income tax

Examples of income tax in the following topics:

• 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.

• Fiscal Policy -- Budget and Taxes

  • The federal income tax is levied on the worldwide income of U.S. citizens and resident aliens and on certain U.S. income of non-residents.
  • The first U.S. income tax law was enacted in 1862 to support the Civil War.
  • From the outset, the income tax has been a progressive levy, meaning that rates are higher for people with more income.
  • The Tax Reform Act of 1986, perhaps the most substantial reform of the U.S. tax system since the beginning of the income tax, reduced income tax rates while cutting back many popular income tax deductions (the home mortgage deduction and IRA deductions were preserved, however).
  • Other provisions reduced, or eliminated, income taxes for millions of low-income Americans.

• 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.

• Financing the US Government

  • For example, income taxes due to their progressive nature are used to equitably derive revenue by differentiating tax rates by income strata.
  • The income derived in this manner is then used to transfer income to lower income groups, thereby, reducing inequalities related to income and wealth.
  • Excise tax: tax levied on production for sale, or sale, of a certain good.
  • Sales tax: tax on business transactions, especially the sale of goods and services.
  • Capital gains tax: tax on increases in the value of owned assets.

• 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.

• What Taxes Do

  • Taxes are most readily understood from the perspective of income taxes or sales tax, although there are many other types of taxes levied on both individuals and firms.
  • However, governments also use taxes to establish income equity and modify consumption decisions .
  • This type of taxation is referred to as progressive taxation because the tax liability increases in proportion to income.
  • Sales tax is a form of regressive taxation; the liability is based on the percentage of income consumed, which is higher for low income earners.
  • As a result, individuals earning a relatively lower income will pay a higher proportion of income in the form of sales tax, defining the regressive nature of the 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.

• Personal Income

  • In the United States the most widely cited personal income statistics are the Bureau of Economic Analysis's (BEA) personal income and the Census Bureau's per capita money income.
  • BEA publishes disposable personal income, which measures the income available to households after paying federal and state and local government income taxes.
  • Personal income and disposable personal income are provided both as aggregate and as per capita statistics.
  • BEA produces monthly estimates of personal income for the nation, quarterly estimates of state personal income, and annual estimates of local-area personal income .
  • The Census Bureau also produces alternative estimates of income and poverty based on broadened definitions of income that include many of these income components that are not included in money income.

• 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