Chapter 1 : TAXES AS TRANSACTION COSTS

Exclusions

Items that are specifically removed from the tax base by law.  Prominent examples of exclusions are sales of foodstuffs for off-premises consumption from the sales tax base (taxable sales) and the exclusion of municipal bond interest from the income tax base (taxable income)

Deductions

Deductions may be differentiated from exclusions in that they are explicitly subtracted in deriving the tax base.  For example, in the case of the individual federal income tax, losses from a sole proprietorship are permitted to be subtracted in deriving taxable income

Tax Base

the net quantity on which any tax is levied.  This is the remaining amount after considering both exclusions and deductions.  For purposes of income taxation, net quantity is called taxable income; for estate taxation, the taxable estate; and for gift taxation, taxable gifts.  The key word in each instance is the word taxable

Tax Rate

A tax rate is a specified percentage or series of percentages in the case of a progressive tax, which the law stipulates as the appropriate multiplier in the determination of the gross tax liability.  For planning purposes, the most important tax rate is the marginal tax rate.  It is the rate that will apply to any incremental increase or decrease in the tax base

Flat Tax

One single rate is applied to the entire tax base.  Examples of a flat tax are the sales tax and the tax on the Regular C Corporation

Progressive Tax

The marginal rates get higher as the tax base increases in amount.  The main example of a progressive tax is the individual federal income tax

Tax Credit

A tax credit is any specifically authorized direct reduction in gross tax liability