The Current Federal Tax Policy - Coursework Example

Current Federal Tax Policy The history of the US tax policy is rather long. It began from the year 1862, when Congress adoptedthe first legal obligation to pay a federal income tax. People were obliged to pay a 3 % tax on incomes above $600 and 5% for incomes over $10,000. Later in 1894 a new Tariff Act was adopted, which stated new income taxes / Tariff Act, 1894/. There exist a number of different taxes in the USA. In this paper I’ll try to mention only some of them. For the time-being income tax is applies to almost 70 % of all population of the United States / Tariff Act, 1894/. Tax distribution We can differentiate different groups of the US tax payers. This differentiation can be made on the basis of the amount of tax paid, which is distinguished on the basis of the progressive nature of the US federal tax system. This means that the lesser person earns the lesser taxes are imposed on him, and with the rise of the income taxes shift disproportionately /Simons, 1938/. If we regard all the taxes paid on the basis of the income taxes, we will see that the top 0,1 % of all people pay 17,4 % of federal taxes. They earn some 9,1 % of the income. The other group of the income taxpayers, which constitute the top 1 % pay 36,9 % of major federal taxes, by this earning 19 % of the income. Those individuals, who earn 33,4 % of the income, constitute the top 5 % and pay 57,1 % of federal taxes. Finally, bottom 50 % of taxpayers pay 3,3 % of individual income taxes and earn 13,4 % of the income / Incomes and Politics, 2006/. The broader information is exemplified in the appendix 2. Income and related taxes Federal income tax Federal income tax constitutes the basis of the treasure filling and depends severely on the amount of person’s income ranging from 0 % to 35 %. In the United Stats the progressive type of taxation is used meaning that higher the income of the individual is the higher is the tax imposed on it /Mastromaco, 1999/. It should be also mentioned that income tax is also levied on the majority of corporations, which leads to double-taxation of the dividends paid to stockholders /Mastromaco, 1999/. One more peculiar feature of the American taxation system is the aspect of citizenship and residency, which takes into consideration in the process of taxation. According to US legislation all US citizens, even those, who do not live on the territory of the USA, should pay U.S. income tax /Mastromaco, 1999/. The group of the population, which earns little (for example in 2000 workers, who earned $20,000 were considered low-earning) pay no income taxes and even receive a small subsidy from the state through child credits and the Earned Income Tax Credit / US Taxation, 2007/. Sometimes, people with lower income are obliged to pay higher taxes for Social Security and Medicare than some people with higher income in terms of the effective tax rate. At a definite period of time all the income earned during the year is calculated, adjusted for inflation and then taxed at 7.65% on the employee. This tax is composed of the Social Security tax constituting 6.2% and of the Medicare tax constituting 1.45%. In addition to this 7.65% tax also is paid by the employer / US Taxation, 2007/. For the self employed individuals the conditions are a bit different. They pay all the amount of 15.3 % tax. On the other hand they can deduct 50 % of this amount from their total income when they file income taxes/ US Taxation, 2007/. It should be mentioned that nowadays personal and corporate income taxes constitute the basis of the federal government, which does not much rely now on the tariffs upon imported goods. Besides the general income tax the federal government imposes some other specific taxes. Among them are the following: by taxes on personal earned income, which finance Social Security and Medicare. The other type of taxes is estate taxes, which are imposed on inheritance / US Taxation, 2007/. Besides there are other taxes – federal exercise taxes - which are imposed on definite types of products and activities and than allocated to definite funds. Among such federal taxes are the ones implied on telephone usage, motor fuels, tires, tobacco and alcohol products and some others / US Taxation, 2007/. Social Security tax The other important tax is Social Security tax, which is also known as FICA for the Federal Insurance and Contributions Act. The amount of the social security tax is 6,2 % paid by the employee and of 6,2 % paid by the employer. This tax is imposed on the earned income, while unearned income is not subjected to this type of tax / US Taxation, 2007/. Medicare tax The other type of taxes, which is also very important and serves the basis of the Medicare program, is the Federal Medical tax. This is the most important source of funding of the program for the elderly and disabled population. Medical tax is imposed both on employer and employee and constitutes 1,45 % of the income. The same as in case of Social Security tax, Medical tax is not imposed on the unearned income /Singer, 2007/. Social Security and Medicare taxes constitute the payroll tax. Just as Federal income taxes, these two taxes are also imposed at income; however, they differ from the Federal income tax in their purpose to serve their definite goals. Other taxes US taxation system also has taxes to support unemployment insurance. The peculiarity of this taxes is that on imposing them it is insured that most employees will not be double taxed in those states, which support unemployment insurance / US Taxation, 2007/. The other US taxes are the ones paid on fuels for transport vehicles, which in 2005 constituted 18.4¢ per gallon of gasoline and 24.4¢ per gallon of diesel. There are taxes on distilled spirits, some weapon and tobacco / US Taxation, 2007/. Transfer taxes One more type of taxes is imposed solely on the wealthy group of population, to which belong families and persons earning over 2 % of the general state annual revenue. These taxes are composed of the gift tax, the estate tax and the generation-skipping transfer tax / US Taxation, 2007/. The gift tax is imposed on the transfer of wealth during the person’s life, while the estate tax is imposed on the wealth, which is transferred after the transferor’s death. The generation-skipping transfer tax is imposed on transfers conducted during life or after death to persons, who are removed by several generations from the transferor / US Taxation, 2007/. Since 2002 the rates of gift and estate taxes differ from 18 % up to 50 %. The GSTT rate is strictly 50 % / US Taxation, 2007/. So, in this paper I briefly outlined main federal taxes. However, their number is not limited by the ones listed here. Have a look at the list of taxes in the appendix 1. Appendix 3 also shows the major types of taxes and explains who bears these taxes. References: Tariff Act. Chapter 349, 28 Stat. 509. August 15, 1894. Simons, Henry. 1938. Personal Income Taxation: The Definition of Income as a Problem of Fiscal Policy. Chicago: University of Chicago Press. Incomes and Politics. September 02, 2006. Wall Street Journal. Mastromarco, Dan. 1999. What’s So Fair about a Tax on Income?. Tax Notes. US Taxation. Accessed 22 February 2007. [Online]. Available from: Singer, Paula. Accessed 22 February 2007. Ten rules of US Taxation. [Online]. Available from: < http://www.windstar.com/> Appendix 1. According to the Internal Revenue Code there are the following taxes: • Accounts receivable tax • Alternative Minimum Tax (AMT) • Building permit tax • Capital gains tax • CDL license tax • Cigarette tax • Corporate income tax • Court fines (indirect taxes) • Dog license tax • Excise tax • Federal income tax • Federal unemployment tax (FUTA) • FICA tax • Fishing license tax • Food license tax • Fuel permit tax • Gasoline tax (42 cents per gallon) • Gift tax • Hunting license tax • Inheritance tax interest expense (tax on the money) • Inventory tax IRS interest charges (tax on top of tax) • IRS penalties (tax on top of tax) • Liquor tax • Local income tax • Luxury taxes • Marriage license tax • Medicare tax • Property tax • Real estate tax • Recreational vehicle tax • Road toll booth taxes • Road usage taxes (Truckers) • Sales tax and equivalent use tax • School tax • Septic permit tax • Service charge taxes • Social Security tax • State income tax • State unemployment tax (SUTA) • Telephone federal excise tax • Telephone federal, state and local surcharge taxes • Telephone federal universal service fee tax • Telephone minimum usage surcharge tax • Telephone recurring and non-recurring charges tax • Telephone state and local tax • Telephone usage charge tax • Toll bridge taxes • Toll tunnel taxes • Traffic fines (indirect taxation) • Trailer registration tax • Transfer tax and Generation-skipping transfer tax • Utility taxes • Vehicle license registration tax • Vehicle sales tax • Watercraft registration tax • Well permit tax • Wheel tax • Workers compensation tax Appendix 2. Appendix 3. Joint Committee on Taxation Incidence Assumptions Type of Tax Incidence Assumption Who Bears the Burden? Income tax on labor income Wage or salary earners Payroll taxes Wage or salary earners Targeted tax on labour income Case-by-case basis Individual income taxes on capital income Owners of capital Corporate income tax Owners of corporate capital Broad-based investment incentives Savers Taxes on savings Savers Broad-based consumption taxes Converted to equivalent income-based tax and attributed to individuals based on their wages and income from old capital Narrow-based consumption taxes and specific excise taxes Converted to equivalent income-based tax and attributed to individuals based on their wages and income from old capital, weighted by the expenditure shares of the taxed goods Estate tax Decedent (based on income in the year preceding death) Gift tax Generally not distributed Income of pass-through entities Distributed as if earned directly by the owners Provisions affecting tax treatment of pass-through entities themselves Generally not distributed Pensions Case-by-case basis Nonprofit organizations Generally not distributed Non-U.S. persons Generally not distributed Source: Joint Committee on Taxation, “Methodology and Issues in Measuring Changes in the Distribution of Tax Burdens,” JCS-7-93, June 14, 1993. 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