Taxation in the United States
The taxation system of the United States of America is flawed in many ways; meanwhile there are some benefits of this system as well. The current taxation system of the United States needs to be analyzed to point out the flaws in the system. The main purpose of this paper is to discuss the current components of this system with respect to the flaws and good things about it, to discuss the problems relevant to the particular taxes and what can be done to solve these problems. Before we go on to analyze the system, it is important for us to know the components of the taxation system and the types of taxes that are imposed on the people in the country.
Overview of the Current System
The United States of America is known as a federal republic. This implies that it is composed of autonomous local and state governments. Taxes are imposed in the United States of America at each of the aforementioned government levels. The taxes that have been imposed in the country consist of income, sales, property, payroll, imports, gifts and estates along with numerous fees. In the year 2010, the taxes that were collected by the municipal, state and federal governments totaled up to 24.8% of the Gross Domestic Product. It is important to note here that the taxation system of the United States is known to be one of the most progressive tax systems in the developed or industrialized world[footnoteRef:2]. [2: U.S. Federal Individual Income Tax Rates History, 1913 -- 2011, 2011.]
The imposition of taxes is done on the gross income of the corporations as well as the individuals by the federal government, most state governments as well as some local governments. Residents and citizens have to pay taxes on worldwide income and they are also allowed a credit as far as foreign taxes are concerned. The income tax is determined by making use of the tax accounting rules and not the principles of financial accounting. Almost all income from every source is included is subjected to taxation in the United States. Due to many business expenses, the income that is taxable is reduced, although there is a limit when it comes to some business expenses. Individuals are allowed to reduce their taxable income by specific nonbusiness expenses, personal allowances that include interest on home mortgage, local and state taxes, and medical expenses, contributions to charity organizations and by other expenses that are made above specific percentages of income. On the other hand, the state rules for determination of taxable income are often different from the federal rules. The rates of federal tax vary from 10 to 39.6% of income that is taxable. Depending upon jurisdiction, the local and state tax rates vary widely from 0 to 13.30%. It should be noted here that most of the aforementioned tax rates are graduated. Generally, the state taxes are considered as one of the deductible expenses for the determination of federal tax. In this year (2013), the top most marginal tax rate for a resident of California (high-income) was 52.9%. Some specific alternative taxes may also be imposed.
It is important to note here that America is the only country in the world that imposes taxes on its nonresident citizens for their worldwide income, just in the same way and with the same rates as they tax their residents. The constitutionality of the payment of the aforementioned tax was upheld by the Court pertaining to the case of Cook v. Tait in the year 1924.
Types of Taxes
The federal as well as all the state governments impose payroll taxes. Medicare and Social Security taxes are also included in the payroll taxes and are payable by the employees as well as the employers. The combined rate of this tax is 15.3%; meanwhile it was 13.3% in the years 2012 and 2011. The Social Security tax is applicable only on the first $106,800 of income in the years 2009 through 2011. Nevertheless, benefits are only accumulated on the first $106,800 of the income. It is the duty of the employers to withhold the income taxes on the salary of the employees. Unemployment tax along with many other levies is also paid by the employers.
Most local governments impose the property taxes. Apart from that, many special purpose organizations also impose this tax based on the value of property in the fair market. School as well as other authorities are governed separately and therefore separately taxed. Generally, property tax is applicable on realty. Even though, there are some jurisdictions that tax some types of business property as well. The rates and rules of property taxes vary...
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