Taxation in the United States
The United States of America has separate federal and local governments with taxes imposed at each of these levels. Taxes are levied on income, property, capital gains, imports and gifts, as well as various fees. In 2010, taxes collected by federal and municipal governments amounted to 24.8% of GDP. In the OECD, only Chile and Mexico are taxed less as a share of their GDP. However, taxes fall much more on labor income than on capital income. Divergent taxes and subsidies for different forms of income and spending can constitute a form of indirect taxation of some activities over others. For example, individual spending on higher education can be said to be "taxed" at a high rate, compared to other forms of personal expenditure which are formally recognized as investments. Taxes are imposed on net income of individuals and corporations by the federal, most state, some local governments. Citizens and residents are allowed a credit for foreign taxes. Income subject to tax is determined under tax accounting rules, not financial accounting principles, includes all income from whatever source.
Most business expenses reduce taxable income. Individuals are permitted to reduce taxable income by personal allowances and certain non-business expenses, including home mortgage interest and local taxes, charitable contributions, medical and certain other expenses incurred above certain percentages of income. State rules for determining taxable income differ from federal rules. Federal marginal tax rates vary from 10% to 39.6% of taxable income. State and local tax rates vary by jurisdiction, from 0% to 13.30% of income, many are graduated. State taxes are treated as a deductible expense for federal tax computation, although the 2017 tax law imposed a $10,000 limit on the state and local tax deduction, which raised the effective tax rate on medium and high earners in high tax states. Prior to the SALT deduction limit, the average deduction exceeded $10,000 in most of the Midwest, exceeded $11,000 in most of the Northeastern United States, as well as California and Oregon; the states impacted the most by the limit were California.
The United States is one of two countries in the world that taxes its non-resident citizens on worldwide income, in the same manner and rates as residents. The U. S. Supreme Court upheld the constitutionality of imposition of such a tax in the case of Cook v. Tait. Payroll taxes are imposed by the federal and all state governments; these include Social Security and Medicare taxes imposed on both employers and employees, at a combined rate of 15.3%. Social Security tax applies only to the first $106,800 of wages in 2009 through 2011. However, benefits are only accrued on the first $106,800 of wages. Employers must withhold income taxes on wages. An unemployment tax and certain other levies apply to employers. Payroll taxes have increased as a share of federal revenue since the 1950s, while corporate income taxes have fallen as a share of revenue.. Property taxes are imposed by most local governments and many special purpose authorities based on the fair market value of property. School and other authorities are separately governed, impose separate taxes.
Property tax is imposed only on realty, though some jurisdictions tax some forms of business property. Property tax rules and rates vary with annual median rates ranging from 0.2% to 1.9% of a property's value depending on the state. Sales taxes are imposed by most states and some localities on the price at retail sale of many goods and some services. Sales tax rates vary among jurisdictions, from 0% to 16%, may vary within a jurisdiction based on the particular goods or services taxed. Sales tax is collected by the seller at the time of sale, or remitted as use tax by buyers of taxable items who did not pay sales tax; the United States imposes tariffs or customs duties on the import of many types of goods from many jurisdictions. These tariffs or duties must be paid before the goods can be imported. Rates of duty vary from 0 % based on the particular goods and country of origin. Estate and gift taxes are imposed by the federal and some state governments on the transfer of property inheritance, by will, or by lifetime donation.
Similar to federal income taxes, federal estate and gift taxes are imposed on worldwide property of citizens and residents and allow a credit for foreign taxes. The U. S. has an assortment of federal, state and special-purpose governmental jurisdictions. Each imposes taxes to or fund its operations; these taxes may be imposed on the same income, property or activity without offset of one tax against another. The types of tax imposed at each level of government vary, in part due to constitutional restrictions. Income taxes are imposed at most state levels. Taxes on property are imposed only at the local level, although there may be multiple local jurisdictions that tax the same property. Other excise taxes are imposed by the federal and some state governments. Sales taxes are imposed by many local governments. Customs duties or tariffs are only imposed by the federal government. A wide variety of user fees or license fees are imposed. A federal wealth tax would be required by the U. S. Constitution to be distributed to the States according to their populations, as this type of tax is considered a direct tax.
State and local government property taxes are w
An income tax is a tax imposed on individuals or entities that varies with respective income or profits. Income tax is computed as the product of a tax rate times taxable income. Taxation rates may vary by type or characteristics of the taxpayer; the tax rate may increase as taxable income increases. The tax imposed on companies is known as corporate tax and is levied at a flat rate. However, individuals are taxed at various rates according to the band. Further, the partnership firms are taxed at flat rate. Most jurisdictions exempt locally organized charitable organizations from tax. Capital gains may be taxed at different rates than other income. Credits of various sorts may be allowed that reduce tax; some jurisdictions impose the higher of an income tax or a tax on an alternative base or measure of income. Taxable income of taxpayers resident in the jurisdiction is total income less income producing expenses and other deductions. Only net gain from sale of property, including goods held for sale, is included in income.
Income of a corporation's shareholders includes distributions of profits from the corporation. Deductions include all income producing or business expenses including an allowance for recovery of costs of business assets. Many jurisdictions allow notional deductions for individuals, may allow deduction of some personal expenses. Most jurisdictions either do not tax income earned outside the jurisdiction or allow a credit for taxes paid to other jurisdictions on such income. Nonresidents are taxed only on certain types of income from sources within the jurisdictions, with few exceptions. Most jurisdictions require self-assessment of the tax and require payers of some types of income to withhold tax from those payments. Advance payments of tax by taxpayers may be required. Taxpayers not timely paying tax owed are subject to significant penalties, which may include jail for individuals or revocation of an entity's legal existence; the concept of taxing income is a modern innovation and presupposes several things: a money economy, reasonably accurate accounts, a common understanding of receipts and profits, an orderly society with reliable records.
For most of the history of civilization, these preconditions did not exist, taxes were based on other factors. Taxes on wealth, social position, ownership of the means of production were all common. Practices such as tithing, or an offering of first fruits, existed from ancient times, can be regarded as a precursor of the income tax, but they lacked precision and were not based on a concept of net increase; the first income tax is attributed to Egypt. In the early days of the Roman Republic, public taxes consisted of modest assessments on owned wealth and property; the tax rate under normal circumstances was 1% and sometimes would climb as high as 3% in situations such as war. These modest taxes were levied against land and other real estate, animals, personal items and monetary wealth; the more a person had in property, the more tax they paid. Taxes were collected from individuals. In the year 10 AD, Emperor Wang Mang of the Xin Dynasty instituted an unprecedented income tax, at the rate of 10 percent of profits, for professionals and skilled labor.
He was overthrown 13 years in 23 AD and earlier policies were restored during the reestablished Han Dynasty which followed. One of the first recorded taxes on income was the Saladin tithe introduced by Henry II in 1188 to raise money for the Third Crusade; the tithe demanded that each layperson in England and Wales be taxed one tenth of their personal income and moveable property. The inception date of the modern income tax is accepted as 1799, at the suggestion of Henry Beeke, the future Dean of Bristol; this income tax was introduced into Great Britain by Prime Minister William Pitt the Younger in his budget of December 1798, to pay for weapons and equipment for the French Revolutionary War. Pitt's new graduated income tax began at a levy of 2 old pence in the pound on incomes over £60, increased up to a maximum of 2 shillings in the pound on incomes of over £200. Pitt hoped that the new income tax would raise £10 million a year, but actual receipts for 1799 totalled only a little over £6 million.
Pitt's income tax was levied from 1799 to 1802, when it was abolished by Henry Addington during the Peace of Amiens. Addington had taken over as prime minister in 1801, after Pitt's resignation over Catholic Emancipation; the income tax was reintroduced by Addington in 1803 when hostilities with France recommenced, but it was again abolished in 1816, one year after the Battle of Waterloo. Opponents of the tax, who thought it should only be used to finance wars, wanted all records of the tax destroyed along with its repeal. Records were publicly burned by the Chancellor of the Exchequer, but copies were retained in the basement of the tax court. In the United Kingdom of Great Britain and Ireland, income tax was reintroduced by Sir Robert Peel by the Income Tax Act 1842. Peel, as a Conservative, had opposed income tax in the 1841 general election, but a growing budget deficit required a new source of funds; the new income tax, based on Addington's model, was imposed on incomes above £150. Although this measure was intended to be temporary, it soon became a fixture of the British taxation system.
A committee was formed in 1851 under Joseph Hume to investigate the matter, but failed to reach a clear recommendation. Despite the vociferous objection, William Gladstone, Chancellor of the Exchequer from 1852, kept the prog
A tax is a mandatory financial charge or some other type of levy imposed upon a taxpayer by a governmental organization in order to fund various public expenditures. A failure to pay, along with resistance to taxation, is punishable by law. Taxes may be paid in money or as its labour equivalent. Most countries have a tax system in place to pay for public, common or agreed national needs and government functions; some levy a flat percentage rate of taxation on personal annual income, but most scale taxes based on annual income amounts. Most countries charge a tax both on corporate income and dividends. Countries or subunits also impose wealth taxes, property taxes, sales taxes, value-added taxes, payroll taxes or tarrifs; the legal definition, the economic definition of taxes differ in some ways such as economists do not regard many transfers to governments as taxes. For example, some transfers to the public sector are comparable to prices. Examples include, tuition at public universities, fees for utilities provided by local governments.
Governments obtain resources by "creating" money and coins, through voluntary gifts, by imposing penalties, by borrowing, by confiscating wealth. From the view of economists, a tax is a non-penal, yet compulsory transfer of resources from the private to the public sector, levied on a basis of predetermined criteria and without reference to specific benefit received. In modern taxation systems, governments levy taxes in money; the method of taxation and the government expenditure of taxes raised is highly debated in politics and economics. Tax collection is performed by a government agency such as the Ghana Revenue Authority, Canada Revenue Agency, the Internal Revenue Service in the United States, Her Majesty's Revenue and Customs in the United Kingdom or Federal Tax Service in Russia; when taxes are not paid, the state may impose civil penalties or criminal penalties on the non-paying entity or individual. The levying of taxes aims to raise revenue to fund governing or to alter prices in order to affect demand.
States and their functional equivalents throughout history have used money provided by taxation to carry out many functions. Some of these include expenditures on economic infrastructure, scientific research and the arts, public works, data collection and dissemination, public insurance, the operation of government itself. A government's ability to raise taxes is called its fiscal capacity; when expenditures exceed tax revenue, a government accumulates debt. A portion of taxes may be used to service past debts. Governments use taxes to fund welfare and public services; these services can include education systems, pensions for the elderly, unemployment benefits, public transportation. Energy and waste management systems are common public utilities. According to the proponents of the chartalist theory of money creation, taxes are not needed for government revenue, as long as the government in question is able to issue fiat money. According to this view, the purpose of taxation is to maintain the stability of the currency, express public policy regarding the distribution of wealth, subsidizing certain industries or population groups or isolating the costs of certain benefits, such as highways or social security.
Effects can be divided in two fundamental categories: Taxes cause an income effect because they reduce purchasing power to taxpayers. Taxes cause a substitution effect when taxation causes a substitution between taxed goods and untaxed goods. If we consider, for instance, two normal goods, x and y, whose prices are px and py and an individual budget constraint given by the equation xpx + ypy = Y, where Y is the income, the slope of the budget constraint, in a graph where is represented good x on the vertical axis and good y on the horizontal axes, is equal to -py/px; the initial equilibrium is in the point, in which budget constraint and indifference curve are tangent, introducing an ad valorem tax on the y good, the budget constraint's slope becomes equal to -py/px. The new equilibrium is now in the tangent point with a lower indifferent curve; as can be noticed the tax's introduction causes two consequences: It changes the consumers' real income It raises the relative price of y good. The income effect shows the variation of y good quantity given by the change of real income.
The substitution effect shows the variation of y good determined by relative prices' variation. This kind of taxation can be considered distortionary. Another example can be the Introduction of an income lump-sum tax, with a parallel shift downward of the budget constraint, can be produced a higher revenue with the same loss of consumers' utility compared with the property tax case, from another point of view, the same revenue can be produced with a lower utility sacrifice; the lower utility or the lower revenue given by a distortionary tax are called excess pressure. The same result, reached with an income lump-sum tax, can be obtained with these following types of taxes (all of them cause only a budget constraint's shift without causi
Revenue Act of 1913
The Revenue Act of 1913 known as the Underwood Tariff or the Underwood-Simmons Act, re-established a federal income tax in the United States and lowered tariff rates. The act was sponsored by Representative Oscar Underwood, passed by the 63rd United States Congress, signed into law by President Woodrow Wilson. Wilson and other members of the Democratic Party had long seen high tariffs as equivalent to unfair taxes on consumers, tariff reduction was President Wilson's first priority upon taking office. Following the ratification of the Sixteenth Amendment in 1913, Democratic leaders agreed to seek passage of a major bill that would lower tariffs and implement an income tax. Underwood shepherded the revenue bill through the House of Representatives, but the bill won approval in the United States Senate only after extensive lobbying by the Wilson administration. Wilson signed the bill into law on October 3, 1913; the Revenue Act of 1913 lowered average tariff rates from 40 percent to 26 percent.
It established a one percent tax on income above $3,000 per year. A separate provision established a corporate tax of one percent, superseding a previous tax that had only applied to corporations with net incomes greater than $5,000 per year. Though a Republican-controlled Congress would raise tariff rates, the Revenue Act of 1913 marked an important shift in federal revenue policy, as government revenue would rely on income taxes rather than tariff duties. Democrats had long seen high tariff rates as equivalent to unfair taxes on consumers, tariff reduction was President Wilson's first priority upon taking office, he argued that the system of high tariffs "cuts us off from our proper part in the commerce of the world, violates the just principles of taxation, makes the government a facile instrument in the hands of private interests." While most Democrats were united behind a decrease in tariff rates, most Republicans held that high tariff rates were useful for protecting domestic manufacturing and factory workers against foreign competition.
Shortly before Wilson took office, the Sixteenth Amendment, proposed by Congress in 1909 during a debate over tariff legislation, was ratified by the requisite number of states. Following the ratification of the Sixteenth Amendment, Democratic leaders agreed to attach an income tax provision to their tariff reduction bill to make up for lost revenue, to shift the burden of funding the government towards the high earners that would be subject to the income tax. By late May 1913, House Majority Leader Oscar Underwood had passed a bill in the House that cut the average tariff rate by 10 percent. Underwood's bill, which represented the largest downward revision of the tariff since the Civil War, aggressively cut rates for raw materials, goods deemed to be "necessities," and products produced domestically by trusts, but it retained higher tariff rates for luxury goods; the bill instituted a tax on personal income above $4,000. Passage of Underwood's tariff bill in the Senate would prove more difficult than in the House because some Southern and Western Democrats favored the continued protection of the wool and sugar industries, because Democrats had a narrower majority in that chamber.
Seeking to marshal support for the tariff bill, Wilson met extensively with Democratic senators and appealed directly to the people through the press. After weeks of hearings and debate and Secretary of State William Jennings Bryan managed to unite Senate Democrats behind the bill; the Senate voted 44 to 37 in favor of the bill, with only one Democrat voting against it and only one Republican, progressive leader Robert M. La Follette Sr. voting for it. Wilson signed the Revenue Act of 1913 into law on October 3, 1913; the Revenue Act of 1913 reduced the average import tariff rates from 40 percent to 26 percent. The Act established the lowest rates since the Walker Tariff of 1857. Most schedules were a percentage of the value of the item; the duty on woolens went from 56% to 18.5%. Steel rails, raw wool, iron ore, agricultural implements now had zero rates; the reciprocity program wanted by the Republicans was eliminated. Congress rejected proposals for a tariff board to fix rates scientifically, but it set up a study commission.
The Underwood-Simmons measure vastly increased the free list, adding woolens, steel, farm machinery, many raw materials and foodstuffs. The average rate was 26%; the Revenue Act of 1913 restored a federal income tax for the first time since 1872. The federal government had adopted an income tax in the Wilson–Gorman Tariff Act, but that tax had been struck down by the Supreme Court in the case of Pollock v. Farmers' Loan & Trust Co; the Revenue Act of 1913 imposed a one percent tax on incomes above $3,000, with a top tax rate of six percent on those earning more than $500,000 per year. Three percent of the population was subject to the income tax; the bill included a one percent tax on the net income of all corporations, superseding a previous federal tax that had only applied to corporate net incomes above $5,000. The Supreme Court upheld the constitutionality of the income tax in the cases of Brushaber v. Union Pacific Railroad Co. and Stanton v. Baltic Mining Co. A normal income tax and an additional tax were levied against the net income of individuals, as shown in the following table: There was an exemption of $3,000 for single filers and $4,000 for married couples.
Therefore, the 1% bottom marginal rate applied only to the first $17,000 of income for single filers or the first $16,000 ($352,300 in
Revenue Act of 1924
The United States Revenue Act of 1924 known as the Mellon tax bill cut federal tax rates and established the U. S. Board of Tax Appeals, renamed the United States Tax Court in 1942; the bill was named after U. S. Secretary of the Treasury Andrew Mellon; the Revenue Act was applicable to incomes for 1924. The bottom rate, on income under $4,000, fell from 1.5% to 1.125%. A parallel act, the Indian Citizenship Act of 1924, granted all non-citizen resident Indians citizenship, thus the Revenue Act declared that there were no longer any "Indians, not taxed" to be not counted for purposes of United States Congressional apportionment. President Calvin Coolidge signed the bill into law. Both a normal Tax and a surtax were levied against the net income of individuals, as shown in the following table: Exemption of $1,000 for single filers and $2,500 for married couples and heads of family. A $400 exemption for each dependent under 18
Economic Growth and Tax Relief Reconciliation Act of 2001
The Economic Growth and Tax Relief Reconciliation Act of 2001 was a major piece of tax legislation passed by the 107th United States Congress and signed by President George W. Bush, it is known by its abbreviation EGTRRA, is referred to as one of the two "Bush tax cuts". Bush had made tax cuts the centerpiece of his campaign in the 2000 presidential election, he introduced a major tax cut proposal shortly after taking office. Though a handful of Democrats supported the bill, most support came from congressional Republicans; the bill was passed by Congress in May 2001, signed into law by Bush on June 7, 2001. Due to the narrow Republican majority in the United State Senate, EGGTRA was passed using the reconciliation process, which bypasses the Senate filibuster. EGGTRA lowered federal income tax rates, reducing the top tax rate from 39.6 percent to 35 percent and reducing rates for several other tax brackets. The act reduced capital gain taxes, raised raised pre-tax contribution limits for defined contribution plans and Individual Retirement Accounts, eliminated the estate tax.
In 2003, Bush signed another bill, the Jobs and Growth Tax Relief Reconciliation Act of 2003, which contained further tax cuts and accelerated certain tax changes that were part of EGGTRA. Due to the rules concerning reconciliation, EGGTRA contained a sunset provision that would end the tax cuts in 2011, but most of the cuts were made permanent with the passage of the American Taxpayer Relief Act of 2012. Bush's promise to cut taxes was the centerpiece of his 2000 presidential campaign, upon taking office, he made tax cuts his first major legislative priority. A budget surplus had developed during the Bill Clinton administration, with the Federal Reserve Chairman Alan Greenspan's support, Bush argued that the best use of the surplus was to lower taxes. By the time Bush took office, reduced economic growth had led to less robust federal budgetary projections, but Bush maintained that tax cuts were necessary to boost economic growth. After Treasury Secretary Paul O'Neill expressed concerns over the tax cut's size and the possibility of future deficits, Vice President Cheney took charge of writing the bill, which the administration proposed to Congress in March 2001.
Bush sought a $1.6 trillion tax cut over a ten-year period, but settled for a $1.35 trillion tax cut. The administration rejected the idea of "triggers" that would phase out the tax reductions should the government again run deficits; the Economic Growth and Tax Relief Reconciliation Act won the support of congressional Republicans and a minority of congressional Democrats, Bush signed it into law in June 2001. The narrow Republican majority in the Senate necessitated the use of the reconciliation, which in turn necessitated that the tax cuts would phase out in 2011 barring further legislative action. One of the most notable characteristics of EGTRRA is that its provisions were designed to sunset on January 1, 2011 (that is, for tax years, plan years, limitation years that begin after December 31, 2010. After a two-year extension by the Tax Relief, Unemployment Insurance Reauthorization, Job Creation Act of 2010, the Bush era rates for taxpayers making less than $400,000 per year were made permanent by the American Taxpayer Relief Act of 2012.
The sunset provision allowed EGTRRA to sidestep the Byrd Rule, a Senate rule that amends the Congressional Budget Act to allow Senators to block a piece of legislation if it purports a significant increase in the federal deficit beyond ten years. The sunset allowed the bill to stay within the letter of the PAYGO law while removing nearly $700 billion from amounts that would have triggered PAYGO sequestration. In addition to the tax cuts implemented by the EGTRRA, it initiated a series of rebates for all taxpayers that filed a tax return for 2000; the rebate was up to a maximum of $300 for single filers with no dependents, $500 for single parents, $600 for married couples. Anybody who paid less than their maximum rebate amount in net taxes received that amount, meaning some people who did not pay any taxes did not receive rebates; the rebates were automatic for anybody who filed their 2000 tax return on time, or filed for an extension and sent a return. If an eligible person did not receive a rebate check by December 2001 they could apply for the rebate in their 2001 tax return.
EGTRRA reduced the rates of individual income taxes: a new 10% bracket was created for single filers with taxable income up to $6,000, joint filers up to $12,000, heads of households up to $10,000. The 15% bracket's lower threshold was indexed to the new 10% bracket the 28% bracket would be lowered to 25% by 2006; the 31% bracket would be lowered to 28% by 2006 the 36% bracket would be lowered to 33% by 2006 the 39.6% bracket would be lowered to 35% by 2006The EGTRRA in many cases lowered the taxes on married couples filing jointly by increasing the standard deduction for joint filers to between 164% and 200% of the deduction for single filers. Additionally, EGTRRA increased the per-child tax credit and the amount eligible for credit spent on dependent child care, phased out limits on itemized deductions and personal exemptions for higher income taxpayers, increased the exemption for the Alternative Minimum Tax, created a new depreciation deduction for qualified property owners; the capital gains tax on qualified gains of property or stock held for five years was reduced from 10% to 8% for those in the 15% income tax bracket.
EGTRRA introduced sweeping changes to retirement plans, incorporating many of the so-called Portman-Cardin provisions proposed by those House members i