Module 1: Basic Principles of Taxation

This set covers the basic principles of taxation including definitions, inherent powers of the state, classifications, purposes, and methods of tax avoidance or evasion.

Taxation

The process or means by which the sovereign through its law-making body, imposes burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government.

Police Power

The inherent power of a government to exercise reasonable control over persons and property within its jurisdiction in the interest of the general security, health, safety, morals, and welfare except where legally prohibited.

Power of Taxation

The means by which the government or the taxing authority imposes or levies a tax on its citizen and business entities.

Power of Eminent Domain

Also called “condemnation,” it is the power of local, state or federal government agencies to take private property for “public use” so long as the government pays “just compensation.”

Revenue or Fiscal Purpose

A primary purpose of taxation aimed at providing funds for the support of the government.

Regulatory Purpose

A purpose of taxation focused on the promotion of general welfare, reduction of social inequality, and economic growth.

Lifeblood Theory / Necessity Theory

A theory or basis of taxation stating that taxes are the lifeblood of the government and their prompt and certain availability is an imperious need.

Benefit Received or Reciprocity Theory

A theory or basis of taxation where the taxpayer receives protection and benefits from the government in exchange for the taxes paid.

Personal, Poll or Capitation Tax

A classification of tax based on the subject, imposed on residents of a particular territory regardless of their citizenship or property.

Specific Tax

A classification of tax as to the determination of the amount, where the tax is based on weight, number, or other standard of measurement.

Ad Valorem Tax

A classification of tax as to the determination of the amount, where the tax is based on the value of the property or item taxed.

Proportional Tax

A tax based on a fixed percentage of the amount of the property, receipts, or other basis to be taxed.

Progressive Tax

A tax where the rate increases as the tax base or bracket increases.

Regressive Tax

A tax where the rate decreases as the tax base or bracket increases.

Fiscal Adequacy

An element of a sound tax system requiring that the sources of revenue must be sufficient to meet government expenditures.

Theoretical Justice or Equity

An element of a sound tax system requiring that the tax burden should be distributed proportionately based on the taxpayer's ability to pay.

Administrative Feasibility

An element of a sound tax system requiring that tax laws should be capable of convenient, just, and effective administration.

Situs of Taxation

The place of taxation; factors to consider include subject matter, nature of tax, citizenship, residence, source of income, and place of business.

Toll

A demand of proprietorship paid for the use of another's property or public improvement, with the amount based on the cost of construction or maintenance.

Penalty

An imposition designed to regulate conduct, which may be imposed by both the government or private individuals.

Direct Duplicate Taxation

Taxing twice by the same taxing authority, jurisdiction, or district for the same purpose, in the same year, upon the same subject or object, and with the same kind of tax.

Shifting

The transfer of the burden of tax by the original payer or the one on whom the tax was assessed to someone else.

Transformation

An escape from taxation where the producer pays the tax and recoups it by improving production processes to lower costs.

Evasion

The use of illegal or fraudulent means by the taxpayer to defeat or lessen the payment of a tax.

Tax Avoidance

Also known as tax minimization; the exploitation of legally permissible alternative tax rates or methods to reduce tax liability.

Exemption

The grant of immunity to particular persons or corporations from a tax which others in the same district are generally obliged to pay.

Capitalization

The reduction in the selling price of income-producing property by an amount equal to the capitalized value of future taxes to be paid by the purchaser.