Chapter 15- The Personal Income Tax Public economics
1 Chapter 15 – The Personal Income Tax Public Economics
Basic structure Figure 15. 1 shows the series of steps used to compute a person's tax liability Step 1: Compute Adjusted Gross Income (AG丿 Step 2: Convert AGl into taxable income by subtracting exemptions and deductions Step 3: Compute tax due by applying a rate schedule, and subtracting tax credits
2 Basic Structure • Figure 15.1 shows the series of steps used to compute a person’s tax liability. • Step 1: Compute Adjusted Gross Income (AGI) • Step 2: Convert AGI into taxable income by subtracting exemptions and deductions • Step 3: Compute tax due by applying a rate schedule, and subtracting tax credits
Figure 15.1 ADD SUBTRACT APPLy Income from all taxable sources: Eligible personal exemptions Rate schedule Rents Some dividends Some realized capital gains SUBTRACT Unemployment compensation Eligible itemized deductions Tax credits Certain medical expenses State income taxes TAX LIABILITY SUBTRACI Certain business SUBTRACT expenses Standard deduction ADJUSTED GROSS INCOME (AGD TAXABLE INCOME
Figure 15.1
Basic structure Later in this lesson, will discuss extensively the " real-life aspects of the U.S. tax code Before doing that, useful to think about What the tax code“ shoulo”| ook like
4 Basic Structure • Later in this lesson, will discuss extensively the “real-life” aspects of the U.S. tax code. • Before doing that, useful to think about what the tax code “should” look like
Defining Income Which forms of income could be taxed? Wages and salaries, rents, dividends, and so on Haig-Simons definition of income Income is the money value of the net increase in an individuals power to consumer during a period
5 Defining Income • Which forms of income could be taxed? – Wages and salaries, rents, dividends, and so on … • Haig-Simons definition of income: Income is the money value of the net increase in an individual’s power to consumer during a period