progressive income tax the same way.

What is the most common complaint about the federal income tax, and what does that perception do to compliance?

That it is unfair, and the perception has grown in recent decades. People who believe the system is unfair are more likely to underreport income. As confidence drops, voluntary compliance drops and honest taxpayers carry more of the burden.

Where does the perception of unfairness come from, and what does the text say about “loopholes for the rich”?

Mostly from complexity and the belief in loopholes for the rich. The text calls that belief unfounded: much of the complexity exists to stop high-income taxpayers from manipulating the system, and most planning strategies use commonplace features of the law, not secrets.