Today's political environment has confused many Americans about the income tax system. Understand what our tax system is designed to do and what are some of the alternatives that have been proposed.

1. Basics of the
American tax system
Forrest Davis, E.A.
Davis Tax Services, LLP

2. Taypayers are confused
• The current political environment has
confused many taxpayers
• Taxes: What is fair?

3. Quick history
• Income was 1st taxed for the Civil War,
but the Supreme Court rejected it
• 16th Amendment created current income
tax in 1913
• Enrolled Agents were instituted in 1884

4. Goals of the income tax
• Raise money to pay for government
services
• Provide economic incentives for public
policy

5. Economic incentives
• Mortgage interest: encourage home
ownership
• Deduction for donations: encourage giving to
charity
• Capital gains: encourage investing in
businesses
• Salary deferral: encourage saving for
retirement
• Depreciation: encourage businesses to buy
equipment to be more productive

6. Progressive tax
• Higher income citizens should pay more
tax
• Poorest citizens should be exempt
• 6 tax brackets from 10% to 35%
• Highest bracket is for income over
$388,350

7. Taxpayers today
• 46% of American households pay no
income tax
• 1/4th of households still
would pay no tax if all tax
breaks were cut
• About half have no tax
because of tax breaks
• Top 1% of filers pay
31% of total taxes

8. Earned Income Tax Credit
• 26 million filers receive Earned Income
Credit (2009)
• "Negative income tax" for low-income
workers
• Refundable -- get money from taxes
instead of paying
• Many also get Child Tax Credit

9. How the US stacks up
• Americans
pay less taxes
than many
other countries

10. Where does the money go?
• Mandatory spending 57%
– Social Security 21%
– Medicare 13%
– Medicaid 7%
– Other programs 17%

11. An alternative: Flat tax
• Premise: Everyone should contribute
• Everyone should be equal
– Opposite of current progressive approach
• Would eliminate nearly all tax breaks
– No incentives for public policy

12. An alternative:
National Sales Tax
• Often tied to eliminating income tax
• Common in Europe
• Sales tax hits lower income citizens
harder
• Economic ups & downs affect sales tax
revenues

13. An alternative:
Tax businesses more
• Premise: businesses generate the money
for everybody
• Higher taxes could make companies
move out of US
• Higher taxes might force some
companies out of business

14. What's the answer?
• Congress doesn't know
• No easy answers
• Lots of different views

15. Davis Tax Services, LLP
• C. Forrest Davis, EA
• Tax Planning, Preparation &
Representation
• www.davis-tax.com
• 4402 E. Brott St.
• Tucson, AZ 85712