Income tax accounting question (a) list and explain at least four reasons for pr
ID: 2419164 • Letter: I
Question
Income tax accounting question
(a) list and explain at least four reasons for provisions of the federal income tax law other than raising revenue for the federal government.
(b) Some of these provisions result in taxpayers with the same income paying different rates and amounts of federal income tax. For example, taxpayers whose income consist of qualified dividends and net capital gains pay less tax than someone who earns the same income as salary. What is the reason for the lower tax rate on qualified dividends and net capital gains?
(c) Define horizontal equity. Is the reason for the lower tax rate on qualified dividends and net capital gains more important than the violation of the principle of horizontal equity that results? Explain in detail.
Explanation / Answer
Answer (a) Following are the reasons for levy of federal income tax law:-
(i) Reducing the gap between Rich and Poor by imposing higher income taxes on persons with higer incomes
(ii) Creation of necessary infrastructure in the Country
(iii) To catch hold of any illegal money transactions
(iv) Discourage tax avoidance and encourage orderly flow of tax transactions
Answer (b) Qualified dividends are taxes at lower tax rates to promote capital investments and flow of money across economy. For instance, one of the conditions of qualified dividends to be taxes at lower rates is to hold stocks for certain minimum period of time. This promotes larger duration investments and money flows in the economy. Similarly, net capital gains are taxes at lower rates to promote regular way flow of money.
Answer (c) : Horizontal equity means equal treatment of equals and this is a means for achieving a distribution of tax burdens that is vertically equitable. It explains that individuals having similar income should pay the same amount in taxes. Horizontal equity applies to individuals considered equal regardless of the tax system in place. The more neutral a tax system is the more horizontally equitable is present.