In the United States, the income tax originated after an amendment was passed by the Congress in 1909 (Terrel). Importantly, it was later approved in 1913, February. In 1861, the congress passed the Revenue Act during the Civil War. Evidently, this revenue Act included personal income which was to help in covering war expenses. Although this tax was repealed ten years later, a flat rate federal income tax was enacted by the Congress in the year 1894 (Terrel). However, this was unconstitutionally ruled in the following year by the Supreme Court since this direct tax was not apportioned in agreement with the population of each state. In the 16th Amendment which was ratified in the year 1913, the court removed this objection and allowed the federal government to tax individuals, regardless of the views of population in every state.
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History of Incomes Taxes in the US
During the early years in the United States, there existed only a few taxes. Until the year 1802, the country was majorly supported by taxes on carriages, sugar, spirits and other goods. During the 1812 war, sales tax was introduced. In fact, this was a way to reduce the high costs of war (“History of the Income Tax in the United States”). In 1862, the Civil War began; thus, the Congress abandoned the idea of introducing income tax as a law. In fact, this was the first time the income tax was introduced. However, during this period, this tax was different from the current one. During this time, an employee who earned from $600 to $10,000 faced a tax of up to 3% of their salary (“History of the Income Tax in the United States”). Moreover, those workers who received over $10,000 annually were imposed to higher tax rates.
Still, in the year 1862, the position of Commissioner of Internal Revenue office was created. Apart from the duties of levying and assessing income tax, the commissioner was also responsible for enforcing tax laws and collecting payments. In cases when individuals refused to pay taxes, it was the commissioner’s right to seize assets, for example income or property. The same as it is nowadays, most of the duties were performed by the Internal Revenue Service (IRS) that was founded in 1862 (“History of the Income Tax in the United States”). In the year 1913, due to the 16th Amendment, the system of the income tax was made permanent. The Congress now had the power to legally assess taxes on income earned either by corporations or individuals. However, it never took too long for the government to begin collecting substantial tax revenue. Thus, in the year 1918, the annual collections totaled $1billion (“History of the Income Tax in the United States”). Further, by 1920, tax revenue exceeded $5 billion.
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In 1986, there were enormous changes in the tax income. Ronald Reagan, who was the US president by then, signed a Tax Reform Act which later led to reduced individual taxation. However, it increased business taxation. Perhaps, the most significant aim of this particular law was to reduce the maximum amount of income tax rates which was from 50% to 28% (“History of the Income Tax in the United States”). Further, in 2001, President Bush signed the Economic Growth and Tax Relief Reconciliation Act which to date remains the biggest tax cut to have ever happened in the US history. Evidently, this cut brought precipitated a new low-income tax rate of 10% (“History of the Income Tax in the United States”). Moreover, the cut caused an increase in child tax credit, as it adjusted the tax brackets for the married couples as well. The US government began collecting revenues by first taxing goods. They later expanded to the introduction of taxes on earned income. Despite all that, numerous amendments have been made to the US tax system over the years. Even though many changes will affect the tax laws differently, it is evident that income tax is not going to progress.
Income Tax during Ancient Times
During the ancient time, taxes were not being given in money form. In fact, taxes were received in the form of items such oil, grains or livestock. As a matter of fact, taxes comprised a significant part of the ancient Egyptian life. As a result, most of the ancient hieroglyphic tablets that were found contain information on someone’s taxes (Dickinson 33). In fact, most of these tablets were records of the amount individuals paid, and some people believe that the taxes were rather high. During this time, many people complained about the high taxes. However, the taxes collected were a means of punishing peasants since they never paid their taxes on time.
Facts about Taxing Wealthy Americans
Between the years 1950s and 60s, when the US economy was booming, those considered the wealthiest Americans paid a top income at a tax rate of 91% (“Fact Sheet: Taxing Wealthy Americans”). However, today, the top rate is 43.4%. In fact, the average income tax rates for 400 richest Americans were at 20% in the year 2009, while people who were making an average amount of $75,000 paid a 19.7% rate (“Fact Sheet: Taxing Wealthy Americans”). Evidently, the CEO of the majority of the corporations in the US earns nearly 300 times more compared to what an average worker makes. Thus, 30% of the income inequality is mostly as a result of unfair taxes and budget cuts to benefits and services.
Approximately, 1,470 households reported an income of over $1 million as of 2009 (“Fact Sheet: Taxing Wealthy Americans”). However, there were no federal income taxes on it. In the US, the principal factors contributing to the increase in income inequality are changes in income from capital dividends and gains. Big corporations and the wealthiest Americans do not fairly pay their share of taxes. Furthermore, rather than cutting education funding for children, all millionaires ought to pay higher tax rates similar to their secretaries. Moreover, rather than cutting the social security and Medicare, the wealthy need to close a few tax loopholes in order to ensure people get secure retirement.
Current Overview of Income Tax
As a matter of fact, the federal income tax is formed in a progressive manner. In other words, tax rates increase as the income grows. For many decades, this policy has helped in restraining differences in income. In addition, it assisted in providing revenue so as to make public services accessible to all Americans. Nowadays, the systems are severely eroding (“Fact Sheet: Taxing Wealthy Americans”). The reason is that most of the multi-billionaires and millionaires pay lower tax rates, as compared to average American families. Sarcastically, this is happening when the gap existing between the wealthy and other individuals is growing wider. Despite the fact that incredibly wealthy individuals own and earn more, most of them are also passing this wealth to their heirs free from tax.
There are numerous ways in which rich individuals avoid paying taxes. However, there are several ways on how to alter such situation (“Fact Sheet: Taxing Wealthy Americans”). For instance, the tax income generated from investment should be taxed the same way as income from work. Most billionaires, for example Warren Buffett, pay lower tax rates compared to millions of Americans. The reason for this is that the federal taxes, especially those on investment income, tend to be lower, as opposed to the taxes that many Americans pay on their wage and salary income. Since Buffett’s high percentage of total income is received from investments, he is entitled to a lower income tax rate compared to his secretary (“Fact Sheet: Taxing Wealthy Americans”). Therefore, to lessen this unfairness, it is important that tax rates are increased in order to match tax rates on both wages and salaries.
Moreover, the cap tax deductions for the wealthiest Americans ought to be at 28% (“Fact Sheet: Taxing Wealthy Americans”). Evidently, wealthy individuals are in a position to get bigger tax breaks more so for the tax deductions which are taken by the middle class. For instance, families living in a McMansion get more tax deductions on their interest in their large mortgages whereas middle-class families get interested in a small mortgage such as a two-bedroom house.
The other thing to do is to strengthen the estate tax. It is obvious that some of the richest Americans take advantage of the loopholes. For this reason, they are to pay hardly anything when talking about inheritance taxes. There are those who receive considerable benefits claiming that levels of exemption, especially for the estate tax, are very high, for instance $10.6 million for couples and $5.3 per individual (“Fact Sheet: Taxing Wealthy Americans”). The other ways to ensure large taxation of inheritance so as to close the income tax loopholes which allows rich people to evade capital gains taxes is through holding their assets until the day they die. In fact, this makes their heirs free from paying taxes on those gains. Thus, this would approximately total nearly $650 billion for over ten years. Furthermore, it is necessary to put an end to specialized trusts since they ultimately avoid paying gift and estate taxes.
Where Income Taxes Come from and How they are Used
In the US, there are four main sources of the tax, namely corporate, payroll, income and “other” taxes (Roach 14). The IRS, a branch of the US Department of Treasury, is responsible for collecting these taxes. The revenue obtained from these taxes is used in funding the government projects, both mandatory and discretionary. An income tax is the tax collected from individuals. The income tax is also addressed as the progressive tax since the more revenue is being generated, the more taxes are being paid. For this reason, families or individuals with higher incomes are forced to pay larger shares.
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The money individuals and corporations in the US pay regarding taxes are used for different purposes. In addition to paying salaries for the government workers, the money taxed helps in supporting shared resources, for instance firefighters and police (Roach 14). Furthermore, the tax money ensures that roads are well-maintained and safe. Moreover, the taxes are also used in funding public parks and libraries. With regard to the income taxes, they are paid to the government so that it covers the expenses of the institutions that Americans use such as libraries, schools, fire protection and police. Additionally, these taxes cater for special programs such as social security and warfare.
In the US, there are three levels of governments, namely state, local and national levels. n fact, these governments have numerous parts which include the executives and legislators just to mention a few. The salaries for these individuals are received from taxes. For average workers, the tax money is withheld from their paychecks annually. Therefore, on the “tax day,” workers are required to submit their expenses and income to IRS (Dickinson 36). The employers must also report to the IRS the amount of money they paid their employees. Thus, the IRS compares the numbers to ensure that every person pays the right amount of taxes.
In conclusion, taxes play a significant role in America. During the ancient period, taxes were in form of items and goods. However, nowadays, they are paid in the form of money. Every citizen, from the wealthy to the middle class, is entitled to pay the income tax. The IRS is responsible for collecting the income tax. Furthermore, the income tax collected goes to the government, thereby covering the salaries of the civil service. In addition, the income taxes ensure roads are well-maintained and safe. Finally, the money collected from taxes is also used for funding public parks and libraries.