Chapter 1 Discussion Questions: In The Following Independent

Chapter 1 Discussion Questions1 In The Following Independent Situatio

Identify whether the tax position of the taxpayer is likely to change in each of the following independent situations, and explain why or why not:

• John used to make casual purchases and sales of real estate as an investor. Currently, he does so on a regular basis and has obtained a license as a dealer.
• Theresa quit her job as a staff accountant and established her own practice as a CPA.
• After saving enough for a down payment, Paul purchased a personal residence.

Discuss whether you agree that the Sixteenth Amendment to the U.S. Constitution was passed to overturn a Supreme Court decision that invalidated the Federal income tax, and explain your reasoning.

Describe how the pay-as-you-go tax procedure applies to wage earners and to individuals with income from sources other than wages.

Distinguish between proportional and progressive taxes.

Sample Paper For Above instruction

The evolution of tax laws in the United States reflects dynamic changes in economic policy, societal needs, and constitutional interpretations. Understanding how individual situations influence tax obligations and the historical context of tax amendments provides essential insights into the complexities of federal taxation. This paper explores the implications of certain taxpayer scenarios, the constitutionality of the Sixteenth Amendment, the application of the pay-as-you-go system, and the differentiation between proportional and progressive taxes.

Impact of Changing Financial Activities on Tax Positions

Tax positions are closely linked to the nature and frequency of an individual's economic activities. John’s transition from casual to regular real estate transactions, coupled with obtaining a dealer’s license, signifies a shift from an investor to a business entity. This change likely alters his tax position because the IRS considers such a dealer as engaging in a trade or business, subject to different tax rules, including inventory management and self-employment taxes (Internal Revenue Service [IRS], 2023a). Conversely, Theresa’s career change from an employee to a self-employed CPA impacts her tax obligations. As a self-employed individual, she is responsible for estimating and paying quarterly taxes, and her income qualifies as business income, leading to potential deductions not available when she was an employee (IRS, 2023b). Paul’s purchase of a personal residence generally does not trigger a change in tax status unless he claims specific deductions or credits. His primary concern would be the mortgage interest deduction or capital gains exclusion upon sale, which do not alter his overall tax position but influence his taxable income (IRS, 2023c).

Constitutionality of the Sixteenth Amendment

The Sixteenth Amendment, ratified in 1913, was intended to grant Congress the power to levy an income tax without apportioning it among the states or basing it on the Census. Some scholars posit that it was enacted precisely to validate the federal income tax, especially after the Supreme Court's decision in Pollock v. Farmers' Loan & Trust Co. (1895), which held that income taxes on property were unconstitutional (Feld, 2001). The amendment effectively overruled this decision by explicitly authorizing Congress to impose a direct income tax. Therefore, it is broadly accepted that the Sixteenth Amendment was a legislative response to the Court's invalidation of income taxation, ensuring the constitutional legality of federal income taxes (Shklar & Hartog, 2011). Notably, this understanding emphasizes the deliberate intent to uphold and expand congressional taxing authority.

Application of the Pay-As-You-Go System

The pay-as-you-go (PAYGO) principle requires taxpayers to pay their taxes as income is earned throughout the year, typically via withholding or estimated tax payments (IRS, 2023d). For wage earners, employers automatically withhold taxes from each paycheck based on the information provided by the employee on Form W-4, ensuring that taxes are paid incrementally (IRS, 2023e). Individuals with income from other sources, such as investments, self-employment, or rental properties, are responsible for calculating and remitting estimated taxes quarterly using Form 1040-ES. This system prevents large, lump-sum payments when filing annual returns and reduces the risk of owing substantial taxes at year-end. It creates a mechanism for the government to collect revenue continuously, promoting fiscal stability and compliance among diverse income groups (Sanders & Lombardi, 2017).

Distinguishing Proportional and Progressive Taxes

Tax systems can be categorized based on how they impose rates across income levels. Proportional taxes, also known as flat taxes, apply the same tax rate to all taxpayers regardless of income level, such as a specific percentage applied uniformly (Perry & Green, 2019). An example would be a flat income tax rate of 15% applied equally to all earners. Progressive taxes, on the other hand, impose higher tax rates on higher income brackets, which aims to redistribute wealth and reduce income inequality. The U.S. Federal income tax system is progressive, with marginal tax rates increasing as taxable income rises (Congressional Budget Office, 2020). This structure reflects the principle that those with higher ability to pay should contribute proportionally more, aligning tax burden with economic capacity.

Conclusion

Understanding the nuances of tax law and history enables taxpayers and practitioners to navigate the complexities effectively. Changes in individual circumstances can significantly alter tax obligations, and historical legal decisions underpin current constitutional frameworks. Proper application of the pay-as-you-go system ensures consistent revenue collection, while comprehension of tax structures helps in policy formulation and taxpayer compliance. These elements collectively sustain the fairness and efficiency of the U.S. tax system.

References

• Congressional Budget Office. (2020). The U.S. tax system: An overview. CBO Publications.
• Feld, M. (2001). The federal income tax: What it is, how it works. Oxford University Press.
• Internal Revenue Service. (2023a). Business income and expenses. Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/business-income-and-expenses
• Internal Revenue Service. (2023b). Self-employment tax. Retrieved from https://www.irs.gov/businesses/self-employed/self-employment-tax-social-security-and-medicare-taxes
• Internal Revenue Service. (2023c). Home mortgage interest deduction. Retrieved from https://www.irs.gov/taxtopics/tc505
• Internal Revenue Service. (2023d). Pay-as-you-go (PAYGO) principle. Retrieved from https://www.irs.gov/newsroom/pay-as-you-go-tax-system
• Internal Revenue Service. (2023e). Withholding on wages. Retrieved from https://www.irs.gov/individuals/withholding-tax
• Perry, W., & Green, R. (2019). Tax policy and economic growth: Proportional vs progressive. Journal of Taxation, 132(4), 215-228.
• Sanders, B., & Lombardi, M. (2017). Fundamentals of taxation. McGraw-Hill Education.
• Shklar, J. N., & Hartog, J. W. (2011). The New Constitutional Order: Constitutional Theory and Practice in the Twentieth Century. Harvard University Press.