Taxation in the United States is a complex system which may involve payment to at least four different levels of government and many methods of taxation. United States taxation includes local government, possibly including one or more of municipal, township, district and county governments. It also includes regional entities such as school and utility, and transit districts as well as including state and federal government.
The National Bureau of Economic Research has concluded that the combined federal, state, and local government average marginal tax rate for most workers to be about 40% of income.[1][2] The Tax Foundation concluded that government at all levels will collect 30.8% of the nation's income for 2008.[3] Tax Day, the day by which tax returns are due, is usually April 15.
Federal taxation
[edit] History
Tariffs were the largest source of federal revenue from the 1790s to the eve of World War I, until it was surpassed by income taxes.
The first federal statutes imposing the legal obligation to pay a federal income tax were adopted by Congress in 1861 and 1862 to pay for the Civil War. The 1862 law levied a 3% tax on incomes above $800, rising to 5% for incomes above $10,000. Rates were raised in 1864. This income tax was repealed in 1872, but a new income tax statute was enacted as part of the Wilson-Gorman Tariff Act in 1894.[4]
The United States Constitution specified Congress could impose a direct tax only if it was apportioned among the states according to each state's census population. [5] In its 1895 decision the Supreme Court held in the case of Pollock v. Farmers' Loan & Trust Co. that a tax on income from property (a tax on interest, dividends or rent) was a direct tax under the Constitution, and so had to be apportioned.
The apportionment requirement made income taxes on property practically impossible, and Congress did not want to limit the income tax solely to a tax on wages. Therefore, in 1909 Congress proposed the Sixteenth Amendment, which became part of the Constitution in 1913 when it was ratified by the required number of states. The Amendment modified the requirement for apportionment of direct taxes by exempting all income taxes—whether considered direct or indirect—from the apportionment requirement. Congress re-adopted the income tax that same year, levying a 1% tax on net personal incomes above $3,000, with a 6% surtax on incomes above $500,000. By 1918, the top rate of the income tax was increased to 77% (on income over $1,000,000) to finance World War I. The top marginal tax rate was reduced to 58% in 1922, to 25% in 1925, and finally to 24% in 1929. In 1932 the top marginal tax rate was increased to 63% during the Great Depression and steadily increased, reaching 94% (on all income over $200,000) in 1945. During World War II, Congress introduced payroll withholding and quarterly tax payments, Franklin D. Roosevelt tried to impose a 100% tax on all incomes over $25,000 to help with the war effort. Top marginal tax rates stayed near or above 90% until 1964 when the top marginal tax rate was lowered to 70%. The top marginal tax rate was lowered to 50% in 1982 and eventually to 28% in 1988. However, in the intervening years Congress subsequently increased the top marginal tax rate to 35% which is the tax rate currently in 2008. President Barack Obama's budget consist of raising the top marginal tax rate to 39.6% in fiscal year 2010.
At first the income tax was incrementally expanded by the Congress of the United States, and then inflation automatically raised most persons into tax brackets formerly reserved for the wealthy until income tax brackets were adjusted for inflation. Income tax now applies to almost two-thirds of the population.[6] The lowest earning workers, especially those with dependents, pay no income taxes as a group and actually get a small subsidy from the federal government because of child credits and the Earned Income Tax Credit.
Some lower income individuals pay a proportionately higher share of payroll taxes for Social Security and Medicare than do some higher income individuals in terms of the effective tax rate. All income earned up to a point, adjusted annually for inflation ($94,200 for the year 2006 and $97,500 for the year 2007) is taxed at 7.65% (consisting of the 6.2% Social Security tax and the 1.45% Medicare tax) on the employee with an additional 7.65% in tax incurred by the employer. The annual limitation amount is sometimes called the "Social Security tax wage base amount" or "Contribution and Benefit Base." Above the annual limit amount, only the 1.45% Medicare tax is imposed. In terms of the effective rate, this means that a worker earning $20,000 for 2006 pays at a 7.65% effective rate ($1,530) while a worker earning $200,000 pays at an effective rate of about 4.37% ($8,740).
When an individual's Social Security benefit is calculated, income in excess of each year's Social Security Tax wage base amount (e.g., $97,500 for 2007) is disregarded for purposes of the calculation of future benefits. Although some lower income individuals pay a proportionately higher share of payroll taxes than do higher income individuals in terms of the "effective tax rate", the lower income individuals also receive a proportionately higher share of Social Security benefits than do some higher income individuals, since the lower income individuals will receive a much higher income replacement percentage in retirement than higher income individuals affected by the Social Security tax wage base cap. If the higher income individuals want to receive an income replacement percentage in retirement that is similar to the income replacement percentage that lower income individuals receive from Social Security, higher income individuals must achieve this through other means such as 401(k)s, IRAs, defined benefit pension plans, personal savings, etc. As a percentage of income, some higher income individuals receive less from Social Security than do lower income individuals.
Self employed people pay the entire 15.3%, but are allowed to deduct one-half of this amount in computing taxable income for purposes of the Federal income tax.[7]
The federal government is now financed primarily by personal and corporate income taxes.[citation needed] While it was originally funded via tariffs upon imported goods, tariffs now represent only a minor portion of federal revenues. There are also non-tax fees to recompense agencies for services or to fill specific trust funds such as the fee placed upon airline tickets for airport expansion and air traffic control. Often the receipts intended to be placed in "trust" funds are used for other purposes, with the government posting an IOU ('I owe you') in the form of a federal bond or other accounting instrument, then spending the money on unrelated current expenditures.
The federal government collects several specific taxes in addition to the general income tax. Social Security and Medicare are large social support programs which are funded by taxes on personal earned income. Estate taxes are levied on inheritance. Net long-term capital gains as well as certain types of qualified dividend income are taxed preferentially.
Federal excise taxes are applied to specific items such as motor fuels, tires, telephone usage, tobacco products, and alcoholic beverages. Excise taxes are often, but not always, allocated to special funds related to the object or activity taxed.
Federal tax code
The Federal tax law is administered primarily by the Internal Revenue Service, a bureau of the Treasury. The U.S. tax code is known as the Internal Revenue Code of 1986 (title 26 of the United States Code). The Code's complexity generally arises from two factors: the use of the tax code for purposes other than raising revenue, and the feedback process of amending the code.
While the main intent of the law is to provide revenue for the federal government, the tax code is frequently used for public policy reasons i.e., to achieve social, economic, and political goals. For example, to encourage home ownership, the tax law provides a deduction for mortgage interest expense on debt secured by primary residences. In addition, the law does not allow a deduction for renters for rent paid to offset the advantage of nonrecognition of exclusion of imputed owner occupied rent. An income tax system that favors neither renting nor owning homes would not allow the mortgage interest deduction and would tax the imputed rent for owners who live in their own homes.
Because the government uses the tax code as an instrument of social policy, the code as a whole appears to some critics[citation needed] to lack a coherent organizing principle. The purported lack of a coherent organizing principle arguably has become magnified over time, due to the interplay between successive legislative amendments and regulatory changes to the law and the private sector responses to those amendments and changes. For instance, suppose that Congress enacts a tax credit to encourage a particular type of activity. In response, a group of taxpayers who are not the intended beneficiaries of the credit re-order their affairs, or the superficial aspects of their affairs, to qualify for the credit. Congress responds by amending the code to add restrictions and target the credit more effectively. Certain taxpayers manage to use this change to claim additional benefits, so Congress acts again, and so on. The result is a feedback loop of enactment and response, which, over an extended period of time, produces significant complexity.
Tax distribution
As of 2007, there are about 138 million taxpayers in the United States.[8] The Treasury Department in 2006 reported, based on Internal Revenue Service (IRS) data, the share of federal income taxes paid by taxpayers of various income levels. The data shows the progressive tax structure of the U.S. federal income tax system on individuals that reduces the tax incidence of people with smaller incomes, as they shift the incidence disproportionately to those with higher incomes - the top 0.1% of taxpayers by income pay 17.4% of federal income taxes (earning 9.1% of the income), the top 1% with gross income of $328,049 or more pay 36.9% (earning 19%), the top 5% with gross income of $137,056 or more pay 57.1% (earning 33.4%), and the bottom 50% with gross income of $30,122 or less pay 3.3% (earning 13.4%).[9][10] If the federal taxation rate is compared with the wealth distribution rate, the net wealth (not only income but also including real estate, cars, house, stocks, etc) distribution of the United States does almost coincide with the share of income tax - the top 1% pay 36.9% of federal tax (wealth 32.7%), the top 5% pay 57.1% (wealth 57.2%), top 10% pay 68% (wealth 69.8%), and the bottom 50% pay 3.3% (wealth 2.8%).[11]
Other taxes in the United States with a less progressive structure or a regressive structure, and legal tax avoidance loopholes change the overall tax burden distribution. For example, the payroll tax system (FICA), a 12.4% Social Security tax on wages up to $106,800(for 2009) and a 2.9% Medicare tax (a 15.3% total tax that is often split between employee and employer) is a regressive tax on income with no standard deduction or personal exemptions. The Center on Budget and Policy Priorities states that three-fourths of U.S. taxpayers pay more in payroll taxes than they do in income taxes.[12] The Tax Foundation has stated that the burden of the corporate income tax (a 15-39% tax) falls on customers and workers of the corporations, who are often not rich.[13]
Inflation and tax brackets
Most tax laws are not accurately indexed to inflation. Either they ignore inflation completely, or they are indexed to the Consumer Price Index (CPI), which some argue understates real inflation.[14] In a progressive tax system, failure to index the brackets to inflation will eventually result in effective tax increases (if inflation is sustained), as inflation in wages will increase individual income and move individuals into higher tax brackets with higher percentage rate. One example is the Alternative Minimum Tax; since it is not indexed to inflation,[15][16] an increasing number of upper-middle-income taxpayers have been finding themselves subject to this tax.
From 1971 to 1977, as the CPI increased 47%, taxpayers faced 60% more taxes at the local, state and federal levels.[17]
Tax withholding
Federal payroll taxes in the United States are primarily collected by employers on behalf of the Internal Revenue Service (IRS). The Federal income tax uses a system of direct withholding. Employers deduct part of a taxpayer's income directly from their payroll checks. Self-employed individuals make similar payments to the government. The amount of withholding is calculated based on an employee's expected annual salary and the employee's living situation (married or unmarried, number of dependents, other factors). Withholding does not perfectly calculate an individual's tax each year. The difference between the amount withheld and the actual tax is either paid to the government after the end of the year, or refunded by the government. Withholding is done on an honor system with penalties imposed on individuals who do not have enough withheld (or make enough estimated tax payments) during the year. The amounts deducted can be found in IRS Publication 15, also referred to as Circular E. For farmers, the rules are outlined in Publication 51 (Circular A). The IRS's Publication 505 can also be used to estimate the amount of tax withheld.
Some individuals choose to withhold more of their estimated tax burden than necessary, using the withholding and the refund check at the end of the year as a way of "forced savings" (at zero percent interest). Conversely, other individuals withhold as little as possible, using the general rule that, for purposes of avoiding the penalty for underpayment of estimated tax (a "penalty" that is essentially analogous to an interest charge that covers the periods from each of four specified interim payment due dates[18] to the initial due date for the filing of the tax return), the total tax paid or constructively paid by April 15th of the year following the tax year in question (i.e., the initial due date for filing the return) need be no more than 100% of the previous year's tax liability. Such individuals thus pay a relatively large amount on April 15.[19] Many individuals fall somewhere in the middle.
Federal income tax
As of June 2001, the income tax forms the bulk of taxes collected by the U.S. government.[citation needed] Depending on individual income, the tax ranges from zero to 35% of one's taxable income.
The income tax is considered a progressive tax because the tax rate is higher as a percentage of the income for higher-income individuals. For an example showing the tax rates imposed by Congress in 1954 on the taxable income of unmarried individuals—with rates as high as 91%—see the chart at Internal Revenue Code of 1954.
Income tax is also imposed on the taxable income of most corporations and again on dividends paid to stockholders, although individuals usually pay a preferential tax rate on dividends; this is sometimes referred to as double taxation.
One unique aspect of federal income tax in the United States, is that the U.S. uses citizenship in addition to residency in determining whether a person's income is subject to U.S. taxation. All U.S. citizens, including those who do not live in the United States, are subject to U.S. income tax on their worldwide income. There are provisions that exist to reduce double-taxation. Most other countries do not impose tax on their citizens who are not resident within their borders, unless they have income which is sourced in that country (and even then they only tax that specific income). [20]
Tax deductions/credits
The U.S. government rewards certain behavior with tax deductions or tax credits. For example, amounts used to pay mortgage interest on a personal home may be deductible, if the taxpayer elects to itemize. Taxpayers who do not participate in an employer-sponsored pension plan may contribute up to $4,000 ($5,000 if age 50 or above) into an individual retirement account, and deduct that contribution from their gross income if they fall within certain income limits. The Earned Income Tax Credit benefits low- to moderate-income working families. It is also possible to receive a child and dependent care credit for amounts spent on daycare.
For businesses, a corporate expense account is treated under the tax code as either "accountable" or "unaccountable". Accountable expense accounts are subject to a variety of restrictions and IRS regulations. There must be a documented business purpose for the account, and spending from the account must be documentable, typically by means of receipts. Any money entrusted to the employee from the account that is not spent for business purposes and accounted for must be returned to the employer. [21]
[edit] Methods of calculation
There are two required ways to calculate the U.S. income tax. The "regular tax" is based on the gross income minus any applicable deductions and then a marginal tax percentage is applied according to the taxpayer's income bracket. From this result, any applicable tax credits are subtracted and the result is the income tax owed. If the result is a negative number due to refundable tax credits and/or if the Federal Withholding Tax was greater than the income tax that was actually owed, the taxpayer is entitled to a tax refund. A taxpayer eligible for a refundable credit (such as the earned income tax credit) may receive a refund even without paying any federal income tax.
The second way, the "Alternative Minimum Tax" (AMT) is based on the gross income, computed without regard to certain tax preference items (such as tax-exempt interest on certain private activity bonds) and with a reduced number of exemptions and deductions. This higher income base is taxed in two rate brackets, 26% and 28%, depending on taxpayer income. The taxpayer pays the higher of the two computed tax liabilities.
In the tax year 2000, many taxpayers in Silicon Valley were caught unprepared by the AMT due to the sudden decline in technology stock prices. Under AMT rules, unrealized gains on incentive stock options are taxed at the date the options are exercised. In contrast, under the regular tax rules capital gains taxes are not paid until the actual shares of stock are sold. For example, if someone exercised a 10,000 share Nortel stock option at $7 when the stock price was at $87, the bargain element was $80 per share or $800,000. Without selling the stock, the stock price dropped to $7. Although the real gain is $0, the $800,000 bargain element still becomes an AMT adjustment, and the taxpayer owes thousands of dollars in AMT.
The AMT was designed to prevent people from using loopholes in the tax law to avoid tax. However, the inclusion of unrealized gain on incentive stock options imposes difficulties for people who cannot come up with cash to pay tax on gains that they have not realized yet. As a result, Congress has taken action to modify the AMT regarding incentive stock options. In 2000 and 2001, people exercised incentive stock options and held onto the shares, hoping to pay long-term capital gains taxes instead of short-term capital gains taxes.[23] Many of these people were forced to pay the AMT on this income, and by the end of the year, the stock was no longer worth the amount of AMT tax owed, forcing some individuals into bankruptcy. In the Nortel example given above, the individual would receive a credit for the AMT paid when the individual did eventually sell the Nortel shares. However, given the way AMT carryover amounts are recalculated each year, the eventual credit received is in many cases less than originally paid, another insidious artifact of AMT.
Another perceived flaw in the AMT is that it hasn't been changed at the same rate as regular income taxes. The tax cut passed in 2001 lowered regular tax rates, but did not lower AMT tax rates. As a result, certain middle-class people are affected by the AMT, even though that was not the original intent of the law. People with large deductions, particularly mortgage interest and state income tax deductions, are affected the most. The AMT also has the potential to tax families with large numbers of dependents (usually children), although in recent years, Congress has acted to keep deductions for dependents, especially children, from triggering the AMT.
A further criticism is that the AMT does not even affect its intended target. Congress introduced the AMT after it was discovered that 21 millionaires did not pay any US income tax in 1969 as a result of various deductions taken on their income tax return. Since the marginal rate of persons with one million dollars of income is 35% and the AMT uses a 26% rate on all income, it is unlikely that millionaires would get tripped by the AMT as their effective tax rates are already higher. Those that do get caught by the AMT are typically upper-middle class persons making approximately $200k-$500k.
Statistics from the U.S. Internal Revenue Service (IRS) for 2000 show that returns showing less than $15,000 in adjusted gross income amounted to 30% of total returns filed but accounted for less than 1% of tax paid. By contrast, although they made up only 2% of all taxpayers that year, taxpayers reporting $200,000 or more in adjusted gross income paid 45% of all federal income taxes. (See: Lucky duckies)
[edit] Progressive nature
In general, the U.S. income tax is progressive, at least with respect to individuals that earn wage income.
"Progressivity" as it pertains to tax is usually defined as meaning that the higher a person's level of income, the higher a tax rate that person pays. In the mid-twentieth century, tax rates in the United States and United Kingdom exceeded 90%. As recently as the late 1970s, the top tax rate in the U.S. was 70%. Despite the dramatic fall in the marginal tax-rate of the top-income brackets from the 1960s to the 2000s, taxes on wages, interest, and dividends have become more progressive over the past fifty years.[24]
Progressivity in the income tax is accomplished mainly by establishing tax "brackets" - branches of income that are taxed at progressively higher rates. For example, for tax year 2006 an unmarried person with no dependents will pay 10% tax on the first $7,550 of taxable income. The next $23,100 (i.e. taxable income over $7,550, up to $30,650) is taxed at 15%. The next $43,550 of income is taxed at 25%. Additional brackets of 28%, 33%, and 35% apply to higher levels of income. So, if a person has $50,000 of taxable income, his next dollar of income earned will be taxed at 25% - this is referred to as "being in the 25% tax bracket," or more formally as having a marginal rate of 25%. However, the tax on $50,000 of taxable income figures to $9,058. This being 18% of $50,000, the taxpayer is referred to as having an effective tax rate of 18%.
In recent years, a reduction in the tax rates applicable to capital gains and received dividends payments, has significantly reduced the tax burden on income generated from savings and investing. An argument is often made that these types of income are not generally received by low-income taxpayers, and so this sort of "tax break" is anti-progressive. Further clouding the issue of progressivity is that far more deductions and tax credits are available to higher-income taxpayers. A taxpayer with $40,000 of wage income may only have the "standard" deductions available to him, whereas a taxpayer with $200,000 of wage income might easily have $50,000 or more of "itemized" deductions. Allowable itemized deductions include payments to doctors, premiums for medical insurance, prescription drugs and insulin expenses, state taxes paid, property taxes, and charitable contributions. In those two scenarios, assuming no other income, the tax calculations would be as follows for a single taxpayer with no dependents in 2006:
| Wage income | $40,000 | $200,000 |
| Allowable deductions | 8,450 | 51,430 |
| Taxable income | 31,550 | 148,570 |
| Income tax | 4,445 | 46,725 |
| Effective rate | 14% | 31% |
This would appear to be highly progressive - the person with the higher taxable income pays tax at twice the rate. However, if you divide the tax by the amount of gross income (i.e. before deductions), the effective rates are 11% and 23%: the higher income person's rate is still twice as high, but his deductions drive down the effective rate to a much greater degree. In addition, most discussions of income tax progressivity do not take into account the social security tax, which has a "ceiling". This is because social security insurance benefits are directly determined by individual social security tax contributions over that individual's lifetime. Thus, since social security taxes serve as direct individual premiums for direct individual benefits, most do not include these taxes in the calculation of the progressive nature of federal taxes much as they do not include private automobile, homeowners, and life insurance policy premiums. If one were to expand the above example to include social security insurance taxes:
| Social security tax | $3,060 | $8,740 |
| Total tax | 7,505 | 55,465 |
| Rate paid on gross income | 19% | 28% |
Progressivity, then is a complex topic which does not lend itself to simple analyses. Given the "flattening" of tax burden that occurred in the early 1980s, many commentators note that the general structure of the U.S. tax system has begun to resemble a partial consumption tax regime.[25]
In 2001 the top 1% earned 14.8% of all income and paid 34.4% of federal income taxes. The next 4% earned 12.7% and paid 20.8%. The next 5% earned 10.1% and paid 12.5%. The next 10% earned 14.8% and paid 14.8%, completing the highest quintile, which in total earned 52.4% of all income and paid 82.5% of federal income taxes. The fourth quintile earned 20.7% and paid 14.3%. The third quintile earned 14.2% and paid 5.2%. The second quintile earned 9.2% and paid 0.3%. The lowest quintile earned 4.2% and received a net 2.3% from the federal government in income "credits".
When including social security insurance taxes: In 2001 the top 1% earned 14.8% of all income and paid 22.7% of all federal taxes. The next 4% earned 12.7% and paid 15.8%. The next 5% earned 10.1% and paid 11.5%. The next 10% earned 14.8% and paid 15.3%, completing the highest quintile for a total of 65.3%. The fourth quintile earned 20.7% of all income and paid 18.5%. The third quintile earned 14.2% and paid 10%. The second quintile earned 9.2% and paid 4.9%. The lowest quintile earned 4.2% and paid 1% of all federal taxes.[26]Whether this breakdown is "fair" is a matter of some debate.
| Percentile | Earnings | Federal Tax Share | Federal Tax Share
(incl. Social Security) |
| Top 1% | 14.8% | 52.4% | 34.4% | 82.5% | 22.7% | 65.3% |
| 95%–98% | 12.7% | 20.8% | 15.8% |
| 90%–94% | 10.1% | 12.5% | 11.5% |
| 80%–89% | 14.8% | 14.8% | 15.3% |
| 60–79% | 20.7% | 14.3% | 18.5% |
| 40–59% | 14.2% | 5.2% | 10.0% |
| 20–39% | 9.2% | 0.3% | 4.9% |
| 0–19% | 4.2% | -2.3% | 1.0% |
Payroll taxes
Social Security tax
The next largest tax is Social Security tax formally known as the Federal Insurance and Contributions Act (FICA). This contribution or tax is 6.2% of an employees' income paid by the employer, and 6.2% paid by the employee (12.4% total). Self-employed workers must pay both halves of the Social Security tax because they are their own employers. This tax is paid only on earned income and, as noted above, only up to a threshold income for calendar year 2009 of $106,800 called the "Social Security Wage Base" (SSWB), for an maximum individual contribution of $6,621.60 ($13,243.20 combined). The SSWB increases every year[27] according to the national index average of wages[28] which also indexes the bend points in the Primary Insurance Amount (PIA) computations. Unearned income like interest from bonds, money market and bank accounts, dividends from REITs and common stocks, rents, and royalties are not subject to the Social Security tax. Wages are defined in the United States Code 42 USC Section 409.[29] Thus, by simple arithmetic, higher earners pay a lower average tax rate than those with earned income at the upper end. Since future benefits are based on total contributions, however, any wages above the SSWB limit do not contribute to higher future benefits received.
Medicare tax
The Medicare tax funds the Medicare program, a health insurance program for the elderly and disabled. 1.45% of the employee's income is paid by the employer as Medicare tax, and 1.45% is paid by the employee. Unlike Social Security, there is no cap on the Medicare tax.
For Self-Employeed people, Medicare taxes are fixed at 2.9% on all earnings (can be offset by income tax provisions.)
As in FICA, unearned income is not subject to the Medicare contribution.
Together, Social Security and Medicare taxes compose the payroll tax. These taxes are based on income, but unlike the Federal income tax, they are set aside for their specific purposes. That is, there is a statutory requirement that expenditures on these programs Medicare and Social Security come out of current taxes or accumulated trust funds, so if they go broke, the Social Security Administration and Medicare would be without the authority to pay benefits. Unlike Congress, they cannot borrow on the federal government's creditworthiness to fund operations from the credit markets.
Other payroll taxes
The U.S. has a payroll tax to support unemployment insurance. This is 1.2% of the first $7,000, but coordinated with state unemployment agencies and taxes in such a way that most employees are not double taxed in states that have unemployment insurance. The U.S. also has a tax to pay for retraining of displaced workers, but it is only 0.1% of the first $7,000 of income, and it is assessed only on employers. The government tracks tax payment by an account number and payment date. For the IRS, the account number is a Social Security Number, Individual Taxpayer Identification Number, or Employer Identification Number.
Corporate income tax
In the United States, the federal corporate income rate for the year 2006 varies between 15 and 39% depending on taxable income. But since 1999, when Treasury announced the "check the box" system many corporations can elect to be treated as a pass-through entity, thereby skipping the entity level 35% tax and having all income pass through to the shareholders. This is the tax treatment that the much discussed "S" corporations receive; but now many more types of state-law corporations may avoid double taxation by "checking the box". Dividends are also subject to a lower rate of income tax in the United States. The U.S. corporate tax rate is ranked as the second highest statutory rate among the OECD countries (the U.S. average rate of 39.3 ranks just behind Japan's 39.5 and well above the OECD average of 28.7).[30] However, the U.S also has the greatest number of corporate tax loopholes of any OECD member,[31] allowing many corporations to achieve a lower effective tax rate than the published rates.
Transfer taxes
The transfer tax generates roughly 1.5% ($30 billion) of the federal government's annual revenue ($2 trillion). It consists of the gift tax, the estate tax and the generation-skipping transfer tax ("GSTT"). Opponents of the transfer tax label these taxes "death taxes". The term "death tax" was popularized by Frank Luntz, a Republican political consultant, but its use goes back to at least the 19th century.[32]
The gift tax is a tax levied on wealth transfers during the transferor's life while the estate tax is levied on transfers made after the transferor's death. The GSTT is a tax in addition to the gift and estate tax and is levied (in rough terms) on transfers made during life or after death to individuals removed by more than one generation from the transferor, for example, from a grandmother to a grandson. Usually transfer tax liabilities are paid by the transferor or the transferor's estate. Payment of transfer taxes by the transferor when the liability is due from the recipient is also a taxable gift.
As of December 2002[update], tax rates for gift and estate taxes begin at 18% and rise to 50% for gifts over $12,000 or taxable estates over $2.5 million under the Unified Transfer Tax Rate Schedule. The GSTT is a flat 50%. Each individual is granted a Unified Credit (currently $345,800) the effect of which exempts estates under $1 million. Each individual is also granted an annual exclusion amount the effect of which exempts total gifts to any one individual during the year up to the annual exclusion amount (As of 2009, $13,000 per person per year). If the transferor does not elect to pay the gift tax on the value of gifts totaling more than the annual exclusion amount, the individual is deemed to have used a portion of his Unified Credit. An exemption (currently $1.1 million) for transfers subject to the GSTT is also granted to each individual during his lifetime. The Unlimited Marital Deduction allows (non-foreign) spouses to transfer any amount of wealth with no transfer tax consequences.
Excise taxes
The U.S. also maintains federal excise taxes on gasoline and other fuels used by vehicles. At this time (2005) they are 18.4¢ per gallon (4.9¢/l) for gasoline and 24.4¢ per gallon (6.4¢/l) for diesel (for highway use). Higher profile excise taxes exist on distilled spirits, tobacco products, and some firearms. Beyond excises taxes on fuel, consumers also pay a 7.5% excise tax on airfare.
State and local government taxation
U.S. states are recognized as having a plenary power to assess taxes on their citizens and on activities that occur within their borders, so long as those taxes do not infringe on a power reserved for the federal government. The Supreme Court has found, in various cases, that states cannot impose taxes designed to impede interstate commerce or influence international relations. States are also prohibited from assessing taxes in ways that discriminate on the basis of race, gender, religion, alienage, or nationality. Finally, states may not condition the right to vote on payment of taxes. The Twenty-fourth Amendment to the United States Constitution, ratified in 1964, specifically prohibits such a condition in Federal elections; the Supreme Court ruled in Harper v. Virginia Board of Elections that the Equal Protection Clause of the Fourteenth Amendment does the same in state elections.
Local government is now typically financed by value-based property taxes, mainly on real estate. Additional taxes may be in the form of fixed sales taxes and use taxes. Local government fees such as building permit fees may reflect the added capital cost and operating costs of services such as schools and parks. Local governments may also collect fines (parking and traffic tickets), income tax, gross receipts or gross payroll tax, or a portion of sales taxes (such as meal taxes) collected by the state. In California, seeds, bulbs, starter plants and trees obtained from a garden center are taxed if adjudged for decorative purposes while plants for food production are untaxed, as is food in California.
Almost every state imposes "sin taxes" on products frowned upon by the community, including cigarettes and liquor. Many states also impose a gas tax. The power of the state to tax encompasses the ability to empower jurisdictions within the state such as counties, cities and school districts to impose taxes on their residents. These jurisdictions may impose any of the kinds of taxes that the state may, within the boundaries established by state law.
Income, sales, and property
Each state also has its own tax system.
Typically there is a tax on real estate, usually called "property taxes". Real estate taxes are often imposed on the value of real estate by reason of its ownership. For example, in Texas the real estate tax is imposed on the real estate and in particular on the owner of the real estate as of January 1 of each tax year. The tax is computed by applying a tax rate to the appraised value of the real estate as of the tax date. Some states like New York also have a real estate transfer tax.
There may be additional income taxes, sales taxes, and excise taxes (including use taxes). Taxable income for state purposes is usually based on federal taxable income with certain state specific adjustments. For example, some states tax municipal bond interest derived from other states that are otherwise exempt from federal income tax. Thus, this income must be added to the federal taxable income to compute the income amount for state income tax purposes. Oil and mineral producing states often impose a severance tax, similar to an excise tax in that tax is paid on the production of products, rather than on sales. Similarly, most New England states have yield taxes on timber/firewood cutting, payable as a percentage of the value cut, not the profit. Taxes on hotel rooms are common, and politically popular because the citizens will often approve such a tax while the taxpayers will come from other areas.
Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming do not levy an individual income tax. New Hampshire and Tennessee only tax interest and dividend income. Delaware, Oregon, Montana and New Hampshire have no state or local sales tax. Alaska has no state sales tax, but allows localities to collect their own sales taxes up to a state-specified maximum.
Many states also levy personal property taxes, which are annual taxes on the privilege of owning or possessing items of personal property within the boundaries of the state. Automobile and boat registration fees are a subset of this tax; however, most people are unaware that practically all personal property is also subject to personal property tax. Usually, household goods are exempt; but virtually all objects of value (including art) are covered, especially when regularly used or stored outside of the taxpayer's household.
States permit the creation of special assessment districts (typically for provision of water or removal of sewage, or for parks, public transit, emergency services or schools) whose boundaries may be independent of other boundaries and whose income may be from one or more of service assessments, property taxes, parcel taxes, a portion of road or bridge tolls, or an additional increment upon sales taxes in addition to the non-tax fees for services provided (such as metered water). State government is financed mainly by a mix of sales and/or income taxes and to a lesser extent by corporate registration fees, certain excise taxes, and automobile license fees.
City and county tax
Cities and counties in the individual states may levy additional taxes, for instance to improve parks or schools, or pay for police, fire departments, local roads, and other services. As in the case of the IRS, they generally require a tax payment account number. Other local governmental agencies may also have the power to tax, notably independent school districts.
Local government usually collect property taxes but may also collect sales taxes and income taxes. Some cities collect income tax on not only residents but non-residents employed in the city. This tax can even be incurred when a non-resident works temporarily in the city. For example, in 1992 the city of Philadelphia began enforcing the collection of city wage taxes on visiting baseball players who played games in Philadelphia.[33] At least some counties levy an Occupational Privilege Tax (OPT), usually for a small amount, in some cases less than $100/yr.
Federal tax reform
An anti-IRS symbol, sometimes used by tax reform advocates
"'Revenue Reform' Train Stopped by 'Vested Interests,' 'Local Issues,' 'Trusts,' and other poles" —
Political cartoon from
1880–
1900 commenting on tax reform.
In 2005, the President's Advisory Panel for Federal Tax Reform criticized the tax system as being extremely complex, requiring detailed record-keeping, lengthy instructions, and complicated schedules, worksheets, and forms. They stated that it penalizes work, discourages saving and investment, and hinders the competitiveness of American business. The tax code is commonly riddled with provisions that treat similarly situated taxpayers differently and create perceptions of unfairness.[34] The panel's major reform push was for the removal of the Alternative Minimum Tax, which is not indexed for inflation. Several organizations and individuals are working for tax reform in the United States including Americans for Tax Reform, Citizens for an Alternative Tax System, Americans For Fair Taxation, and Libertarian Party (United States). Various proposals have been put forth for tax simplification in Congress including the FairTax and various Flat tax plans. Proposals have also been put forth to completely abolish the Federal Income Tax for individuals.
Tax protester arguments
Various individuals and groups have questioned the legitimacy of United States federal income tax. One such group argues that the 16th Amendment to the United States Constitution was not approved by the requisite number of states[35] and therefore never came into effect. The argument that the Sixteenth Amendment was "never ratified" has been rejected by the Internal Revenue Service and by the courts and ruled to be a frivolous argument.[36][37][38]
[edit] VDA: Voluntary Disclosure Agreement
A voluntary disclosure agreement (VDA) is a program whereby taxpayers can receive certain benefits from proactively disclosing prior period tax liabilities in accordance with a binding agreement.[39]
[edit] List of taxes
Taxes and fees imposed by federal, state or local laws.
Label:
Financial,
Information
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