income tax

Examples of income tax in the following topics:

• Federal Income Tax Rates

  • Federal income tax is levied on the income of individuals or businesses, which is the total income minus allowable deductions.
  • Federal income tax is levied on the income of individuals or businesses.
  • When the tax is levied on the income of companies, it is often called a corporate tax, corporate income tax or profit tax.
  • Individual income taxes often tax the total income of the individual, while corporate income taxes often tax net income.
  • This tax was repealed and replaced by another income tax in 1862.

• Trading off Equity and Efficiency

  • Income taxes are a laddered progressive tax where income tax rates are set in income bands or ranges.
  • Each tax rate corresponds to a particular income range; income above a tax range is subject to a higher tax rate that corresponds to a higher income range and income below a specific range is subject to a lower tax rate, similarly identified with a lower income range.
  • Within any given income range, the tax rate is the same.
  • However, income taxes are only proportional within specific income ranges.
  • At the highest income tax rate, income taxes can become regressive, since high earners are only subject to a constant albeit highest rate on their income.

• Tax Rate

  • An income tax could have multiple statutory rates for different income levels, whereas a sales tax may have a flat statutory rate.
  • To calculate the average tax rate on an income tax, divide the total tax liability by the taxable income.
  • A marginal tax rate is the tax rate that applies to the last dollar of the tax base (taxable income or spending) and is often applied to the change in one's tax obligation as income rises.
  • It may be calculated by noting how tax changes with changes in pre-tax income, rather than with taxable income.
  • In U.S. income tax law, the term is used in relation to determining whether a foreign income tax on specific types of income exceeds a certain percentage of U.S. tax that might apply on such income.

• Disposable Income

  • Income left after paying taxes is referred to as disposable income.
  • Disposable income is thus total personal income minus personal current taxes .
  • Amounts required to be deducted by law include federal, state, and local taxes, state unemployment and disability taxes, social security taxes, and other garnishments or levies, but does not include such deductions as voluntary retirement contributions and transportation deductions.
  • Discretionary income = Gross income - taxes - all compelled payments (bills)
  • It is whatever income is left after taxes.

• Corporate and Payroll Taxes

  • Many countries impose a corporate tax, also called corporation tax or company tax, on the income or capital of some types of legal entities.
  • The taxes may also be referred to as income tax or capital tax.
  • Most countries tax all corporations doing business in the country on income from that country.
  • Many countries tax all income of corporations organized in the country.
  • Net taxable income for corporate tax is generally financial statement income.

• Individual Taxes

  • Personal income tax is generally the largest source of tax revenue in the United States.
  • Income tax is levied on the total income of the individual, less deductions, reducing an individual's taxable income, and credits, a dollar-for-dollar reduction of total tax liability.
  • Federal and many state income tax rates are graduated or progressive–they are higher (graduated) at higher levels of income.
  • State income tax rates vary from 1% to 16%, including local income tax where applicable.
  • These include income tax witholding, social security and medicare taxes, and unemployment taxes.

• The Federal Tax System

  • These include taxes on income, payroll, property, sales, imports, estates and gifts, as well as various fees.
  • Citizens and residents are taxed on worldwide income and allowed a credit for foreign taxes.
  • Income subject to tax is determined under tax rules, not accounting principles, and includes almost all income.
  • Federal tax rates vary from 10% to 35% of taxable income.
  • Employers also must withhold income taxes on wages.

• Financing State and Local Government

  • Taxes are the primary source of revenue for state and local governments; income, property, and sales taxes are common examples of state and local taxes.
  • On a federal level, taxes are used to fund government activities such as the provision of welfare and transfer payments to redistribute income.
  • Income taxes are taxes imposed on the net income of individuals and corporations by the federal, most state, and some local governments.
  • State and local income tax rates vary widely by jurisdiction and many are graduated, or increase progressively as income levels increase.
  • Sales tax is collected by the seller at the time of sale, or remitted as use tax by buyers of taxable items who did not pay sales tax.

• Comparing Marginal and Average Tax Rates

  • An average tax rate is the ratio of the total amount of taxes paid, T, to the total tax base, P, (taxable income or spending), expressed as a percentage.
  • The marginal tax rate is sometimes defined as the tax rate that applies to the last (or next) unit of the tax base (taxable income or spending), it is in effect, the tax percentage on the highest dollar earned.
  • In terms of individual income and wealth, a regressive tax imposes a greater burden (relative to resources) on the poor than on the rich — there is an inverse relationship between the tax rate and the taxpayer's ability to pay as measured by assets, consumption, or income.
  • "Proportional" describes a distribution effect on income or expenditure, referring to the way the rate remains consistent (does not progress from "low to high" or "high to low" as income or consumption changes), where the marginal tax rate is equal to the average tax rate.
  • Graph demonstrates a progressive tax distribution on income that becomes regressive for top earners.

• Taxes

  • Direct Taxation: A direct tax is assessed on the income of the taxpayer and is generally collected before the taxpayer collects his wages.
  • Proportional Tax: Otherwise known as a flat tax, a flat tax rate is applied to all earned income regardless of how much the taxpayer earns.
  • Generally in a progressive tax system, income is divided into "brackets. " For example, assume a tax system divides earners into people two groups.
  • Since high income earners spend a lower proportion of their income on goods and services in comparison to low income earners, the rich tend to pay proportionally less sales tax.
  • Categorize types of taxes into ad valorem taxes and excise taxes