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Encyclopedia > Income tax in the United States
Taxation in the United States

This article is part of the series:
Politics and government of
the United States
FairTax Flat tax Tax protester arguments Constitutional Statutory Conspiracy Taxation by country Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        Taxation in the United States is a complex system which may involve payment to at least four different levels of government and many... Image File history File links US-GreatSeal-Obverse. ... Politics of the United States takes place in a framework of a presidential republic, whereby the President of the United States is head of state, head of government, and of a two-party legislative and electoral system. ...


Federal taxation
Authority · History
Internal Revenue Service
Court · Forms · Code
Income tax · Payroll tax
Alternative Minimum Tax
Estate tax · Excise tax
Gift tax · Corporate tax
Capital gains tax
State & local taxation
State income tax
Sales tax · Use tax
Property tax
State tax levels
FairTax · Flat tax
Constitutional
Statutory · Conspiracy

Part of the Taxation series
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The federal government of the United States imposes a progressive tax on the taxable income of individuals, partnerships, companies, corporations, trusts, decedents' estates, and certain bankruptcy estates. Some state and municipal governments also impose income taxes. The first Federal income tax was imposed (under Article I, section 8, clause 1 of the U.S. Constitution) during the Civil War, then again in the 1890s, and again after the Sixteenth Amendment was ratified in 1913. Current income taxes are imposed under these constitutional provisions and various sections of Subtitle A of the Internal Revenue Code of 1986, as amended, including 26 U.S.C. § 1 (imposing income tax on the taxable income of individuals, estates and trusts) and 26 U.S.C. § 11 (imposing income tax on the taxable income of corporations). A tax is an involuntary fee paid by individuals or businesses to a state, or to functional equivalents of a state, including tribes, secessionist movements or revolutionary movements. ... United States Government redirects here. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        A progressive tax is a tax imposed so that the effective... Taxable income is the portion of income that is the subject of taxation according to the laws that determine what is income and the taxation rate for that income. ... For other uses, see Corporation (disambiguation). ... This article or section does not adequately cite its references or sources. ... Notice of closure stuck on the door of a computer store the day after its parent company, Granville Technology Group Ltd, declared bankruptcy (strictly, put into administration—see text) in the United Kingdom. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        An income tax is a tax levied on the financial income... Page I of the Constitution of the United States of America Page II of the United States Constitution Page III of the United States Constitution Page IV of the United States Constitution The Syng inkstand, with which the Constitution was signed The Constitution of the United States is the supreme... Combatants United States of America (Union) Confederate States of America (Confederacy) Commanders Abraham Lincoln, Ulysses S. Grant Jefferson Davis, Robert E. Lee Strength 2,200,000 1,064,000 Casualties 110,000 killed in action, 360,000 total dead, 275,200 wounded 93,000 killed in action, 258,000 total... The 1890s were sometimes referred to as the Mauve Decade, because William Henry Perkins aniline dye allowed the widespread use of that colour in fashion, and also as the Gay Nineties, under the then-current usage of the word gay which referred simply to merriment and frivolity, with no... Amendment XVI in the National Archives Amendment XVI (the Sixteenth Amendment) of the United States Constitution was ratified on February 3, 1913. ... Year 1913 (MCMXIII) was a common year starting on Wednesday (link will display the full calendar) of the Gregorian calendar (or a common year starting on Tuesday of the 13-day-slower Julian calendar). ... The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes... Year 1986 (MCMLXXXVI) was a common year starting on Wednesday (link displays 1986 Gregorian calendar). ... The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes... The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes...

Contents

Income tax basics

While U.S. tax law is very complex, the underlying idea is relatively easy to understand. Simplifying greatly, gross income is all income from all sources (§ 61) less any exclusions (§ 101 et seq.). An exclusion is something that Congress has effectively said a taxpayer need not include in his or her income for tax purposes, such as employer-paid health insurance (§ 106) or interest from tax-exempt bonds (§ 103). Gross income is commonly defined as the amount of a companys or a persons income before all deductions or any taxpayer’s income, except that which is specifically excluded by the Internal Revenue Code, before taking deductions or taxes into account. ...


For individuals, Adjusted Gross Income (AGI) is gross income less any above-the-line deductions (§ 62). Above-the-line deductions are listed in § 62 and include trade or business deductions, alimony (§ 215), and moving expenses (§ 217). Taxable income is AGI less (1) itemized deductions or the applicable standard deduction, whichever is greater, and (2) a deduction for any allowable personal exemptions for the taxpayer, the taxpayer's spouse (if filing jointly), and the taxpayer's dependents. (In certain cases involving higher income taxpayers, the allowed personal exemptions may be reduced or even eliminated.) Adjusted gross income (AGI) is a financial term to describe the amount used in the calculation of an individuals income tax liability. ... A tax deduction or a tax-deductible expense represents an expense incurred by a taxpayer that is subtracted from gross income and results in a lower overall taxable income. ... Alimony, maintenance or spousal support is an obligation established by law in many countries that is based on the premise that both spouses have an absolute obligation to support each other during the marriage (or civil union) unless they are legally separated. ... Taxable income is the portion of income that is the subject of taxation according to the laws that determine what is income and the taxation rate for that income. ... Individual taxpayers in the United States are faced with a choice when preparing their tax returns. ... Individual taxpayers in the United States are faced with a choice when preparing their tax returns. ... A deduction for a Personal Exemption amount for the individual taxpayer, the taxpayers spouse, and the taxpayers child or other dependent for purposes of calculating a U.S. taxpayers federal income tax is provided in the Internal Revenue Code at 26 U.S.C. Â§ 151. ...


Non-itemizers take the standard deduction. Itemized deductions include any deduction not listed in § 62 such as charitable contributions (§ 170) and certain medical expenses (§ 213). Taxable income is then multiplied by the appropriate tax rate to arrive at the tax due. Tax credits such as the Earned Income Tax Credit (§ 32) or the Child Tax Credit (§ 24) lower the tax owed on a dollar-for-dollar basis. This means tax credits are more valuable than deductions because deductions are applied before the tax rate while credits are applied after. For instance, with a 35% tax rate, a deduction of $100 would save only $35 of taxes while a $100 credit would save $100 worth of taxes. Individual taxpayers in the United States are faced with a choice when preparing their tax returns. ... Taxable income is the portion of income that is the subject of taxation according to the laws that determine what is income and the taxation rate for that income. ... Within the Australian, Canadian, United Kingdom, and United States tax systems, a tax credit is an item which is treated as a payment already made towards taxes owed. ... The United States federal Earned Income Tax Credit (EITC) is a refundable tax credit that reduces or eliminates the taxes that low-income married or single working people pay (such as payroll taxes) and also frequently operates as a wage subsidy for low-income workers. ... A child tax credit is a tax credit based on the number of dependent children in a family. ...


Types of income

For tax purposes, income can be divided in a variety of ways. The first division is between ordinary income and capital gains. Ordinary income includes compensation for personal services such as wages and salaries, business profit and interest income from invested funds while capital gain generally comes from the sale of investment property. Congress has typically shown a preference for long-term investment by having a capital gains tax rate lower than the ordinary income rate. However, only long-term capital gains get preferential treatment; short-term capital gains (from property held for one year or less) are taxed at the same rate as ordinary income. Added complications come from various distinctions within each category. For instance, qualified dividends, which were previously taxed at ordinary income rates (as non qualified dividends currently are), are currently taxed at long-term capital gain rates until 2011 under the Jobs and Growth Tax Relief Reconciliation Act of 2003, and within long-term capital gains, gains on certain real estate, collectibles, and small business stock each have their own tax rates. The rules for offsetting capital losses with gains (whether capital or ordinary) add further complications. In ordinary usage, when someone speaks of their "tax rate", they typically are referring to their marginal tax rate for ordinary income. Under the United States Internal Revenue Code, the type of income is defined by its character. ... In finance, a capital gain is profit that results from the appreciation of a capital asset over its purchase price. ... The Jobs and Growth Tax Relief Reconciliation Act of 2003 was passed by the United States Congress on May 23, 2003 and signed by President Bush five days later. ... In the tax system and in economics, the marginal tax rate refers to the increase in ones tax obligation as ones taxable income rises: marginal tax rate = Δ(tax obligation)/Δ(taxable income) This can be measured either by looking at the published tax tables (to get the official marginal...


Another important distinction in types of income is income from passive activities versus non-passive activities (§ 469), an attempt to curb tax shelters used by taxpayers not directly involved with an activity other than as an investor ("passive"). Tax shelters are any method of reducing taxable income resulting in a reduction of the payments to tax collecting entities including state and federal governments. ...


Year 2007 income brackets and tax rates

An individual's marginal income tax bracket depends upon their income and their tax-filing classification. As of 2007, there are six tax brackets for ordinary income (ranging from 10% to 35%) and four classifications: single, married filing jointly (or qualified widow or widower), married filing separately, and head of household. Tax brackets are the divisions at which tax rates change in a progressive tax system (or an explicitly regressive tax system, although this is much rarer). ... 2007 is a common year starting on Monday of the Gregorian calendar. ... Head of Household is a tax filing classification for individual American taxpayers. ...

Marginal Tax Rate Single Married Filing Jointly or Qualified Widow(er) Married Filing Separately Head of Household
10% $0 – $7,825 $0 – $15,650 $0 – $7,825 $0 – $11,200
15% $7,826 – $31,850 $15,651 – $63,700 $7,826 – $31,850 $11,201 – $42,650
25% $31,851 – $77,100 $63,701 – $128,500 $31,851 – $64,250 $42,651 – $110,100
28% $77,101 – $160,850 $128,501 – $195,850 $64,251 – $97,925 $110,101 – $178,350
33% $160,851 – $349,700 $195,851 – $349,700 $97,926 – $174,850 $178,351 – $349,700
35% $349,701+ $349,701+ $174,851+ $349,701+

An individual pays tax at a given bracket only for each dollar within that bracket's range. For example, a single taxpayer who earned $10,000 in 2007 would be taxed 10% of each dollar earned from the 1st dollar to the 7,825th dollar (10% × $7,825 = $782.50), then 15% of each dollar earned from the 7,826th dollar to the 10,000th dollar (15% × $2,175 = $326.25), for a total of $1,108.75. Notice this amount ($1,108.75) is lower than if the individual had been taxed at 15% on the full $10,000 (for a tax of $1,500). This is because the individual's marginal rate (the percentage tax on the last dollar earned, here 15%) has no effect on the income taxed at a lower bracket (here the first $7,825 of income taxed at 10%). This ensures that every rise in a person's pre-tax salary results in an increase of their after-tax salary, contrary to the popular misconception that being bumped into a higher tax bracket reduces after-tax income.


Claiming deductions may reduce an individual's tax liability by a rate equal to the marginal tax rate of their particular tax bracket, with a corresponding reduction in returns as the individual crosses in to a lower tax bracket. For example, if an individual is able to increase the amount of their deduction by $1000 with a last-minute donation to a charitable organization, and the individual's adjusted gross income is $500 in to the 25% marginal tax bracket, the donation will reduce the tax liability of the individual by ($500 × 25%) + ($500 × 15%) = $200.


Year 2008 income brackets and tax rates

Marginal Tax Rate Single Married Filing Jointly or Qualified Widow(er) Married Filing Separately Head of Household
10% $0 – $8,025 $0 – $16,050 $0 – $8,025 $0 – $11,450
15% $8,026 – $32,550 $16,051 – $65,100 $8,026 – $32,550 $11,451 – $43,650
25% $32,551 – $78,850 $65,101 – $131,450 $32,551 – $65,725 $43,651 – $112,650
28% $78,851 – $164,550 $131,451 – $200,300 $65,726 – $100,150 $112,651 – $182,400
33% $164,551 – $357,700 $200,301 – $357,700 $100,151 – $178,850 $182,401 – $357,700
35% $357,701+ $357,701+ $178,851+ $357,701+

The effect of the these rates is shown in the figure below.

US taxes as a percent of income in 2008.

Short-term capital gains are taxed as ordinary income rates as listed above. Long-term capital gains have lower rates corresponding to an individual’s marginal ordinary income tax rate, with special rates for a variety of capital goods.

Ordinary Income Rate Long-term Capital Gain Rate Short-term Capital Gain Rate Long-term Gain on Real Estate Long-term Gain on Collectibles Long-term Gain on Certain Small Business Stock
10% 0% 10% 10% 10% 10%
15% 0% 15% 15% 15% 15%
25% 15% 25% 25% 25% 25%
28% 15% 28% 25% 28% 28%
33% 15% 33% 25% 28% 28%
35% 15% 35% 25% 28% 28%

Example of a tax computation

Income tax for year 2007:

  • $40,000 (taxable income)
    • $7,825 × 0.10 = $782.50
    • ($31,850 - $7,825) × 0.15 = $3,603.75
    • ($40,000 - $31,850) × 0.25 = $2,037.50
  • Total income tax = $6,423.75 (16.06% of income assuming no deductions, exemptions or credits are taken)

Note that in addition to income tax, a wage earner would also have to pay FICA (payroll) tax (and an equal amount of FICA tax must be paid by the employer): Federal Insurance Contributions Act (FICA) tax is a United States tax levied in an equal amount on employees and employers to fund old-age, survivors, and disability insurance portion of the Social Security system and the hospital insurance portion ( Medicare). ...

  • $40,000 (adjusted gross income)
    • $40,000 × 0.062 = $2,480 (Social Security portion)
    • $40,000 × 0.0145 = $580 (Medicare portion)
  • Total FICA tax = $3,060 (7.65% of income)
  • Total federal tax of individual = $9,483.75 (23.71% of income)

See also Rate schedule (federal income tax) Rate Schedule A rate schedule is a chart that helps United States taxpayers determine their federal income tax burden for a particular year. ...


Legal history

OR Image File history File links Merge-arrow. ... Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        The history of taxation in the United States began when it was composed of colonies ruled by the British Empire, French Empire, and Spanish Empire. ...

Article I, Section 8, Clause 1 of the United States Constitution (the "Taxing and Spending Clause"), specifies Congress's power to impose "Taxes, Duties, Imposts and Excises," but Article I, Section 9 requires that, "Duties, Imposts and Excises shall be uniform throughout the United States." Image File history File links Merge-arrow. ... It has been suggested that this article or section be merged into Taxation history of the United States. ... Article I, Section 8, Clause 1 of the United States Constitution, known as the Taxing and Spending Clause states: The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States... Type Bicameral Houses Senate House of Representatives President of the Senate President pro tempore Dick Cheney, (R) since January 20, 2001 Robert C. Byrd, (D) since January 4, 2007 Speaker of the House Nancy Pelosi, (D) since January 4, 2007 Members 535 plus 4 Delegates and 1 Resident Commissioner Political...


In addition, the Constitution specifically limited Congress' ability to impose direct taxes, by requiring it to distribute direct taxes in proportion to each state's census population. It was thought that head taxes and property taxes (slaves could be taxed as either or both) were likely to be abused, and that they bore no relation to the activities in which the federal government had a legitimate interest. The fourth clause of section 9 therefore specifies that, "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken." The Canadian Head Tax was a fee charged for each Chinese person entering Canada. ... Property tax, millage tax is an ad valorem tax that an owner of real estate or other property pays on the value of the property being taxed. ...


Taxation was also the subject of Federalist No. 33 penned secretly by the Federalist Alexander Hamilton under the pseudonym Publius. In it, he explains that the wording of the "Necessary and Proper" clause should serve as guidelines for the legislation of laws regarding taxation. The legislative branch is to be the judge, but any abuse of those powers of judging can be overturned by the people, whether as states or as a larger group. Alexander Hamilton, author of Federalist No. ... Alexander Hamilton (November 20, 1755 or 1757 - July 12, 1804) was the first Secretary of the Treasury of the United States, lawyer, Founding Father, American politician, leading statesman, political economist,] financier, and political theorist. ... For other uses, see Alias. ... Title page of an early Federalist compilation. ...


The courts have generally held that direct taxes are limited to taxes on people (variously called "capitation", "poll tax" or "head tax") and property.[1] All other taxes are commonly referred to as "indirect taxes," because they tax an event, rather than a person or property per se.[2] What seemed to be a straightforward limitation on the power of the legislature based on the subject of the tax proved inexact and unclear when applied to an income tax, which can be arguably viewed either as a direct or an indirect tax.


Early Federal income taxes

In order to help pay for its war effort in the American Civil War, the United States government imposed its first personal income tax, on August 5, 1861, as part of the Revenue Act of 1861 (3% of all incomes over US $800; rescinded in 1872). Other income taxes followed, although an 1895 United States Supreme Court ruling, Pollock v. Farmers' Loan & Trust Co., held that taxes on rents from real estate, on interest income from personal property and other income from personal property (which includes dividend income) were direct taxes on property, and therefore had to be apportioned. Since apportionment of income taxes is impractical, this had the effect of prohibiting a federal tax on income from property. Due to the political difficulties of taxing individual wages without taxing income from property, a federal income tax was impractical from the time of the Pollock decision until the time of ratification of the Sixteenth Amendment (below). Combatants United States of America (Union) Confederate States of America (Confederacy) Commanders Abraham Lincoln, Ulysses S. Grant Jefferson Davis, Robert E. Lee Strength 2,200,000 1,064,000 Casualties 110,000 killed in action, 360,000 total dead, 275,200 wounded 93,000 killed in action, 258,000 total... The government of the United States, established by the United States Constitution, is a federal republic of 50 states, a few territories and some protectorates. ... is the 217th day of the year (218th in leap years) in the Gregorian calendar. ... Year 1861 (MDCCCLXI) was a common year starting on Tuesday (link will display the full calendar) of the Gregorian calendar (or a common year starting on Sunday of the 12-day slower Julian calendar). ... The Revenue Act of 1861 proposed that there shall be levied, collected, and paid, upon annual income of every person residing in the U.S. whether derived from any kind of property, or from any professional trade, employment, or vocation carried on in the United States or elsewhere, or from... The Supreme Court Building, Washington, D.C. The Supreme Court Building, Washington, D.C., (large image) The Supreme Court of the United States, located in Washington, D.C., is the highest court (see supreme court) in the United States; that is, it has ultimate judicial authority within the United States... Holding --- Court membership Case opinions Laws applied --- Pollock v. ... This article does not cite any references or sources. ... For other senses of this word, see interest (disambiguation). ... This article is about financial dividends. ...


Ratification of the Sixteenth Amendment

In response, Congress proposed the Sixteenth Amendment (ratified by the requisite number of states in 1913[3]), which states: Amendment XVI in the National Archives Amendment XVI (the Sixteenth Amendment) of the United States Constitution was ratified on February 3, 1913. ...

The Congress shall have 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 Supreme Court in Brushaber v. Union Pacific Railroad, 240 U.S. 1 (1916), indicated that the amendment did not expand the federal government's existing power to tax income (meaning profit or gain from any source) but rather removed the possibility of classifying an income tax as a direct tax on the basis of the source of the income. The Amendment removed the need for the income tax to be apportioned among the states on the basis of population. Income taxes are required, however, to abide by the law of geographical uniformity. The Supreme Court of the United States (sometimes colloquially referred to by the acronym SCOTUS[1]) is the highest judicial body in the United States and leads the federal judiciary. ... Holding It is erroneous to assume that the 16th Amendment provides for a hitherto unknown power of taxation; that is, a power to levy an income tax which, although direct, should not be subject to the regulation of apportionment applicable to all other direct taxes. ...


Some tax protesters and others opposed to income taxes cite what they contend is evidence that the Sixteenth Amendment was never "properly ratified," based in large part on materials sold by William J. Benson. In December of 2007, Benson's "Defense Reliance Package" containing his non-ratification argument which he offered for sale on the internet, was ruled by a federal court to be a "fraud perpetrated by Benson" that had "caused needless confusion and a waste of the customers' and the IRS' time and resources."[4] The court stated: "Benson has failed to point to evidence that would create a genuinely disputed fact regarding whether the Sixteenth Amendment was properly ratified or whether United States Citizens are legally obligated to pay federal taxes."[5] See also Tax protester constitutional arguments. Ratification is the act of giving official sanction or approval to a formal document such as a treaty or constitution. ... Year 2007 (MMVII) was a common year starting on Monday of the Gregorian calendar in the 21st century. ... Tax protester constitutional arguments are arguments raised by tax protesters that assert that the imposition of the income tax in the United States violates the United States Constitution. ...


Modern interpretation of the power to tax incomes

The modern interpretation of the Sixteenth Amendment taxation power can be found in Commissioner v. Glenshaw Glass Co. 348 U.S. 426 (1955). In that case, a taxpayer had received an award of punitive damages from a competitor for antitrust violations, and sought to avoid paying taxes on that award. The Court observed that Congress, in imposing the income tax, had defined gross income, under the Internal Revenue Code of 1936, to include: Holding --- Court membership Case opinions Laws applied --- Commissioner v. ... Gross income is commonly defined as the amount of a companys or a persons income before all deductions or any taxpayer’s income, except that which is specifically excluded by the Internal Revenue Code, before taking deductions or taxes into account. ... The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes...

gains, profits, and income derived from salaries, wages, or compensation for personal service . . . of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.[6]

(Note: this case was under the Tax Code of 1954 and the definition of income found in Title 26 sec. 61. from which our present laws derive.)


The Court held that "this language was used by Congress to exert in this field the full measure of its taxing power", id., and that "the Court has given a liberal construction to this broad phraseology in recognition of the intention of Congress to tax all gains except those specifically exempted."[7]


The Court then enunciated what is now understood by Congress and the Courts to be the definition of taxable income, "instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." Id. at 431. The defendant in that case suggested that a 1954 rewording of the tax code had limited the income that could be taxed, a position which the Court rejected, stating:

The definition of gross income has been simplified, but no effect upon its present broad scope was intended. Certainly punitive damages cannot reasonably be classified as gifts, nor do they come under any other exemption provision in the Code. We would do violence to the plain meaning of the statute and restrict a clear legislative attempt to bring the taxing power to bear upon all receipts constitutionally taxable were we to say that the payments in question here are not gross income.[8]

Tax statutes passed after the ratification of the Sixteenth Amendment in 1913 are sometimes referred to as the "modern" tax statutes. Hundreds of Congressional acts have been passed since 1913, as well as several codifications (i.e., topical reorganizations) of the statutes (see Codification). In law, codification is the process of collecting and restating the law of a jurisdiction in certain areas, usually by subject, forming the legal code. ...


Central Illinois Public Service Co. v. United States, 435 U.S. 21 (1978), confirmed that wages and income are not identical as far as taxes on income are concerned, because income not only includes wages, but any other gains as well. The Court in that case noted that in enacting taxation legislation, Congress "chose not to return to the inclusive language of the Tariff Act of 1913, but, specifically, 'in the interest of simplicity and ease of administration,' confined the obligation to withhold [income taxes] to 'salaries, wages, and other forms of compensation for personal services'" and that "committee reports ... stated consistently that 'wages' meant remuneration 'if paid for services performed by an employee for his employer'".[9]


Other courts have noted this distinction in upholding the taxation not only of wages, but also of personal gain derived from other sources, recognizing some limitation to the reach of income taxation. For example, in Conner v. United States, 303 F. Supp. 1187 (S.D. Tex. 1969), aff’d in part and rev’d in part, 439 F.2d 974 (5th Cir. 1971), a couple had lost their home to a fire, and had received compensation for their loss from the insurance company, partly in the form of hotel costs reimbursed. The court acknowledged the authority of the IRS to assess taxes on all forms of payment, but did not permit taxation on the compensation provided by the insurance company, because unlike a wage or a sale of goods at a profit, this was not a gain. As the Court noted, "Congress has taxed income, not compensation".


By contrast, other courts have interpreted the Constitution as providing even broader taxation powers for Congress. In Murphy v. IRS, the United States Court of Appeals for the District of Columbia Circuit upheld the Federal income tax imposed on a monetary settlement recovery that the same court had previously indicated was not income, stating: "[a]lthough the 'Congress cannot make a thing income which is not so in fact,' [ . . . ] it can label a thing income and tax it, so long as it acts within its constitutional authority, which includes not only the Sixteenth Amendment but also Article I, Sections 8 and 9."[10] Marrita Murphy and Daniel J. Leveille, Appellants v. ...


Similarly, in Penn Mutual Indemnity Co. v. Commissioner, the United States Court of Appeals for the Third Circuit indicated that Congress could properly impose the Federal income tax on a receipt of money, regardless of what that receipt of money is called:

It could well be argued that the tax involved here [an income tax] is an "excise tax" based upon the receipt of money by the taxpayer. It certainly is not a tax on property and it certainly is not a capitation tax; therefore, it need not be apportioned. [ . . . ] Congress has the power to impose taxes generally, and if the particular imposition does not run afoul of any constitutional restrictions then the tax is lawful, call it what you will.[11]

Tax rates in history

History of top rates

  • In 1913 the tax rate was 1% on taxable net income above $3,000 ($4,000 for married couples), less deductions and exemptions. It rose to a rate of 7% on incomes above $500,000.
  • During World War I the top rate rose to 77%; after the war, the top rate was scaled down to a low of 25%.
  • During the Great Depression and World War II, the top income tax rate rose again. In the Internal Revenue Code of 1939, the top rate was 75%. The top rate reached 94% during the war and remained at 91% until 1964.
  • In 1964 the top rate was decreased to 70% (1964 Revenue Act), then to 50% in 1981 (Economic Recovery Tax Act or ERTA).
  • The Tax Reform Act of 1986 reduced the top rate to 28%, at the same time raising the bottom rate from 11% to 15% (in fact 15% and 28% became the only two tax brackets).
  • During the 1990s the top rate rose again, standing at 39.6% by the end of the decade.
  • The top rate was cut to 35% and the bottom rate was cut to 10% by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

“The Great War ” redirects here. ... For other uses, see The Great Depression (disambiguation). ... Combatants Allied powers: China France Great Britain Soviet Union United States and others Axis powers: Germany Italy Japan and others Commanders Chiang Kai-shek Charles de Gaulle Winston Churchill Joseph Stalin Franklin Roosevelt Adolf Hitler Benito Mussolini Hideki Tōjō Casualties Military dead: 17,000,000 Civilian dead: 33,000... Also Nintendo emulator: 1964 (emulator). ... AUGUST 25 1981 US Marine Sean Vance is Born on the 25th of August {ear nav|1981}} Year 1981 (MCMLXXXI) was a common year starting on Thursday (link displays the 1981 Gregorian calendar). ... The Kemp-Roth Tax Cut (officially the Economic Recovery Tax Act, or ERTA) of 1981 reduced marginal income tax in the United States rates by approximately 25% over three years (the top rate falling to 50% from 70% while the bottom rate dropped to 11% from 14%) and indexed them... President Ronald Reagan signs the Tax Reform Act of 1986 on the South Lawn. ... For the band, see 1990s (band). ... The Economic Growth and Tax Relief Reconciliation Act of 2001 was a sweeping piece of tax legislation in the United States. ...

History of progressivity in federal income tax

The federal income tax rates in the United States have varied widely since 1913. For example, in 1954 the Congress imposed a federal income tax on individuals, with the tax imposed in layers of 24 income brackets at tax rates ranging from 20% to 91% (for a chart, see Internal Revenue Code of 1954). Here is a partial history of changes in the U.S. federal income tax rates for individuals (and the income brackets) since 1913: The United States Internal Revenue Code of 1954 temporarily extended the 5 percentage point increase in corporate tax rates through March 31, 1955, increased depreciation deductions by providing additional depreciation schedules, and created a 4 percent dividend tax credit for individuals. ...

Partial History of
U.S. Federal Income Tax Rates
Since 1913
Applicable
Year
Income
brackets
First
bracket
Top
bracket
Source
1913-1915 - 1% 7% Census
1916 - 2% 15% Census
1917 - 2% 67% Census
1918 - 6% 73% Census
1919-1920 - 4% 73% Census
1921 - 4% 73% Census
1922 - 4% 56% Census
1923 - 3% 56% Census
1924 - 1.5% 46% Census
1925-1928 - 1.5% 25% Census
1929 - 0.375% 24% Census
1930-1931 - 1.125% 25% Census
1932-1933 - 4% 63% Census
1934-1935 - 4% 63% Census
1936-1939 - 4% 79% Census
1940 - 4.4% 81.1% Census
1941 - 10% 81% Census
1942-1943 - 19% 88% Census
1944-1945 - 23% 94% Census
1946-1947 - 19% 86.45% Census
1948-1949 - 16.6% 82.13% Census
1950 - 17.4% 84.36% Census
1951 - 20.4% 91% Census
1952-1953 - 22.2% 92% Census
1954-1963 - 20% 91% Census
1964 - 16% 77% Census
1965-1967 - 14% 70% Census
1968 - 14% 75.25% Census
1969 - 14% 77% Census
1970 - 14% 71.75% Census
1971-1981 15 brackets 14% 70% IRS
1982-1986 12 brackets 12% 50% IRS
1987 5 brackets 11% 38.5% IRS
1988-1990 3 brackets 15% 33% IRS
1991-1992 3 brackets 15% 31% IRS
1993-2000 5 brackets 15% 39.6% IRS
2001 5 brackets 15% 39.1% IRS
2002 6 brackets 10% 38.6% IRS
2003-2007 6 brackets 10% 35% IRS

Sources:

Seal of the Internal Revenue Service Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        IRS redirects here. ... The Form 1040 is the starting form for personal income tax returns filed in the United States. ...

Sources of U.S. income tax laws

United States income tax law comes from a number of sources. These sources have been divided into three tiers as follows:[12]

  • Tier 2
    • Agency interpretative regulations (executive authority, written by the Internal Revenue Service (IRS) and Department of the Treasury), including:
      • Final, Temporary and Proposed Regulations promulgated under IRC § 7805;
      • Treasury Notices and Announcements;
    • Public Administrative Rulings (IRS Revenue Rulings, which provide informal guidance on specific questions and are binding on all taxpayers)
  • Tier 3
    • Legislative History
    • Private Administrative Rulings (private parties may approach the IRS directly and ask for a Private Letter Ruling on a specific issue - these rulings are binding only on the requesting taxpayer).

Where conflicts exist between various sources of tax authority, an authority in Tier 1 outweighs an authority in Tier 2 or 3. Similarly, an authority in Tier 2 outweighs an authority in Tier 3.[13] Where conflicts exist between two authorities in the same tier, the "last-in-time rule" is applied. As the name implies, the "last-in-time rule" states that the authority that was issued later in time is controlling.[14] Wikisource has original text related to this article: The United States Constitution The United States Constitution is the supreme law of the United States of America. ... The Internal Revenue Code (or IRC) (more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes... Type Bicameral Houses Senate House of Representatives President of the Senate President pro tempore Dick Cheney, (R) since January 20, 2001 Robert C. Byrd, (D) since January 4, 2007 Speaker of the House Nancy Pelosi, (D) since January 4, 2007 Members 535 plus 4 Delegates and 1 Resident Commissioner Political... Legislation (or statutory law) is law which has been promulgated (or enacted) by a legislature or other governing body. ... A treaty is a binding agreement under international law concluded by subjects of international law, namely states and international organizations. ... Seal of the Internal Revenue Service Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        IRS redirects here. ... The United States Department of the Treasury is a Cabinet department, a treasury, of the United States government established by an Act of U.S. Congress in 1789 to manage the revenue of the United States government. ...


Regulations and case law serve to interpret the statutes. Additionally, various sources of law attempt to do the same thing. Revenue Rulings, for example, serves as an interpretation of how the statutes apply to a very specific set of facts. Treaties serve in an international realm.


The complexity of the U.S. income tax laws

Even venerable legal scholars like Judge Learned Hand have expressed amazement and frustration with the complexity of the U.S. income tax laws. In the article, Thomas Walter Swan, 57 Yale Law Journal No. 2, 167, 169 (December 1947), Judge Hand wrote: Billings Learned Hand (January 27, 1872 – August 18, 1961) — usually called simply Learned Hand — was a famed American judge and an avid supporter of free speech, though he is most remembered for applying economic reasoning to American tort law. ...

In my own case the words of such an act as the Income Tax… merely dance before my eyes in a meaningless procession: cross-reference to cross-reference, exception upon exception — couched in abstract terms that offer [me] no handle to seize hold of [and that] leave in my mind only a confused sense of some vitally important, but successfully concealed, purport, which it is my duty to extract, but which is within my power, if at all, only after the most inordinate expenditure of time. I know that these monsters are the result of fabulous industry and ingenuity, plugging up this hole and casting out that net, against all possible evasion; yet at times I cannot help recalling a saying of William James about certain passages of Hegel: that they were no doubt written with a passion of rationality; but that one cannot help wondering whether to the reader they have any significance save that the words are strung together with syntactical correctness.

Complexity is a separate issue from flatness of rate structures. In the United States, income tax codes are often legislatures' favored policy instrument for encouraging numerous undertakings deemed socially useful — including the buying of life insurance, the funding of employee health care and pensions, the raising of children, home ownership, development of alternative energy sources and increased investment in conventional energy. Special tax rebates granted for any purpose increase complexity, irrespective of the system's flatness or lack thereof.


State and territorial income taxes

Map of USA showing states with no state income tax in red, and states that tax only interest and dividend income in yellow.
Map of USA showing states with no state income tax in red, and states that tax only interest and dividend income in yellow.
Main article: State income tax

Income tax may also be levied by individual U.S. states and are on top of the federal income tax. In addition, some states allow individual cities to impose an additional income tax. However, some state and local taxes are deductible for federal tax purposes. Through this deduction, the federal government effectively subsidizes a portion of an individual's state income tax. Not all states levy an income tax and U.S. territories such as Puerto Rico and Guam pay no federal income tax. Image File history File links This is a lossless scalable vector image. ... Image File history File links This is a lossless scalable vector image. ... States with no state income tax are in red, states taxing only dividend and interest income are in yellow Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        State income tax is an income tax in the United States that is levied by each... Federal courts Supreme Court Circuit Courts of Appeal District Courts Elections Presidential elections Midterm elections Political Parties Democratic Republican Third parties State & Local government Governors Legislatures (List) State Courts Local Government Other countries Atlas  US Government Portal      A U.S. state is any one of the fifty subnational entities of...


Arguments against income taxation

For more details on this topic, see Tax protester arguments.

A libertarian viewpoint proposes the existence of a natural right to "enjoy all the fruits of one's own labor" (previously protected, some libertarians claim, by the Ninth Amendment). Taxation of income is argued to be an infringement on that right. Under this argument, income taxation offers the federal government a technique to radically diminish the power of the states, because the federal government is then able to distribute funding to states with conditions attached, often giving the states no choice but to submit to federal demands. Tax protester arguments are a number of theories that deny that a person has a legal obligation to pay a tax for which the government has determined that person is liable. ... This article is about the political philosophy based on private property rights. ... Human rights are rights which some hold to be inalienable and belonging to all humans. ... The Bill of Rights in the National Archives Amendment IX (the Ninth Amendment) to the United States Constitution, which is part of the Bill of Rights, addresses rights of the people that are not specifically enumerated in the Constitution. ...


Proponents of a consumption tax argue that the income tax system creates perverse incentives by encouraging taxpayers to spend rather than save. This result is due to the fact that a taxpayer will only be taxed once on income earned and spent in the same year, while income earned and invested will be taxed again, in the form of a tax on interest earned on the investment.[15] The proposed Fair Tax Act, a bill before the U.S. Congress, repeals the income tax in favor of a national sales tax with a rebate, and calls for a repeal of the Sixteenth Amendment. A consumption tax is a tax on the purchase of a good or service. ... The Congress of the United States is the legislative branch of the federal government of the United States of America. ... Amendment XVI in the National Archives Amendment XVI (the Sixteenth Amendment) of the United States Constitution was ratified on February 3, 1913. ...


See also

FairTax Flat tax Tax protester arguments Constitutional Statutory Conspiracy Taxation by country Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        Taxation in the United States is a complex system which may involve payment to at least four different levels of government and many... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        Payroll tax generally refers to two kinds of taxes: Taxes which... Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        A sales tax is a tax on consumption and is normally a certain percentage that is added onto the price of goods or services that are purchased. ... States with no state income tax are in red, states taxing only dividend and interest income are in yellow Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        State income tax is an income tax in the United States that is levied by each... State tax levels indicate both the tax burden and the services a state can afford to provide residents. ... A flat tax, also called a proportional tax, is a system that taxes all entities in a class (typically either citizens or corporations) at the same rate (as a proportion on income), as opposed to a graduated, or progressive, scheme. ... Throughout this article, the unqualified term dollar and the $ symbol refer to the United States dollar. ... Tax preparation is the act of preparing the filing of income taxes. ... A tax resister is a person who resists or refuses payment of a tax because they oppose the action or actions of the institution collecting the tax. ... Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        US State Nonresident withholding Tax is a tax of individuals or entities that do not live within the state. ... Tax Day is the day that income taxes are due from most employed Americans. ...

References

  1. ^ Penn Mutual Indemnity Co. v. Commissioner, 227 F.2d 16, 19-20 (3rd Cir. 1960)
  2. ^ Steward Machine Co. v. Davis, 301 U.S. 548 (1937), 581-582
  3. ^ United States Government Printing Office, at Amendments to the Constitution of the United States of America; see generally United States v. Thomas, 788 F.2d 1250 (7th Cir. 1986), cert. denied, 107 S.Ct. 187 (1986); Ficalora v. Commissioner, 751 F.2d 85, 85-1 U.S. Tax Cas. (CCH) paragr. 9103 (2d Cir. 1984); Sisk v. Commissioner, 791 F.2d 58, 86-1 U.S. Tax Cas. (CCH) paragr. 9433 (6th Cir. 1986); United States v. Sitka, 845 F.2d 43, 88-1 U.S. Tax Cas. (CCH) paragr. 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) paragr. 9518 (9th Cir. 1986), cert. denied, 107 S. Ct. 888 (1987); 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) paragr. 9296 (7th Cir. 1987); Miller v. United States, 868 F.2d 236, 89-1 U.S. Tax Cas. (CCH) paragr. 9184 (7th Cir. 1989); also, see generally Boris I. Bittker, Constitutional Limits on the Taxing Power of the Federal Government, The Tax Lawyer, Fall 1987, Vol. 41, No. 1, p. 3 (American Bar Ass'n).
  4. ^ Memorandum Opinion, p. 14, Dec. 17, 2007, docket entry 106, United States v. Benson, case no. 1:04-cv-07403, United States District Court for the Northern District of Illinois, Eastern Division.
  5. ^ Memorandum Opinion, p. 9, Dec. 17, 2007, docket entry 106, United States v. Benson, case no. 1:04-cv-07403, United States District Court for the Northern District of Illinois, Eastern Division.
  6. ^ 348 U.S. at 429
  7. ^ Id. at 430.
  8. ^ Id. at 432-33.
  9. ^ Id. at 27.
  10. ^ Opinion on rehearing, July 3, 2007, p. 16, Murphy v. Internal Revenue Service and United States, case no. 05-5139, United States Court of Appeals for the District of Columbia Circuit, 2007-2 U.S. Tax Cas. (CCH) paragr. 50,531 (D.C. Cir. 2007).
  11. ^ Penn Mutual Indemnity Co. v. Commissioner, 277 F.2d 16, 60-1 U.S. Tax Cas. (CCH) paragr. 9389 (3d Cir. 1960) (footnotes omitted).
  12. ^ Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 4 (2nd Ed. 2007).
  13. ^ Id.
  14. ^ Id.
  15. ^ Chirelstein, Marvin A., Federal Income Taxation 433 (Foundation Press, 10th Ed., 2005)

The United States Court of Appeals for the Third Circuit is a federal court with appellate jurisdiction over the district courts for the following districts: District of Delaware District of New Jersey Eastern District of Pennsylvania Middle District of Pennsylvania Western District of Pennsylvania It also has appellate jurisdiction over... Year 1960 (MCMLX) was a leap year starting on Friday (link will display full calendar) of the Gregorian calendar. ... Steward Machine Company v. ... The logotype of the United States Government Printing Office In the United States, the Government Printing Office (GPO) prints and provides access to documents produced by and for all three branches of the federal government, including the Supreme Court, the Congress, and all executive branch agencies like the FCC and... Boris I. Bittker (November 28, 1916 - September 8, 2005) was a prominent United States legal academician. ... American Bar Associations Washington, DC office The American Bar Association (ABA) is a voluntary bar association of lawyers and law students, which is not specific to any jurisdiction in the United States. ...

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