Taxation in the United States the Taxation Essay

Excerpt from Essay :

Taxation in the United States

The taxation system of the United States of America is flawed in many ways; meanwhile there are some benefits of this system as well. The current taxation system of the United States needs to be analyzed to point out the flaws in the system. The main purpose of this paper is to discuss the current components of this system with respect to the flaws and good things about it, to discuss the problems relevant to the particular taxes and what can be done to solve these problems. Before we go on to analyze the system, it is important for us to know the components of the taxation system and the types of taxes that are imposed on the people in the country.

Overview of the Current System

The United States of America is known as a federal republic. This implies that it is composed of autonomous local and state governments. Taxes are imposed in the United States of America at each of the aforementioned government levels. The taxes that have been imposed in the country consist of income, sales, property, payroll, imports, gifts and estates along with numerous fees. In the year 2010, the taxes that were collected by the municipal, state and federal governments totaled up to 24.8% of the Gross Domestic Product. It is important to note here that the taxation system of the United States is known to be one of the most progressive tax systems in the developed or industrialized world[footnoteRef:2]. [2: U.S. Federal Individual Income Tax Rates History, 1913 -- 2011, 2011.]

The imposition of taxes is done on the gross income of the corporations as well as the individuals by the federal government, most state governments as well as some local governments. Residents and citizens have to pay taxes on worldwide income and they are also allowed a credit as far as foreign taxes are concerned. The income tax is determined by making use of the tax accounting rules and not the principles of financial accounting. Almost all income from every source is included is subjected to taxation in the United States. Due to many business expenses, the income that is taxable is reduced, although there is a limit when it comes to some business expenses. Individuals are allowed to reduce their taxable income by specific nonbusiness expenses, personal allowances that include interest on home mortgage, local and state taxes, and medical expenses, contributions to charity organizations and by other expenses that are made above specific percentages of income. On the other hand, the state rules for determination of taxable income are often different from the federal rules. The rates of federal tax vary from 10 to 39.6% of income that is taxable. Depending upon jurisdiction, the local and state tax rates vary widely from 0 to 13.30%. It should be noted here that most of the aforementioned tax rates are graduated. Generally, the state taxes are considered as one of the deductible expenses for the determination of federal tax. In this year (2013), the top most marginal tax rate for a resident of California (high-income) was 52.9%. Some specific alternative taxes may also be imposed.

It is important to note here that America is the only country in the world that imposes taxes on its nonresident citizens for their worldwide income, just in the same way and with the same rates as they tax their residents. The constitutionality of the payment of the aforementioned tax was upheld by the Court pertaining to the case of Cook v. Tait in the year 1924.

Types of Taxes

The federal as well as all the state governments impose payroll taxes. Medicare and Social Security taxes are also included in the payroll taxes and are payable by the employees as well as the employers. The combined rate of this tax is 15.3%; meanwhile it was 13.3% in the years 2012 and 2011. The Social Security tax is applicable only on the first $106,800 of income in the years 2009 through 2011. Nevertheless, benefits are only accumulated on the first $106,800 of the income. It is the duty of the employers to withhold the income taxes on the salary of the employees. Unemployment tax along with many other levies is also paid by the employers.

Most local governments impose the property taxes. Apart from that, many special purpose organizations also impose this tax based on the value of property in the fair market. School as well as other authorities are governed separately and therefore separately taxed. Generally, property tax is applicable on realty. Even though, there are some jurisdictions that tax some types of business property as well. The rates and rules of property taxes vary considerably.

Most states and come local governments impose sales tax on the price at retail sale of most products and also some services. Depending upon the different jurisdictions, the rates of sales tax vary from 0 to 16%. Moreover, the rates can also differ within a jurisdiction on the basis of specific goods or services that are taxed. The seller is the collector of the sales tax when the product is being sold, or when it is remitted in the form of use tax by purchasers of items that are taxed.

The individual mandate of the Affordable Care Act and the Patient Protection also come under the category of taxation.

On the important of most kinds of good, the United States has imported custom duties and tariffs as a part of many jurisdictions. The custom duties and tariffs have to be paid before the legal import of the goods that are taxed. The rates of this tax differ from 0 to 20%, on the basis of the country of origin from where the goods are being imported and the particular goods.

Gift and estate taxes are imposed by some state governments and the federal government when property inheritance is transferred by life time donation or by will. Just like the federal income taxes, the gift and estate taxes are also applicable on the worldwide property of residents and citizens that are allowed a credit pertaining to foreign taxes.

Types of Taxpayers

As mentioned earlier, taxes can be imposed on business entities, individuals, trusts, estates or other forms of organizations. The aforementioned taxes are based on income, property, transfers, transactions, and import of goods, some business activities and on a number of other factors. Moreover, the taxes are imposed on the kind of taxpayer for whom one of such tax bases is relevant. Therefore, the property tax will be imposed on owners of real estate or other forms of property. Apart from that, some taxes, specifically income taxes might be applicable on the members of different organizations for the activities of the organizations. Thus, partners that are in a partnership are taxed individually.

With some exceptions, if a tax is imposed by one level of the government, the other level does not imply that same tax.

Tax Administration

Hundreds of tax authorities are responsible for auditing and collecting the taxes in the United States. There are three tax administrations at the federal level. As for most of the domestic federal taxes, these are administered by the Internal Revenue Service. The aforementioned organization is a part of the Department of the Treasury. Firearms, tobacco and alcohol taxes are administered by the Tobacco and Alcohol Tax and Trade Bureau, also referred to as the TTB. Custom duties and tariffs on the imported goods are administered by the United States Customs and Border Patrol. TTB is a branch of the Department of Justice. As for the Customs and Border Patrol, it is a part of the Department of Homeland Security.

The organizations of local and state administration differ considerably. Every state has to maintain its own tax authority and administration. There are some states that administer some local taxes in part or as a whole. As for most of the local governments, they maintain a tax administration department of their own or can share one with one of their neighboring local governments.

1.2 Rationale of the Study

As mentioned in the beginning of the paper, there are many flaws in the taxation system that is being employed in the United States. Since the burden of the taxation system lies on the shoulders of the general public, it is important for us to highlight the problems within the system so that they can be sorted out. The main objective of this study is to pin point the problems and flaws of the tax system in the country and then provide solutions or recommendations to solve these problems.

Part 2: What is wrong with the system?

2.1 Complexity

The United States tax system is in fact one of the world's most complicated systems. Since most Americans are aware of the fact that the tax code has become so complex that the situation seems hopeless at times, with exclusions that are worth an encyclopedia with workarounds that seem to favor that one percent and…

Sources Used in Document:


"Effective tax rates: income, payroll, corporate and estate taxes combined." Peter G. Peterson Foundation. July 01, 2013.

Edwards, Chris. "Options for Tax Reform," Cato Institute Policy Analysis no. 536, February 24, 2005.

Matthews, Dylan. U.S. tax code isn't as progressive as you think. The Washington Post, 2013.

Olen, John. "America's Tax System Must Be Improved." Economy in Crisis, 2013.

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