Glossary Of Terms
Alternative Minimum Tax:
The alternative minimum tax (or AMT) is an extra tax some people have to pay on top of the regular income tax. The AMT provides an alternative set of rules for calculating your income tax. These rules determine the minimum amount of tax that someone with your income should be required to pay. If you’re already paying at least that much because of the “regular” income tax, you don’t have to pay the AMT. But if your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax.
Average Tax Rate:
The average tax rate is computed by dividing total taxes paid by the tax base.
Business taxes are those taxes that are legally imposed on businesses, such as the corporate income tax and employer payroll taxes. However, businesses do not necessarily pay these taxes, as they treat them as part of the cost of doing business and pass them on to consumers in the form of higher prices than would otherwise be in the absence of these taxes.
Business Transfer Tax:
The Business Transfer Tax (BTT) is a subtraction method value-added tax based on the difference between revenues and purchased goods and services for all enterprises and employers. The BTT would exempt fixed investment and exports, but it would apply to imports and it would credit an employer for Social Security taxes paid.
Compliance costs include the value of the taxpayer’s time and resources, along with any out-of-pocket costs paid to tax preparers and other tax advisors, spent to ensure compliance with the tax laws.
Consumed Income Tax:
Under a consumed income tax, all household savings would be tax deductible. Meanwhile, all consumption would be taxed. Taxable income is defined as total cash inflow minus savings and previous tax payments.
The taxation of personal income only when it is spent on goods and services is referred to as a consumption tax. The tax base for a consumption tax consists of the total purchases of goods and services in the economy. It does not tax savings.
Corporate Profits Tax:
A tax on corporate profits paid by businesses that are C corporations.
A customs duty is a tariff or tax on the import of or export of goods.
Expenses that the IRS allows you to deduct from your gross income in order to reduce your taxable income. Certain expenses can be deducted only if you itemize your deductions – state and local taxes, charitable contributions, medical expenses in excess of a certain percentage of your income, etc. Other expenses can be deducted without itemizing deductions – alimony, moving expenses, IRA contributions, etc. Under the FairTax deductions are no longer necessary since there are no taxes on your income, i.e., there is nothing to deduct them from.
A direct tax is one that you have to pay; it cannot be shifted to others. State and federal income and property taxes are examples of direct taxes.
Dynamic Tax Model:
Dynamic tax models recognize that changes in the tax system will change the financial choices of workers, consumers, and businesses. Such a model would take into account that replacement of the income tax system with a consumption tax system will increase savings and investment, productivity, and economic growth.
Effective tax rate:
The actual rate of tax paid by the taxpayer as opposed to the stated tax rate. The stated FairTax rate is 23 percent but persons spending at the poverty level have an effective tax rate of 0 percent since the FairTax prebate pays all of the tax on spending at the poverty level. Sales tax paid divided by total spending on taxable goods and services is the effective tax rate under the FairTax.
Efficiency costs result when taxes alter the economic decisions that people make – decisions such as how much to work, how much to save, what to consume, and where to invest – in ways that reduce overall well-being.
Embedded taxes are taxes that are hidden from taxpayers. They are passed on to consumers through higher prices, to workers through lower wages, or to shareholders through lower dividends than would otherwise be the case in the absence of those taxes.
A tax on a specific good or service, often imposed on the quantity purchased rather than the value. Examples are gasoline taxes, cigarette taxes, and telecommunications taxes.
Family consumption allowance:
The family consumption allowance is equal to the poverty level guidelines established by the Department of Health and Human Services, plus and adjustment to eliminate the marriage penalty. This is the amount of consumption that can be purchased tax free under the FairTax. The FairTax prebate rebates the taxes on this amount of spending to each qualified household.
FICA (Federal Insurance Contribution Act):
The Federal Insurance Contributions Act (FICA) consists of both a Social Security (retirement) payroll tax and a Medicare (hospital insurance) tax. The tax is levied on employers, employees, and certain self-employed individuals.
In tax terms, “flat” simply means everybody pays the same rate; there is no graduation in the rate structure. If you graph income levels versus tax rates, you get a “flat” line. The “flat tax” is a tax on income with a single uniform rate and a standard deduction.
A hidden tax is one that is not explicitly clear to the taxpayer. Sales taxes are not considered to be hidden taxes, because the tax is clearly indicated on cash register receipts. When the government imposes taxes on businesses the potential responses include (1) raising prices, (2) lowering dividends to shareholders, and (3) reducing wages and benefits or capital investment. Under any of the three options, Americans end up paying the tax either through lower wages if they work for a corporation, poorer performance if they own a mutual fund, or higher prices when they buy a product. But this tax burden doesn’t show up on any pay slip or price tag.
Income taxes are the primary source of revenue for the federal government and many states. The tax is based on your gross earned income (salaries, wages, tips, and dividends if you own stock) plus unearned income less deductions, exemptions or credits. Both businesses and individuals are subject to income taxes.
A tax which is not directly paid by the taxpayer but is included in his/her expenses. A sales tax is an indirect tax; you pay it when you purchase something.
In addition to federal and state taxes, your local town or city can also impose taxes. Examples of local taxes are property taxes, sales taxes, and occasionally income taxes.
Marginal tax rate:
The marginal tax rate is the amount of taxes paid on the next dollar earned. The marginal tax rate is the most relevant tax rate when making an economic analysis about the impact of a tax system on decisions about working, saving, and investing because the marginal tax rate is what the tax will be on the activity the taxpayer is thinking about undertaking. For example, a worker considering whether to work overtime or to take a second job will be most concerned about what percentage of the extra money he will earn will be paid in taxes.
Payroll taxes are imposed on wages and salaries in addition to income taxes. There are no tax deductions or exemptions for payroll taxes, however, Social Security taxes do not apply to wages in excess of $94,200. Medicare and federal unemployment taxes are payroll taxes.
The FairTax prebate is a rebate of taxes paid on spending up to the poverty level. It is paid, in advance, on a monthly basis and is equal to the FairTax rate times the family consumption allowance.
A progressive tax is one where the rate of tax increases as ability to pay increases.
Property taxes are value-based taxes that an owner of real estate or other property pays on the value of the thing taxed. The taxing authority requires and/or performs an appraisal of the monetary value of the property, and tax is assessed in proportion to that value.
A regressive tax is one where the rate of tax decreases as the ability to pay increases.
A tax proposal is revenue neutral if it neither increases nor decreases tax revenues when compared to existing law.
A tax proposal is revenue neutral if it neither increases nor decreases tax revenues when compared to existing law.
State taxes are taxes that are imposed by state governments to fund state programs. The state taxes generating the largest share of state revenues are state sales taxes and state income taxes.
Static tax model:
A static tax model assumes away the behavioral effects of tax changes. For example, a static tax model would assume that an increase in the tax rate would have no effect on the tax base.
Statutory tax rate:
The tax rate specified by law. The statutory rate of the FairTax is 23 percent.
Tax avoidance refers to the legal means by which taxpayers can reduce their tax bill. Examples would be investing in tax-free municipal bonds so that you would not have to pay income tax on the earnings from those bonds.
The tax base is what the tax is imposed on. In an income tax, the tax base is taxable income. In a sales tax, the tax base is taxable sales.
Tax burden refers to the changes in peoples’ after-tax incomes after all the economic adjustments to the tax have occurred throughout the economy as consumption behavior, resource use, and incomes shift to their new patterns.
Tax evasion refers to illegal activities undertaken by taxpayers to escape paying taxes.
An exclusive tax rate “excludes” the amount of the tax paid from the base. Most state sales taxes are tax exclusive because they are imposed only on the amount that you pay to the store before taxes (i.e., exclusive of taxes). Take a person that earns $100, pays $20 in tax and spends $80 in the store. In a tax-exclusive system like many state sales taxes, we would say that the tax rate is 25 percent because $20 divided by $80 is 25 percent. In a tax-inclusive system like the income tax, we would say that the tax rate is 20 percent because $20 divided by $100 is 20 percent.
The tax gap is defined by the IRS as the difference between what taxpayers should pay (what they owe) and what they actually pay on a timely basis.
A tax haven is a jurisdiction where certain taxes are levied at a low rate or not at all. This encourages wealthy individuals and/or firms to establish themselves in areas that would otherwise be overlooked. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies.
Tax incidence refers to how the economic supply and demand conditions in the market for the taxed product, service, or factor of production distribute the tax among the suppliers and consumers of the taxed item. This distribution may be different in the short run and the long run.
An inclusive tax rate “includes” the amount of tax paid in the base. The income tax and payroll tax are tax-inclusive taxes because they are imposed not only on the money you actually receive, but also on the taxes that are withheld from your paycheck. Take a person that earns $100, pays $20 in tax and spends $80 in the store. In a tax-inclusive system like the income tax, we would say that the tax rate is 20 percent because $20 divided by $100 is 20 percent. In a tax-exclusive system like many state sales taxes, we would say that the tax rate is 25 percent because $20 divided by $80 is 25 percent.
One’s tax liability is the amount of taxes he/she owes.
The tax rate is the amount of tax per dollar of income received (income tax) or the amount of tax per dollar spent (consumption tax).
The difference between workers’ take-home pay and what it costs to employ them. For example, a worker gets paid $12.50 per hour or $500 per week, but because the governments take a variety of income and payroll taxes out of his/her wages, the worker sees a net of only $380, or $9.50 an hour. The $120 per week difference is the tax wedge. The worker is doing $500 worth of work, but getting only $380 for his labors, and has a tendency to offer less labor as the wedge increases.
Used goods are those items which were owned before the FairTax was implemented or goods on which the FairTax has already been paid. The FairTax does not tax used goods.
A value-added tax (VAT) is levied on the “value added” to goods and services as they pass through each stage of the production process. While a VAT can operate several ways, it is typically administered by taxing the total value of sales of all businesses, but allowing businesses to claim a credit for taxes paid on their purchases of raw materials, intermediate materials, and capital goods from other businesses. Like the sales tax, it is a tax on final consumption and has a tax base equivalent to a sales tax.
Withholding (“Pay-as-you-earn” taxation):
Your employer takes out a certain amount from your check to pay the government taxes.