Income tax is a tax levied by government on the income of individuals and businesses. The income tax was first introduced in the United States in 1862 as a levy on the salary of federal officers. In 1913, the Sixteenth Amendment to the Constitution made clear the federal government can collect taxes from any source, free from the previous requirement to apportion the tax among the states in proportion to their census populations. The Amendment won near-unanimous support from conservatives at the time. The federal income tax started low but became high during World War I; it was lowered in the 1920s by the conservatives. Most states and some localities (especially New York City) levy their own income tax. Taxes were raised by Republican President Herbert Hoover in 1932, and jumped to very high levels during World War II to pay for the war. The withholding tax was introduced in 1943 so people would pay taxes from every paycheck, instead of waiting until next spring.
Since the Reagan Revolution of the 1980s, the top income tax rate paid by the rich has fallen sharply. However the proportion of GDP absorbed by federal taxes has remained constant at about 20%, in accord with Hauser's Law.
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.
|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|
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 of income 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.
States and Local Municipalities
Most states and even some cities asses a tax on income, further increasing the amount of money withheld before a worker even sees their paycheck. For example, in Maryland, each county and the independent city of Baltimore collect a local income tax of up to 3.2% on top of the state income tax, whose marginal rate is 4.75% for most earners and 6.25% for the top earners. This means that a taxpayer in Montgomery County pays a combined state and county rate of 7.95% if that person is a typical earner or 9.45% if that person is a top earner.
Other Taxation systems
Other state and national proposed tax systems include the Flat Tax and the Fair tax
- Flat Tax - creates a single income tax bracket that applies equally to all Americans
- Fair Tax - eliminates the income tax in favor of a consumption tax, most often proposed as a ~23% National Sales tax
- The withholding tax was devised by economist Milton Friedman, at the time a liberal.
- See David Randon, "You Can't Soak the Rich," Wall Street Journal May 20, 2008
- Maryland Local Income Tax
- Maryland Income Tax Rates and Brackets