9 Taxation

Tax Freedom Day – the day on which American tax payers have earned enough money to pay their total tax debt for the year. All across the country, people worked 3 to 4 months of the year just to pay their taxes! No wonder everyone complains. People with high income grumble because they pay the highest taxes. Low-income earners point out that even a low tax rate is too much to bear. People in the middle consider their situation the worst of all – their incomes are not high but their taxes are.

“In this world nothing is certain but death and taxes.” (Benjamin Franklin)

The power to tax

Congress exercises the taxing power in order to raise money to finance at least most of what it costs to operate the Federal Government. But Congress also levies some taxes for nonrevenue purposes.

Constitutional limitations. The power to tax is not an unlimited one. Congress must exercise the taxing power in account with the Constitution, which puts four expressed limits on the power of Congress to tax.

1. Taxes must be for public purposes only, not for the benefit of some private interests.

2. Export taxes are prohibited. No tax or duty should be laid on articles exported from any State. Thus, custom duties cab be applied only to imports. While Congress cannot tax exporters, it cab and does prohibit the export of certain items – usually for reasons of national security and acting under its expressed power to regulate foreign commerce.

3. Direct taxes must be equally apportioned. Recall that a direct tax is one that must be borne by the person upon whom it’s levied, e. g. a tax on land or buildings, must be paid by the owner of the property; or a capitation tax – a head or poll tax – laid on each person. Other taxes are indirect taxes. An income tax is a direct tax. Congress first levied on income tax in 1861, to help finance the Civil War.

4. The 4-th expressed limitation on the taxing power is that indirect taxes must be uniform. It means that all indirect taxes must be levied at the same rate in all parts of the country.

The implied limitations. The Federal Government cannot tax the States or any of their local governments in the exercise of their governmental functions. That is , federal taxes cannot be imposed on those governments when they are doing such things as providing public education, furnishing health care or building streets and highways.

Current federal taxes

The Income Tax – is the largest source of federal revenue today. It first became the major source in 1917 and except for a few years during the Depression of the 1930s, it has remained so. Several factors suit the income tax to its dominate role. It’s a flexible tax; its rates can be adjusted to produce whatever amount of money Congress thinks is necessary. It’s a progressive tax – the higher the income and the ability to pay, the higher the tax rate. Ever since 1913, the income tax has been levied on the incomes of both individuals and corporations.

The Individual Income Tax – the tax is levied on each person’s taxable income – one’s total income in the previous year, minus exemptions and deductions. Deductions are allowed for a number of things, including the costs of some medical care, some state and local taxes (except for sales taxes), interest paid on home mortgages, and contributions to charitable organizations.

The Corporation Income Tax – each corporation must pay a tax on its net income – on all of its earnings above the costs of doing business. The corporate tax has been called the most complicated of all federal taxes because of the many deductions allowed. Nonprofit organizations (churches and charitable foundations) are not subject to the corporation income tax.

Social Insurance Taxes – The Federal Government collects huge sums to finance three major social welfare programs:

1. the Old-Age, Survivors and Disability Insurance program (OASDI)

2. Medicare - health care for the elderly

3. the unemployment compensation program – benefits paid to jobless workers

OASDI and Medicare are supported by taxes imposed on nearly all employers and their employees, and on self-employed persons.

These levies are often called payroll taxes because the amounts owed by employees are withheld from their paychecks.

The unemployment insurance program is a joint federal-state operation. Each State has its own unemployment compensation law; and the amount of a worker’s weekly benefits, and their duration, is determined by State law.

Notice that social insurance taxes are not progressive – instead, they are regressive taxes – taxes levied at a flat rate, without regard to the level of a tax payer’s income or his ability to pay them.

Excise Taxes – are laid on the manufacture, sale or consumption of goods and/or the performance of services. Today, federal excise taxes are imposed on a long list of things. Many excise taxes are often called hidden taxes because they are collected from producers who then figure them into the price that the retail consumer finally pays.

Some are called luxury taxes as they are levied on goods not usually considered to be necessities.

And some excise taxes are known as sin taxes, in particular, those laid on tobacco products, beer, wine, liquor and gambling.

Estate and Gift Taxes - an estate tax is a levy imposed on the assets (the estate) of one who dies. A gift tax is one imposed on the making of a gift by a living person. Any person may make up to 10000$ in tax-free gifts to any other person. Gifts that husbands/wives make to one another are not taxed, regardless of value.

Custom Duties – are laid on goods brought into the US from abroad. They are also known as tariffs, import duties, or imports. Congress decides which imports will be dutied and at what rates.