United States Taxation – An Overview
In the United States of America, a tax must be required, imposed by a government, and not tied to the benefit directly received by the taxpayer. Taxation occurs at three levels within American Government: local, state, and federal.
What is a Tax
Taxes are not optional, unlike other payments in the capitalist marketplace. A government imposes taxes; the individual taxpayer is not choosing to pay any commercial entity, only the government; federal, state, local. This distinction leads to the third facet of taxation, the absence of direct benefit. A tax is not tied to a direct benefit or service received by the taxpayer in its design. Instead, it is a collective among all citizens to be allocated equitably.
For example, a 2% added “cost” on your local property value to improve town roads would be a Tax. However, a $1000 “cost” for connecting a sewer line to your house would not be a tax because of the direct benefit received by the payer. Although it is a government service, it is not a tax.
Overview of Federal Taxes
The largest groups of taxes from the U.S. Federal government include income taxes, employment taxes, excise taxes, and transfer taxes.
Income taxes are the most significant tax imposed by the United States. 60% of all tax revenue collected in the United States is from income tax. Individuals, corporations, trusts, and estates are all subject to income tax.
Employment taxes are the second-largest group of taxes within the United States government. This includes items like; the Social Security tax, Medicare tax, and unemployment benefits for people who lose their jobs in a qualifying manner.
Excise taxes are the third-largest group of taxes within the Federal Taxation system. These are based on the number of products sold. For example, cigarettes are an excise tax item because the tax incurred is based on the sale of each individual package.
Calculation of Taxation in Concept
Taxation is calculated as the multiplication of a “base” and a “rate.” Depending on the structure of taxation, the base and rate can change. In a “flat tax,” a non-changing rate is applied to an entire base. A “graduated tax,” the base is divided into a series of monetary amounts, “brackets,” and each bracket are taxed at a different rate; this is seen in the federal income tax. In a graduated tax, the “marginal tax rate” is the rate that applies to the following additional increment of the taxpayer’s income.
Tax Structures in Practice
In federal income tax, where payments go directly to the central United States government, a single taxpayer will pay 12% of their income between $9,876 à $40,125, however for any income, $40,126 à $85,525 will be taxed at 22%. This example would indicate that an income of $50,000 would have a marginal tax rate of 22%. The income tax owed to the federal government in this example would be $5,802.28. This example would also illustrate a proportional tax structure because the tax rate increases as the tax base increase.
A regressive tax structure has a decreasing marginal tax rate as the base increases. An example use of this tax is the Social Security tax, which funds the Social Security programs. You pay a smaller percentage of your income at higher brackets.
The United States Internal Revenue Service has lots of information, guidance, and learning about the American taxation system. Learn more.
2020 US IRS Federal Tax Brackets: Click Here.
