Difference between revisions of "Income tax"

Revision as of 08:52, April 17, 2009

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. 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.^[1]

Income taxes are collected by the Internal Revenue Service. Republicans, believing in a smaller, more efficient, and less expensive government, work hard to cut income taxes.

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".^[2]

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.

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.

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

Sources

http://usinfo.state.gov/products/pubs/oecon/chap12.htm

references

1. ↑ The withholding tax was devised by economist Milton Friedman, at the time a liberal.
2. ↑ See David Randon, "You Can't Soak the Rich," Wall Street Journal May 20, 2008