Taxation in United States involves a complex system wherein payment is required to be made to four levels of the government. The four levels include the:
- Federal government
- Local government, which includes districts, municipalities, counties as well as townships.
- Regional government which includes transit districts
- State government
The following section concentrates on Federal taxation in United States, which have been discussed under the following heads.
A) Taxation in United States -historical overview:
Paying federal income tax was made mandatory in United States from the year 1862. This step was adopted with a view to finance the Civil War. During that period, a 3 percent tax was imposed on the income level above USD$600. Income tax rate of 5 percent was levied if the level of income was above USD$10,000. These tax rates were revised in the year 1864.
In the year 1895, Supreme Court made certain alterations pertaining to tax imposed on property. The Supreme Court declared in the same year (1895), that income earned from property would be taxable.
At present, the various activities of the federal government are funded by revenues obtained from corporate income tax as well as personal income taxes. Earlier, these activities used to be financed by tariffs. Currently, the tariffs play a very insignificant role in providing financial assistance for activities of the federal government.
B) Tax Code of the Federal Government:
Taxation in United States has a tax code, which is referred to as Internal Revenue Code of 1986. The main aim of the Internal Revenue Code of 1986 is to raise revenues. The code is also used for other purposes,for fulfilling the federal government's political, social and economic objectives.
C) Tax brackets and rate of inflation:
The tax code pertaining to taxation in United States has a drawback. The code does not take into consideration, the rate of inflation. Majority of the tax laws use CPI or consumer price index and do not offer the provision of inflation adjustment.
It is a well known fact that, more is the income earned, higher is the amount of tax payable. This progressive tax system is followed in United States. In case of Inflation, if inflation is high, salary of the individuals would increase. As wages increase, people are pushed into higher tax brackets where the tax rate is also high.
D) Withholding Tax:
Employers collect payroll taxes in the United States of America. The payroll tax is collected by the employers on internal revenue services or IRS 's behalf. A part of the salary is deducted at source by the employer. Such payments are also made by the ones who are self employed. Amount of tax ,which is withheld depends on the salary earned by the taxpayer on a yearly basis. The amount of Withholding Tax also depends on the marital status and number of members dependent on the taxpayer.
E) Income tax under the federal government:
- In the year 2001, income tax revenue of the federal government accounted for the major portion of the revenues earned by the government in the United States of America.
- Based on the income of the taxpayer, the tax rate ranges from 0 percent to 35 percent of one's income level.
- Taxation in United States pertaining to federal income tax is done following a progressive pattern.
- Corporates too have to shell out this tax depending on the profits earned by them.
Note:
In the United States of America, federal income tax is imposed not only on the basis of citizenship, but also on the status of residency. Depending on these two factors, the federal government decides whether a particular individual is entitled to pay taxes in the United States.
Citizens of United States, even though not residing in America are eligible for taxation in United States. They are required to pay taxes on the basis of worldwide income.
F) Tax Calculation Methods:
There are two methods, by which federal tax is calculated in the United States of America. They are:
(i)"Regular Tax" -
In this method, applicable deductions are deducted from the gross income. Thereafter, tax rates are applied according to the tax bracket, which is assigned to the tax payer.
(ii)"AMT or Alternative Minimum Tax"-
The tax is calculated not taking into consideration, interest payments on certain bonds. This method is also based on gross income. But, this process has comparatively less number of deductions.
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