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Taxation in the United States

The United States of America has separate federal, state, and local governments with taxes imposed at each of these levels. Taxes are levied on income, payroll, property, sales, capital gains, dividends, imports, estates and gifts, as well as various fees. In 2010, taxes collected by federal, state, 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.[1]

However, taxes fall much more heavily on labor income than on capital income. Divergent taxes and subsidies for different forms of income and spending can also 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, and some local governments. Citizens and residents are taxed on worldwide income and allowed a credit for foreign taxes. Income subject to tax is determined under tax accounting rules, not financial accounting principles, and includes almost all income from whatever source. Most business expenses reduce taxable income, though limits apply to a few expenses. Individuals are permitted to reduce taxable income by personal allowances and certain non-business expenses, including home mortgage interest, state and local taxes, charitable contributions, and medical and certain other expenses incurred above certain percentages of income. State rules for determining taxable income often differ from federal rules. Federal marginal tax rates vary from 10% to 37% of taxable income. State and local tax rates vary widely by jurisdiction, from 0% to 13.30% of income,[2] and many are graduated. State taxes are generally 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 ("SALT") 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, and exceeded $11,000 in most of the Northeastern United States, as well as California and Oregon.[3] The states impacted the most by the limit were the tri-state area (NY, NJ, and CT) and California; the average SALT deduction in those states was greater than $17,000 in 2014.[3]

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 other is Eritrea. The U.S. Supreme Court upheld the constitutionality of imposition of such a tax in the case of Cook v. Tait.[4]

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% (13.3% for 2011 and 2012). Social Security tax applies only to the first $132,900 of wages in 2019.[5] There is an additional Medicare tax of 0.9% on wages above $200,000. Employers must withhold income taxes on wages. An unemployment tax and certain other levies apply to employers. Payroll taxes have dramatically increased as a share of federal revenue since the 1950s, while corporate income taxes have fallen as a share of revenue. (Corporate profits have not fallen as a share of GDP).

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 often separately governed, and impose separate taxes. Property tax is generally imposed only on realty, though some jurisdictions tax some forms of business property. Property tax rules and rates vary widely with annual median rates ranging from 0.2% to 1.9% of a property's value depending on the state.[6]

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 widely among jurisdictions, from 0% to 16%, and 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 legally imported. Rates of duty vary from 0% to more than 20%, 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.

Taxes revenue by source chart history
Government Revenue and spending GDP.png
Federal taxes by type
Median household income and taxes

Levels and types of taxationEdit

 
U.S. federal tax receipts for 2014

The U.S. has an assortment of federal, state, local, and special-purpose governmental jurisdictions. Each imposes taxes to fully or partly fund its operations. These taxes may be imposed on the same income, property or activity, often 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 the federal and most state levels. Taxes on property are typically 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 most states and many local governments. Customs duties or tariffs are only imposed by the federal government. A wide variety of user fees or license fees are also 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 wealth taxes on real estate.

Types of taxpayersEdit

Taxes may be imposed on individuals (natural persons), business entities, estates, trusts, or other forms of organization. Taxes may be based on property, income, transactions, transfers, importations of goods, business activities, or a variety of factors, and are generally imposed on the type of taxpayer for whom such tax base is relevant. Thus, property taxes tend to be imposed on property owners. In addition, certain taxes, particularly income taxes, may be imposed on the members of organizations for the organization's activities. Therefore, partners are taxed on the income of their partnership.

With a few exceptions, one level of government does not impose tax on another level of government or its instrumentalities.

Income taxEdit

 
U.S. federal effective tax rates by income percentile and component as projected for 2014 by the Tax Policy Center[7][8]

Taxes based on income are imposed at the federal, most state, and some local levels within the United States. The tax systems within each jurisdiction may define taxable income separately. Many states refer to some extent to federal concepts for determining taxable income.

History of the income taxEdit

The first Income tax in the United States was implemented with the Revenue Act of 1861 by Abraham Lincoln during the Civil War. In 1895 the Supreme Court ruled that the U.S. federal income tax on interest income, dividend income and rental income was unconstitutional in Pollock v. Farmers' Loan & Trust Co., because it was a direct tax. The Pollock decision was overruled by the ratification of the Sixteenth Amendment to the United States Constitution in 1913,[9] and by subsequent U.S. Supreme Court decisions including Graves v. New York ex rel. O'Keefe,[10] South Carolina v. Baker,[11] and Brushaber v. Union Pacific Railroad Co.[12]

Basic conceptsEdit

The U.S. income tax system imposes a tax based on income on individuals, corporations, estates, and trusts.[13] The tax is taxable income, as defined, times a specified tax rate. This tax may be reduced by credits, some of which may be refunded if they exceed the tax calculated. Taxable income may differ from income for other purposes (such as for financial reporting). The definition of taxable income for federal purposes is used by many, but far from all states. Income and deductions are recognized under tax rules, and there are variations within the rules among the states. Book and tax income may differ. Income is divided into "capital gains", which are taxed at a lower rate and only when the taxpayer chooses to "realize" them, and "ordinary income", which is taxed at higher rates and on an annual basis. Because of this distinction, capital is taxed much more lightly than labor.

Under the U.S. system, individuals, corporations, estates, and trusts are subject to income tax. Partnerships are not taxed; rather, their partners are subject to income tax on their shares of income and deductions, and take their shares of credits. Some types of business entities may elect to be treated as corporations or as partnerships.[14]

 
Federal receipts by source as share of total receipts (1950–2010).
  Individual income taxes
  Payroll taxes/FICA
  Corporate income taxes
  Excise taxes
  Estate and gift taxes
  Other receipts

Taxpayers are required to file tax returns and self assess tax. Tax may be withheld from payments of income (e.g., withholding of tax from wages). To the extent taxes are not covered by withholdings, taxpayers must make estimated tax payments, generally quarterly. Tax returns are subject to review and adjustment by taxing authorities, though far fewer than all returns are reviewed.

Taxable income is gross income less exemptions, deductions, and personal exemptions. Gross income includes "all income from whatever source". Certain income, however, is subject to tax exemption at the federal or state levels. This income is reduced by tax deductions including most business and some nonbusiness expenses. Individuals are also allowed a deduction for personal exemptions, a fixed dollar allowance. The allowance of some nonbusiness deductions is phased out at higher income levels.

The U.S. federal and most state income tax systems tax the worldwide income of citizens and residents.[15] A federal foreign tax credit is granted for foreign income taxes. Individuals residing abroad may also claim the foreign earned income exclusion. Individuals may be a citizen or resident of the United States but not a resident of a state. Many states grant a similar credit for taxes paid to other states. These credits are generally limited to the amount of tax on income from foreign (or other state) sources.

Filing statusEdit

 
Historical federal marginal tax rates for income for the lowest and highest income earners in the U.S.[16]

Federal and state income tax is calculated, and returns filed, for each taxpayer. Two married individuals may calculate tax and file returns jointly or separately. In addition, unmarried individuals supporting children or certain other relatives may file a return as a head of household. Parent-subsidiary groups of companies may elect to file a consolidated return.

Graduated tax ratesEdit

 
Progressive effective tax burden

Income tax rates differ at the federal and state levels for corporations and individuals. Federal and many state income tax rates are higher (graduated) at higher levels of income. The income level at which various tax rates apply for individuals varies by filing status. The income level at which each rate starts generally is higher (i.e., tax is lower) for married couples filing a joint return or single individuals filing as head of household.

Individuals are subject to federal graduated tax rates from 10% to 39.6%.[17] Corporations are subject to federal graduated rates of tax from 15% to 35%; a rate of 34% applies to income from $335,000 to $15,000,000.[18] State income tax rates, in states which have a tax on personal incomes, vary from 1% to 16%, including local income tax where applicable. Nine (9) states do not have a tax on ordinary personal incomes. These include Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Two states with a tax only on interest and dividend income of individuals, are New Hampshire and Tennessee.

State and local taxes are generally deductible in computing federal taxable income. Federal and many state individual income tax rate schedules differ based on the individual's filing status.

IncomeEdit

 
Share of income tax paid by level of income. The top 2.7% of taxpayers (those with income over $250,000) paid 51.6% of the federal income taxes in 2014.[19]

Taxable income is gross income[20] less adjustments and allowable tax deductions.[21] Gross income for federal and most states is receipts and gains from all sources less cost of goods sold. Gross income includes "all income from whatever source", and is not limited to cash received. Income from illegal activities is taxable and must be reported to the IRS.[22]

The amount of income recognized is generally the value received or which the taxpayer has a right to receive. Certain types of income are specifically excluded from gross income. The time at which gross income becomes taxable is determined under federal tax rules. This may differ in some cases from accounting rules.[23]

Certain types of income are excluded from gross income (and therefore subject to tax exemption).[24] The exclusions differ at federal and state levels. For federal income tax, interest income on state and local bonds is exempt, while few states exempt any interest income except from municipalities within that state. In addition, certain types of receipts, such as gifts and inheritances, and certain types of benefits, such as employer-provided health insurance, are excluded from income.

Foreign non-resident persons are taxed only on income from U.S. sources or from a U.S. business. Tax on foreign non-resident persons on non-business income is at 30% of the gross income, but reduced under many tax treaties.

 

 

These brackets are the taxable income plus the standard deduction for a joint return. That deduction is the first bracket. For example, a couple earning $88,600 by September owes $10,453; $1,865 for 10% of the income from $12,700 to $31,500, plus $8,588 for 15% of the income from $31,500 to $88,600. Now, for every $100 they earn, $25 is taxed until they reach the next bracket.

After making $400 more; going down to the 89,000 row the tax is $100 more. The next column is the tax divided by 89,000. The new law is the next column. This tax equals 10% of their income from $24,000 to $43,050 plus 12% from $43,050 to $89,000. The singles' sets of markers can be set up quickly. The brackets with its tax are cut in half.

Itemizers can figure the tax without moving the scale by taking the difference off the top. The couple above, having receipts for $22,700 in deductions, means that the last $10,000 of their income is tax free. After seven years the papers can be destroyed; if unchallenged.

Source and Method[25][26]

Deductions and exemptionsEdit

 
The share of total income and federal, state and local taxes paid by income group. Total taxes include income taxes, payroll taxes, state and local sales taxes, federal and state excise taxes, and local property taxes.[27]

The U.S. system allows reduction of taxable income for both business[28] and some nonbusiness[29] expenditures, called deductions. Businesses selling goods reduce gross income directly by the cost of goods sold. In addition, businesses may deduct most types of expenses incurred in the business. Some of these deductions are subject to limitations. For example, only 50% of the amount incurred for any meals or entertainment may be deducted.[30] The amount and timing of deductions for business expenses is determined under the taxpayer's tax accounting method, which may differ from methods used in accounting records.[31]

Some types of business expenses are deductible over a period of years rather than when incurred. These include the cost of long lived assets such as buildings and equipment. The cost of such assets is recovered through deductions for depreciation or amortization.

In addition to business expenses, individuals may reduce income by an allowance for personal exemptions[32] and either a fixed standard deduction or itemized deductions.[33] One personal exemption is allowed per taxpayer, and additional such deductions are allowed for each child or certain other individuals supported by the taxpayer. The standard deduction amount varies by taxpayer filing status. Itemized deductions by individuals include home mortgage interest, property taxes, certain other taxes, contributions to recognized charities, medical expenses in excess of 7.5% of adjusted gross income, and certain other amounts.

Personal exemptions, the standard deduction, and itemized deductions are limited (phased out) above certain income levels.[34]

Business entitiesEdit

 
The U.S. federal effective corporate income tax rate is lower than the highest nominal rate, which can be significant in part because of tax shelters such as tax havens.[35][36]

Corporations must pay tax on their taxable income independently of their shareholders.[18] Shareholders are also subject to tax on dividends received from corporations.[37] By contrast, partnerships are not subject to income tax, but their partners calculate their taxes by including their shares of partnership items.[38] Corporations owned entirely by U.S. citizens or residents (S corporations) may elect to be treated similarly to partnerships. A limited liability company and certain other business entities may elect to be treated as corporations or as partnerships.[39] States generally follow such characterization. Many states also allow corporations to elect S corporation status. Charitable organizations are subject to tax on business income.[40]

Certain transactions of business entities are not subject to tax. These include many types of formation or reorganization.[41]

CreditsEdit

A wide variety of tax credits may reduce income tax at the federal[42] and state levels. Some credits are available only to individuals, such as the child tax credit for each dependent child, American Opportunity Tax Credit[43] for education expenses, or the Earned Income Tax Credit for low income wage earners. Some credits, such as the Work Opportunity Tax Credit, are available to businesses, including various special industry incentives. A few credits, such as the foreign tax credit, are available to all types of taxpayers.

Payment or withholding of taxesEdit

The United States federal and state income tax systems are self-assessment systems. Taxpayers must declare and pay tax without assessment by the taxing authority. Quarterly payments of tax estimated to be due are required to the extent taxes are not paid through withholdings.[44] Employers must withhold income tax, as well as Social Security and Medicare taxes, from wages.[45] Amounts to be withheld are computed by employers based on representations of tax status by employees on Form W-4, with limited government review.[46]

State variationsEdit

 
Composition of state and local government tax revenue for sample state of Ohio, 2007.[47]
 
Total State Government Tax Revenue By Type in 2015

Forty-three states and many localities in the U.S. impose an income tax on individuals. Forty-seven states and many localities impose a tax on the income of corporations. Tax rates vary by state and locality, and may be fixed or graduated. Most rates are the same for all types of income. State and local income taxes are imposed in addition to federal income tax. State income tax is allowed as a deduction in computing federal income, but is capped at $10,000 per household since the passage of the 2017 tax law. Prior to the change, the average deduction exceeded $10,000 in most of the Midwest, most of the Northeast, as well as California and Oregon.[3]

State and local taxable income is determined under state law, and often is based on federal taxable income. Most states conform to many federal concepts and definitions, including defining income and business deductions and timing thereof.[48] State rules vary widely regarding to individual itemized deductions. Most states do not allow a deduction for state income taxes for individuals or corporations, and impose tax on certain types of income exempt at the federal level.

Some states have alternative measures of taxable income, or alternative taxes, especially for corporations.

States imposing an income tax generally tax all income of corporations organized in the state and individuals residing in the state. Taxpayers from another state are subject to tax only on income earned in the state or apportioned to the state. Businesses are subject to income tax in a state only if they have sufficient nexus in (connection to) the state.

Non-residentsEdit

Foreign individuals and corporations not resident in the United States are subject to federal income tax only on income from a U.S. business and certain types of income from U.S. sources.[49] States tax individuals resident outside the state and corporations organized outside the state only on wages or business income within the state. Payers of some types of income to non-residents must withhold federal or state income tax on the payment. Federal withholding of 30% on such income may be reduced under a tax treaty. Such treaties do not apply to state taxes.

Alternative tax bases (AMT, states)Edit

An alternative minimum tax (AMT) is imposed at the federal level on a somewhat modified version of taxable income.[50] The tax applies to individuals and corporations. The tax base is adjusted gross income reduced by a fixed deduction that varies by taxpayer filing status. Itemized deductions of individuals are limited to home mortgage interest, charitable contributions, and a portion of medical expenses. AMT is imposed at a rate of 26% or 28% for individuals and 20% for corporations, less the amount of regular tax. A credit against future regular income tax is allowed for such excess, with certain restrictions.

Many states impose minimum income taxes on corporations or a tax computed on an alternative tax base. These include taxes based on capital of corporations and alternative measures of income for individuals. Details vary widely by state.

Differences between book and taxable income for businessesEdit

In the United States, taxable income is computed under rules that differ materially from U.S. generally accepted accounting principles. Since only publicly traded companies are required to prepare financial statements, many non-public companies opt to keep their financial records under tax rules. Corporations that present financial statements using other than tax rules must include a detailed reconciliation of their financial statement income to their taxable income as part of their tax returns. Key areas of difference include depreciation and amortization, timing of recognition of income or deductions, assumptions for cost of goods sold, and certain items (such as meals and entertainment) the tax deduction for which is limited.

Reporting under self-assessment systemEdit

Income taxes in the United States are self-assessed by taxpayers[51] by filing required tax returns.[52] Taxpayers, as well as certain non-tax-paying entities, like partnerships, must file annual tax returns at the federal and applicable state levels. These returns disclose a complete computation of taxable income under tax principles. Taxpayers compute all income, deductions, and credits themselves, and determine the amount of tax due after applying required prepayments and taxes withheld. Federal and state tax authorities provide preprinted forms that must be used to file tax returns. IRS Form 1040 series is required for individuals, Form 1120 series for corporations, Form 1065 for partnerships, and Form 990 series for tax exempt organizations.

The state forms vary widely, and rarely correspond to federal forms. Tax returns vary from the two-page (Form 1040EZ) used by nearly 70% of individual filers to thousands of pages of forms and attachments for large entities. Groups of corporations may elect to file consolidated returns at the federal level and with a few states. Electronic filing of federal and many state returns is widely encouraged and in some cases required, and many vendors offer computer software for use by taxpayers and paid return preparers to prepare and electronically file returns.

Capital gains taxEdit

 
U.S. capital gains taxes history

Individuals and corporations pay U.S. federal income tax on the net total of all their capital gains. The tax rate depends on both the investor's tax bracket and the amount of time the investment was held. Short-term capital gains are taxed at the investor's ordinary income tax rate and are defined as investments held for a year or less before being sold. Long-term capital gains, on dispositions of assets held for more than one year, are taxed at a lower rate.[53]

Payroll taxesEdit

 
Payroll taxes were among the most regressive in 2010.

In the United States, payroll taxes are assessed by the federal government, many states, the District of Columbia, and numerous cities. These taxes are imposed on employers and employees and on various compensation bases. They are collected and paid to the taxing jurisdiction by the employers. Most jurisdictions imposing payroll taxes require reporting quarterly and annually in most cases, and electronic reporting is generally required for all but small employers.[54] Because payroll taxes are imposed only on wages and not on income from investments, taxes on labor income are much heavier than taxes on income from capital

Customs and Border ProtectionEdit

U.S. Customs and Border Protection (CBP), an agency of the United States Department of Homeland Security, collects customs duties and regulates international trade. It has a workforce of over 58,000 employees covering over 300 official ports of entry to the United States. CBP has authority to seize and dispose of cargo in the case of certain violations of customs rules.

State administrationsEdit

Every state in the United States has its own tax administration, subject to the rules of that state's law and regulations. These are referred to in most states as the Department of Revenue or Department of Taxation. The powers of the state taxing authorities vary widely. Most enforce all state level taxes but not most local taxes. However, many states have unified state-level sales tax administration, including for local sales taxes.

State tax returns are filed separately with those tax administrations, not with the federal tax administrations. Each state has its own procedural rules, which vary widely.

Local administrationsEdit

Most localities within the United States administer most of their own taxes. In many cases, there are multiple local taxing jurisdictions with respect to a particular taxpayer or property. For property taxes, the taxing jurisdiction is typically represented by a tax assessor/collector whose offices are located at the taxing jurisdiction's facilities.

Legal basisEdit

The United States Constitution provides that Congress "shall have the power to lay and collect Taxes, Duties, Imposts, and Excises ... but all Duties, Imposts, and Excises shall be uniform throughout the United States."[55] Prior to amendment, it provided that "No Capitation, or other direct, Tax shall be Laid unless in proportion to the Census ..." The 16th Amendment provided that "Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration." The 10th Amendment provided that "powers not delegated to the United States by this Constitution, nor prohibited to the States, are reserved to the States respectively, or to the people."

Congress has enacted numerous laws dealing with taxes since adoption of the Constitution. Those laws are now codified as Title 19, Customs Duties, Title 26, Internal Revenue Code, and various other provisions. These laws specifically authorize the United States Secretary of the Treasury to delegate various powers related to levy, assessment and collection of taxes.

State constitutions uniformly grant the state government the right to levy and collect taxes. Limitations under state constitutions vary widely.

Various fringe individuals and groups have questioned the legitimacy of United States federal income tax. These arguments are varied, but have been uniformly rejected by the Internal Revenue Service and by the courts and ruled to be frivolous.[56][57][58]

Policy issuesEdit

Commentators Benjamin Page, Larry Bartels and Jason Seawright contend that Federal tax policy in relation to regulation and reform in the United States tends to favor wealthy Americans. They assert that political influence is a legal right the wealthy can exercise by contributing funds to lobby for their policy preference.[59]

 
The distribution of U.S. federal taxes for 2000 as a percentage of income among the family income quintiles

Each major type of tax in the United States has been used by some jurisdiction at some time as a tool of social policy. Both liberals and conservatives have called for more progressive taxes in the U.S.[60][61] Page, Bartels and Seawright assert that although members of the government favor a move toward progressive taxes, due to budget deficits upper class citizens are not yet willing to make a push for the change. Tax cuts were provided during the Bush administration, and were extended in 2010, making federal income taxes less progressive.[59]

Tax evasionEdit

The Internal Revenue Service estimated that in 2001, the tax gap was $345 billion.[62] The tax gap is the difference between the amount of tax legally owed and the amount actually collected by the government. The tax gap in 2006 was estimated to be $450 billion.[63] The tax gap two years later in 2008 was estimated to be in the range of $450–$500 billion and unreported income was estimated to be approximately $2 trillion.[64] Therefore, 18–19 percent of total reportable income was not properly reported to the IRS.[64]

EconomicsEdit

The complexity of the US tax code causes economic inefficiency.[65]

HistoryEdit

 
Total government spending on all levels (United States)

Before 1776, the American Colonies were subject to taxation by the United Kingdom, and also imposed local taxes. Property taxes were imposed in the Colonies as early as 1634.[66] In 1673, the English Parliament imposed a tax on exports from the American Colonies, and with it created the first tax administration in what would become the United States.[67] Other tariffs and taxes were imposed by Parliament. Most of the colonies and many localities adopted property taxes.

Under Article VIII of the Articles of Confederation, the United States government did not have the power to tax. All such power lay with the states. The United States Constitution, adopted in 1787, authorized the federal government to lay and collect taxes, but required that some types of tax revenues be given to the states in proportion to population. Tariffs were the principal federal tax through the 1800s.

By 1796, state and local governments in fourteen of the 15 states taxed land. Delaware taxed the income from property. The War of 1812 required a federal sales tax on specific luxury items due to its costs. However, internal taxes were dropped in 1817 in favor of import tariffs that went to the federal government.[68] By the American Civil War, the principle of taxation of property at a uniform rate had developed, and many of the states relied on property taxes as a major source of revenue. However, the increasing importance of intangible property, such as corporate stock, caused the states to shift to other forms of taxation in the 1900s.

Income taxes in the form of "faculty" taxes were imposed by the colonies. These combined income and property tax characteristics, and the income element persisted after 1776 in a few states. Several states adopted income taxes in 1837.[69] Wisconsin adopted a corporate and individual income tax in 1911,[70] and was the first to administer the tax with a state tax administration.

The first federal income tax was adopted as part of the Revenue Act of 1861.[71] The tax lapsed after the American Civil War. Subsequently enacted income taxes were held to be unconstitutional by the Supreme Court in Pollock v. Farmers' Loan & Trust Co. because they did not apportion taxes on property by state population.[72] In 1913, the Sixteenth Amendment to the United States Constitution was ratified, permitting the federal government to levy an income tax on both property and labor.

 
U.S. federal government tax receipts as a percentage of GDP from 1945 to 2015 (note that 2010 to 2015 data are estimated)

The federal income tax enacted in 1913 included corporate and individual income taxes. It defined income using language from prior laws, incorporated in the Sixteenth Amendment, as "all income from whatever source derived". The tax allowed deductions for business expenses, but few non-business deductions. In 1918 the income tax law was expanded to include a foreign tax credit and more comprehensive definitions of income and deduction items. Various aspects of the present system of definitions were expanded through 1926, when U.S. law was organized as the United States Code. Income, estate, gift, and excise tax provisions, plus provisions relating to tax returns and enforcement, were codified as Title 26, also known as the Internal Revenue Code. This was reorganized and somewhat expanded in 1954, and remains in the same general form.

Federal taxes were expanded greatly during World War I. In 1921, Treasury Secretary Andrew Mellon engineered a series of significant income tax cuts under three presidents. Mellon argued that tax cuts would spur growth.[73] Taxes were raised again in the latter part of the Great Depression, and during World War II. Income tax rates were reduced significantly during the Johnson, Nixon, and Reagan presidencies. Significant tax cuts for corporations and all individuals were enacted during the second Bush presidency.

In 1986, Congress adopted, with little modification, a major expansion of the income tax portion of the IRS Code proposed in 1985 by the U.S. Treasury Department under President Reagan. The thousand-page Tax Reform Act of 1986 significantly lowered tax rates, adopted sweeping expansions of international rules, eliminated the lower individual tax rate for capital gains, added significant inventory accounting rules, and made substantial other expansions of the law.

Federal income tax rates have been modified frequently. Tax rates were changed in 34 of the 97 years between 1913 and 2010.[74] The rate structure has been graduated since the 1913 act.

 
Total tax revenue (not adjusted for inflation) for the U.S. federal government from 1980 to 2009 compared to the amount of revenue coming from individual income taxes

The first individual income tax return Form 1040 under the 1913 law was four pages long. In 1915, some Congressmen complained about the complexity of the form.[75] In 1921, Congress considered but did not enact replacement of the income tax with a national sales tax.

By the 1920s, many states had adopted income taxes on individuals and corporations.[76] Many of the state taxes were simply based on the federal definitions. The states generally taxed residents on all of their income, including income earned in other states, as well as income of nonresidents earned in the state. This led to a long line of Supreme Court cases limiting the ability of states to tax income of nonresidents.

The states had also come to rely heavily on retail sales taxes. However, as of the beginning of World War II, only two cities (New York and New Orleans) had local sales taxes.[77]

The Federal Estate Tax was introduced in 1916, and Gift Tax in 1924. Unlike many inheritance taxes, the Gift and Estate taxes were imposed on the transferor rather than the recipient. Many states adopted either inheritance taxes or estate and gift taxes, often computed as the amount allowed as a deduction for federal purposes. These taxes remained under 1% of government revenues through the 1990s.[78]

All governments within the United States provide tax exemption for some income, property, or persons. These exemptions have their roots both in tax theory,[79] federal and state legislative history,[80] and the United States Constitution.[81]

See alsoEdit

ReferencesEdit

  1. ^ Porter, Eduardo (August 14, 2012). "America's Aversion to Taxes". New York Times. Retrieved 2012-08-15. In 1965, taxes collected by federal, state and municipal governments amounted to 24.7 percent of the nation's output. In 2010, they amounted to 24.8 percent. Excluding Chile and Mexico, the United States raises less tax revenue, as a share of the economy, than every other industrial country.
  2. ^ "TEMPORARY TAXES TO FUND EDUCATION. GUARANTEED LOCAL PUBLIC SAFETY FUNDING. INITIATIVE CONSTITUTIONAL AMENDMENT" (PDF). Vig.cdn.sos.ca.gov/. 2013-04-05. Retrieved 2013-10-13.
  3. ^ a b c DeVore, Chuck. "New York And Other High-Tax States Sue Over SALT Deduction Cap While Jobs Follow Lower Taxes". Forbes. Retrieved 2019-01-08.
  4. ^ 265 U.S. 47 (1924).
  5. ^ "Social Security Wage Base for 2019 Announced". www.adp.com. 2015-06-30. Retrieved 2019-11-13.
  6. ^ "Property Taxes By State". Tax-Rates.org. 2009. Retrieved 2015-02-01.
  7. ^ "Effective tax rates: income, payroll, corporate and estate taxes combined". Peter G. Peterson Foundation. July 1, 2013. Retrieved 3 November 2013.
  8. ^ "T13-0174 - Average Effective Federal Tax Rates by Filing Status; by Expanded Cash Income Percentile, 2014". Tax Policy Center. Jul 25, 2013. Archived from the original on 2014-12-11. Retrieved 3 November 2013.
  9. ^ See generally Boris I. Bittker, "Constitutional Limits on the Taxing Power of the Federal Government," Tax Lawyer, Vol. 41, No. 1, p. 3, American Bar Ass'n (Fall 1987); William D. Andrews, Basic Federal Income Taxation, p. 2, Little, Brown and Company (3d ed. 1985); Calvin H. Johnson, "The Constitutional Meaning of 'Apportionment of Direct Taxes'", 80 Tax Notes 591 (Aug. 3, 1998); and Sheldon D. Pollack, "Origins of the Modern Income Tax, 1894–1913," 66 Tax Lawyer 295, 323–24, Winter 2013 (Amer. Bar Ass'n).
  10. ^ 306 U.S. 466 (1939).
  11. ^ 485 U.S. 505 (1988).
  12. ^ "Brushaber v. Union Pacific R. Co., 240 U.S. 1 (1916)". Justia Law. Retrieved 2018-01-10.
  13. ^ 26 U.S.C. § 1 and 26 U.S.C. § 11; IRS Publication 17 and Publication 542.
  14. ^ JCX-49-11, Joint Committee on Taxation, September 22, 2011, pp. 4, 50.
  15. ^ See, e.g., IRS Publication 17, p. 45.
  16. ^ "U.S. Federal Individual Income Tax Rates History, 1913–2011". Tax Foundation. 9 September 2011. Archived from the original on 16 January 2013.
  17. ^ 26 U.S.C. § 1; IRS [Publication 17], page 266.
  18. ^ a b 26 U.S.C. § 11; IRS Publication 542.
  19. ^ "High-income Americans pay most income taxes, but enough to be 'fair'?". Pew Center. Retrieved November 30, 2016.
  20. ^ 26 U.S.C. § 61; IRS Publication 17, Part II.
  21. ^ 26 U.S.C. §§ 161249; IRS Publication 17, Publication 501 and Publication 535.
  22. ^ James v. United States, 366 U.S. 213 (1961).
  23. ^ 26 U.S.C. §§ 446475; IRS [ Publication ].
  24. ^ 26 U.S.C. §§ 101140.
  25. ^ "IRS 1040 '17" p. 104"
  26. ^ "Tax Cut and Jobs Act".
  27. ^ Coombes, Andrea (2012-04-15). "Taxes – Who Really Is Paying Up". Online.wsj.com. Retrieved 2013-10-13.
  28. ^ 26 U.S.C. §§ 161199; IRS Publication 535.
  29. ^ 26 U.S.C. §§ 211224; IRS Publication 17, Chapters 21–28.
  30. ^ 26 U.S.C. § 274; IRS Publication 463.
  31. ^ IRS Regulations at 26 CFR 1. 446-1; IRS Publication 538.
  32. ^ 26 U.S.C. § 151; IRS Publication 501.
  33. ^ 26 U.S.C. § 63; IRS Publication 501.
  34. ^ 26 U.S.C. § 68; IRS Publication 17, Chapter 29.
  35. ^ "Repatriating Offshore Funds" Archived 2014-12-06 at the Wayback Machine U.S. Senate Committee on Homeland Security and Governmental Affairs, Permanent Subcommittee on Investigations, October 11, 2011
  36. ^ "Picking Up the Tab" U.S. Public Interest Research Group, April 2012
  37. ^ 26 U.S.C. § 61(a)(7).
  38. ^ 26 U.S.C. § 701; IRS Publication 541.
  39. ^ 26 CFR 301.7701-2; IRS Form 8832.
  40. ^ 26 U.S.C. § 512; IRS Publication 598.
  41. ^ 26 U.S.C. §§ 332368; IRS Publication 542.
  42. ^ 26 U.S.C. §§ 2154AA.
  43. ^ "The American Opportunity Tax Credit" (PDF). U.S. Department of the Treasury. Archived from the original (PDF) on 2012-09-25. Retrieved 2012-06-26.
  44. ^ 26 U.S.C. §§ 66546655; IRS Publication 505.
  45. ^ 26 U.S.C. § 3102; 26 U.S.C. § 3402; IRS Publication 15.
  46. ^ Contrast to, e.g., the United Kingdom system in which all withholding amounts are determined by Inland Revenue.
  47. ^ Carl Davis, Kelly Davis, Matthew Gardner, Robert S. McIntyre, Jeff McLynch, Alla Sapozhnikova, "Who Pays? A Distributional Analysis of the Tax Systems in All 50 States" Archived 2012-05-15 at the Wayback Machine, Institute on Taxation & Economic Policy, Third Edition, November 2009, p. 87.
  48. ^ Hellerstein, Jerome H., and Hellerstein, Walter, State and Local Taxation, Cases and Materials, Eighth Edition, 2001 (hereafter "Hellerstein"), p. 929.
  49. ^ 26 U.S.C. §§ 871898; IRS Publication 515.
  50. ^ 26 U.S.C. §§ 5559; IRS Form 6251 instructions.
  51. ^ 26 U.S.C. § 6201(a)(1); IRS [ Publication ].
  52. ^ 26 U.S.C. § 6011.
  53. ^ See subsection (h) of 26 U.S.C. § 1.
  54. ^ A tutorial is available online from the Internal Revenue Service (IRS) explaining various aspects of employer compliance, see Video Tutorial.
  55. ^ Constitution Article I Section 8.
  56. ^ Frivolous Tax, Internal Revenue Service
  57. ^ United States v. Thomas, 788 F.2d 1250, (7th Cir. 1986), cert. denied, 107 S.Ct. 187 (1986); United States v. Benson, 941 F.2d 598, 91-2 U.S. Tax Cas. (CCH) ¶ 50,437 (7th Cir. 1991); Knoblauch v. Commissioner, 749 F.2d 200, 85-1 U.S. Tax. Cas. (CCH) ¶ 9109 (5th Cir. 1984), cert. denied, 474 U.S. 830 (1985); Ficalora v. Commissioner, 751 F.2d 85, 85-1 U.S. Tax Cas. (CCH) ¶ 9103 (2d Cir. 1984); Sisk v. Commissioner; 791 F.2d 58, 86-1 U.S. Tax Cas. (CCH) ¶ 9433 (6th Cir. 1986); United States v. Sitka, 845 F.2d 43, 88-1 U.S. Tax Cas. (CCH) ¶ 9308 (2d Cir.), cert. denied, 488 U.S. 827 (1988); United States v. Stahl, 792 F.2d 1438, 86-2 U.S. Tax Cas. (CCH) ¶ 9518 (9th Cir. 1986), cert. denied, 107 S. Ct. 888 (1987); United States v. House, 617 F. Supp. 237, 87-2 U.S. Tax Cas. (CCH) ¶ 9562 (W.D. Mich. 1985); Ivey v. United States, 76-2 U.S. Tax Cas. (CCH) ¶ 9682 (E.D. Wisc. 1976).
  58. ^ Brown v. Commissioner; 53 T.C.M. (CCH) 94, T.C. Memo 1987-78, CCH Dec. 43,696(M) (1987); Lysiak v. Commissioner; 816 F.2d 311, 87-1 U.S. Tax Cas. (CCH) ¶ 9296 (7th Cir. 1987); and Miller v. United States, 868 F.2d 236, 89-1 U.S. Tax Cas. (CCH) ¶ 9184 (7th Cir. 1989). For background on how arguments that the tax laws are unconstitutional may help the prosecution prove willfulness in tax evasion cases, see the United States Supreme Court decision in Cheek v. United States, 498 U.S. 192 (1991) (defendant arguing about constitutionality may be evidence that the defendant was aware of the tax law, and is not a defense to a charge of willfulness).
  59. ^ a b Page, Benjamin I.; Bartels, Larry M.; Seawright, Jason (2013). "Democracy and the Policy Preferences of Wealthy Americans". Perspectives on Politics. 11 (1): 51–73. doi:10.1017/s153759271200360x.
  60. ^ Yglesias, Matthew (March 6, 2013). "America Does Tax Wealth, Just Not Very Intelligently". Slate. Retrieved 18 March 2013.
  61. ^ Bair, Sheila (February 26, 2013). "Grand Old Parity". New York Times. Retrieved 18 March 2013.
  62. ^ "IRS Updates Tax Gap Estimates". Irs.gov. Retrieved 2011-12-10.
  63. ^ "Tax Gap for Tax Year 2006 Overview Jan. 6, 2012" (PDF). U.S. Internal Revenue Service. Retrieved 2012-06-14.
  64. ^ a b Richard Cebula and Edgar Feige "America's Underground Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S" https://ideas.repec.org/p/pra/mprapa/29672.html
  65. ^ https://www.politico.com/pdf/PPM156_laffer_tax_code_paper.pdf
  66. ^ Jens P. Jensen, Property Taxation in the United States, 1931, referring to a 1634 Massachusetts property tax statute.
  67. ^ Tax History Museum 1660–1712, Tax Analysts.
  68. ^ "Bookly Academy".
  69. ^ Hellerstein, p. 928.
  70. ^ Hellerstein, p. 431.
  71. ^ Revenue Act of 1861, sec. 49, ch. 45, 12 Stat. 292, 309 (Aug. 5, 1861).
  72. ^ "Pollock v. Farmers' Loan and Trust Company". Law.cornell.edu. Retrieved 2013-10-13.
  73. ^ "Tax History Museum, 1901–1932". Taxhistory.org. 1906-04-14. Retrieved 2013-11-15.
  74. ^ See changes in 1916, 1917, 1918, 1921, 1922, 1924, 1926, 1928, 1932, 1934, 1935, 1936, 1940, 1941, 1942, 1943, 1944, 1945, 1948, 1950, 1951, 1953, 1954, 1964, 1968, 1969, 1975, 1978, 1981, 1986, 1993, 1997, 2001, and 2003.
  75. ^ Tax History Museum covering 1914–1915.
  76. ^ Hellerstein, pp. 429, 431.
  77. ^ Hellerstein, p. 10.
  78. ^ Federal Budget 2012 historical tables 2.4 and 2.5. Census Bureau state tax summary table, year 2000.
  79. ^ See, e.g., Martin, James W. et al, Tax Exemptions, Tax Policy League, New York, cited in Hellerstein, pp. 1013–17.
  80. ^ The 1861 federal income tax exempted religious, charitable, educational, and scientific organizations.
  81. ^ The Supreme Court ruled that the federal government is immune from state taxation in McCulloch v. Maryland, 17 U.S. 316 (1819).

Further readingEdit

Government sources:

Law & regulations:

Standard texts (most updated annually):

  • Fox, Stephen C., Income Tax in the USA, 2013 edition ISBN 978-0-9851-8233-5
  • Hoffman, William H. Jr.; et al., South-Western Federal Taxation, 2013 edition ISBN 978-0-324-66050-0
  • Pratt, James W.; Kulsrud, William N.; et al, Federal Taxation", 2013 edition ISBN 978-1-1334-9623-6 (cited above as Pratt).
  • Whittenberg, Gerald; Altus-Buller, Martha; and Gill, Stephen, Income Tax Fundamentals 2013, ISBN 978-1-1119-7251-6
  • Hellerstein, Jerome R., and Hellerstein, Walter, State and Local Taxation: Cases and Materials, 2005, ISBN 978-0-314-15376-0

Reference works:

Popular publications (annual):

External linksEdit

  • Tariffs applied by the United States as provided by ITC's Market Access Map, an online database of customs tariffs and market requirements.