Taxation of Individuals and Business Entities 2011, eBook - 1st 2/e Content
Chapter1: An Introduction to Tax
Who Cares About Taxes and Why?
LO1 A clear understanding of the role of taxes in everyday decisions will help you make an informed decision about the value of studying taxation or pursuing a career in taxation. One view of taxation is that it represents an inconvenience every April 15th (the annual due date for filing federal individual tax returns without extensions). However, the role of taxation is much more pervasive than this view suggests. Your study of this subject will provide you a unique opportunity to develop an informed opinion about taxation. As a business student, you can overcome the mystery that pervades popular impressions of the tax system and perhaps, one day, share your expertise with friends or clients. What are some common decisions you face that taxes may influence? In this course, we alert you to situations in which you can increase your return on investments by up to one third! Even the best lessons in finance courses can’t approach the increase in risk-adjusted return that smart tax planning provides. Would you like to own your home someday? Tax deductions for home mortgage interest and real estate taxes can reduce the after-tax costs of owning a home relative to renting. Thus, when you face the decision to buy or rent, you can make an informed choice if you understand the relative tax advantages of home ownership. Would you like to retire someday? Understanding the tax-advantaged methods of saving for retirement can increase the after-tax value of your retirement nest egg—and thus increase the likelihood that you can afford to retire, and do so in style. Other common personal financial decisions that taxes influence include: choosing investments, evaluating alternative job offers, saving for education expenses, and doing gift or estate planning. Indeed, taxes are a part of everyday life and have a significant effect on many of the personal financial decisions all of us face. The role of taxes is not limited to personal finance. Taxes play an equally important role in fundamental business decisions such as the following: ■ What organizational form should a business use? ■ Where should the business locate? ■ How should business acquisitions be structured? ■ How should the business compensate employees? ■ What is the appropriate mix of debt and equity for the business? ■ Should the business rent or own its equipment and property? ■ How should the business distribute profits to its owners?
Savvy business decisions require owners and managers to consider all costs and benefits in order to evaluate the merits of a transaction. Although taxes don’t necessarily dominate these decisions, they do represent large transaction costs that businesses should factor into the financial decision-making process. Taxes also play a major part in the political process. U.S. presidential candidates often distinguish themselves from their opponents based upon their tax rhetoric. Indeed, the major political parties generally have very diverse views of the appropriate way to tax the public.1 Determining who is taxed, what is taxed, and how much is taxed are tough questions with nontrivial answers. Voters must have a basic understanding of taxes to evaluate the merits of alternative tax proposals. Later in this chapter, we’ll introduce criteria you can use to evaluate alternative tax proposals. Taxes in the Real World No New Taxes George H. W. Bush famously stated in his 1988 presidential election campaign, “Read my lips, no new taxes.” In 1990, he signed legislation increasing individual income tax rates. Political observers cite this as one reason he lost the 1992 presidential election to Bill Clinton.
In summary, taxes affect many aspects of personal, business, and...
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