Ch1. Tax Law Overview — The Concept and Classification of Taxes

The Meaning of a Tax

Tax:
A compulsory levy imposed by a government authority to raise
revenue for public expenditures, required by statute.

Core characteristics of a tax:
① Compulsory: Legally required regardless of consent
② Non-reciprocal: No direct benefit given in exchange
③ Monetary: Generally paid in currency
④ Statutory: Must be authorized by legislation

Classification of Taxes

Federal vs. State and Local

Federal taxes (collected by the IRS):
- Income taxes: Individual (Form 1040), Corporate (Form 1120)
- Payroll taxes: Social Security (6.2%), Medicare (1.45%) — FICA
- Estate and gift taxes: Form 706, Form 709
- Excise taxes: Fuel, tobacco, alcohol, firearms
- Customs duties: On imported goods

State and local taxes (collected by state/local agencies):
- State income taxes (in 41 states + DC)
- Sales and use taxes (in 45 states)
- Property taxes (all states; primarily local)
- State estate/inheritance taxes (in ~12 states)
- Vehicle registration and other fees

Revenue split:
Federal > State/Local (approximately 55:45)

Direct vs. Indirect Taxes

Direct taxes:
- Taxpayer = economic burden-bearer (no pass-through to others)
- Examples: Individual income tax, corporate tax, estate tax,
  property tax
- Characteristics: Can apply progressive rates; responds to
  ability to pay (the "benefits principle")

Indirect taxes:
- Taxpayer ≠ economic burden-bearer (seller collects, consumer pays)
- Examples: Sales tax, excise tax, customs duties, VAT
- Characteristics: Regressive effect — low-income households
  spend a higher share of income on taxable consumption

Earmarked vs. General Revenue Taxes

General revenue taxes: Used for any government purpose
→ Individual income tax, corporate tax, and most federal taxes

Earmarked taxes: Dedicated to a specific purpose
→ Social Security payroll tax (FICA): funds Social Security trust fund
→ Medicare tax: funds Medicare trust fund
→ Highway fuel taxes: funds the Highway Trust Fund
→ Unemployment insurance (FUTA): funds unemployment benefits

The Constitutional and Statutory Basis of US Tax Law

Constitutional authority:
Article I, § 8: Congress has the power "to lay and collect Taxes,
Duties, Imposts and Excises"

16th Amendment (1913):
"The Congress shall have power to lay and collect taxes on incomes,
from whatever source derived, without apportionment among the several
States, and without regard to any census or enumeration."
→ This amendment created the modern federal income tax.

No Taxation Without Representation (statutory principle):
All federal taxes must be enacted by Congress in legislation.
The executive branch (Treasury/IRS) can only promulgate
regulations within the authority Congress has granted.

Rule of Law in Taxation:
① Elements of tax obligation must be defined by statute
② Tax provisions must be clear and ascertainable
③ No retroactive taxation (generally)
④ Statutory construction: tax statutes are construed strictly
   (ambiguity generally resolved in favor of the taxpayer)

Tax Equality:
Equal treatment for those with equal capacity to pay.
→ Ability-to-pay principle underlying progressive rate structure

The Structure of the Tax Code

US Federal Tax Law Hierarchy:
Internal Revenue Code (IRC / Title 26 of US Code) — Primary law
    ├── Individual income tax (Subchapter A)
    ├── Corporate income tax (Subchapter C)
    ├── S-corporations (Subchapter S)
    ├── Partnerships (Subchapter K)
    ├── Estate and gift tax (Subtitles B, E)
    ├── Employment taxes (Subtitle C)
    └── Excise taxes (Subtitle D)

Treasury Regulations (Treas. Reg.):
    Interpretive rules issued by Treasury Department
    under authority delegated by Congress

IRS Guidance:
    Revenue Rulings, Revenue Procedures, Notices,
    Private Letter Rulings (PLRs), Technical Advice Memoranda

Order of precedence when applicable law conflicts:
IRC (statute) → Treasury Regulations → IRS guidance (lower authority)

Tax liability lifecycle:
Arising: When the taxable event occurs (e.g., earning income)
Becoming fixed: Through self-assessment or IRS determination
Extinguishing: By payment, expiration of statute of limitations

Direct tax vs. Indirect tax ★★★★★ : Direct = taxpayer bears the cost (income tax, estate tax). Indirect = burden shifted to consumer (sales tax, excise tax). Memory tip: Direct = direct burden on taxpayer; Indirect = passes through intermediary

Constitutional authority for income tax ★★★★★ : 16th Amendment (1913) authorizes Congress to tax income from any source without apportionment. Article I, § 8 covers all other taxes. Memory tip: 16th Amendment = income tax; Article I = everything else

Federal vs. State/Local taxes ★★★★☆ : Federal = income, payroll, estate/gift, excise. State/local = state income, sales, property. Memory tip: IRS = federal; state agency = state/local

Practice Quiz

Q. Why is sales tax an indirect tax?

The retailer (taxpayer) collects the tax and remits it to the state, but the economic burden is passed to the consumer (the true burden-bearer). The retailer and the burden-bearer are different parties.

Q. What does the rule against retroactive taxation mean?

A new tax law generally cannot impose liability on transactions completed before the law was enacted. Taxpayers who acted in compliance with the law as it existed at the time cannot have new tax burdens applied retroactively.