There is a federal estate tax, and some states levy their own estate taxes as well. If you take your annual salary and divide it by the number of times you get paid each year, chances are that number is higher than your actual paycheck.
One reason could be that your healthcare premiums or k contributions are deducted from your paycheck. Another reason is payroll taxes. These taxes cover your contributions to Medicare, Social Security, disability and survivor benefits and to federal unemployment benefits. You can learn all about payroll taxes here. Income taxes do what the name implies. They tax the income you earn. Federal income taxes are both progressive and marginal. Marginal means that there are different tax rates for different income brackets.
There are two important concepts of equity: horizontal equity and vertical equity. While no system of taxes is perfect, it is important to seek horizontal equity because taxpayers must believe they are treated equally. It is just as important to seek vertical equity so government does not become a burden to low-income residents.
Adequacy means that taxes must provide enough revenue to meet the basic needs of society. A tax system meets the test of adequacy if it provides enough revenue to meet the demand for public services, if revenue growth each year is enough to fund the growth in cost of services, and if there is enough economic activity of the type being taxed so rates can be kept relatively low. Simplicity means that taxpayers can avoid a maze of taxes, forms and filing requirements.
A simpler tax system helps taxpayers better understand the system and reduces the costs of compliance. The Sixteenth Amendment makes clear that income, not ownership, is being taxed, so there is no requirement of apportionment and thus no constitutional problem.
Today, the Direct Tax Clause operates to render impracticable only federal capitations, federal taxes on the ownership of land, and federal taxes on personal property.
Murphy v. IRS D. For example, the minimum coverage provision in the Patient Protection and Affordable Care Act ACA requires most individuals to either obtain health insurance or make a payment to the Internal Revenue Service. In NFIB v. Sebelius , the Supreme Court, after upholding the required payment as a tax for purposes of the Taxing Clause in the first clause of Article I, Section 8, rejected the argument that it was a direct tax and so had to be apportioned. The required payment for going without health insurance in the ACA is a tax on those who choose to remain uninsured, not a head tax on those who simply exist, or a tax on land ownership, or a tax on personal property.
It is therefore not a direct tax and need not be apportioned. Excepting Pollock , the Court has been right all these years to define the category of direct taxes very narrowly. A narrow definition also makes good sense from a consequentialist perspective. The Constitution confers robust federal power to tax on the theory grounded in experience that taxation with representation is a necessity.
Requiring apportionment, however, renders federal taxation impracticable. Apportionment also requires the federal government to privilege regressivity over progressivity in taxation. Apportionment means that citizens of relatively wealthy states must pay at lower rates than citizens of relatively poor states in order to make the total payment for states of equal population come out the same.
Such a tax regime is difficult to defend morally, particularly in an America in which the income distribution is increasingly skewed in favor of a very small number of extraordinarily wealthy Americans. Finally, such a tax regime is difficult to defend from a structural, federalism perspective.
States that impose progressive income taxes are at a competitive disadvantage in attracting wealthy residents relative to states that do not. Classification between the two categories, as well as application of the apportionment and uniformity tests can determine the validity of modern statutes.
Very difficult to satisfy, the apportionment requirement can be met only with a capitation—a direct tax on humans simply because they are humans. To satisfy apportionment, the tax would necessarily be the same per person nationwide. Congress has never enacted such a tax and arguably is unlikely to do so in the foreseeable future.
That equality requirement is a powerful restriction on the taxing power: remember, the income tax is progressive and applies much more heavily on high-income persons than on others.
Because the income tax is not subject to apportionment—largely because of the Sixteenth Amendment —progressivity is possible. In addition, Congress cannot impose a property tax on land. Apportioning such a tax would be impossible because the amount of land per person is not the same in every state. Restricting such taxes to the states is another very significant restriction on the federal taxing power.
Although Congress cannot impose a property tax directly on personal property —such as cars, furniture, stocks or bonds—as opposed to land— , it has two fairly easy work-arounds for such taxes.
NFIB v. Since , the Supreme Court has viewed a tax on the use of personal property as an indirect tax subject to uniformity rather than to apportionment. Hylton v. United States Chase, J. As a result, it could easily style a tax on automobiles as a tax on the use of the item and thus avoid apportionment. Indeed, because the number of cars or any other personal item is unlikely ever to be the same per capita in every state, without the Hylton decision, a federal personal property tax would be impossible because it could never satisfy apportionment.
Although Congress does not often impose direct taxes on personal property, Congress routinely imposes similar taxes on the purchase of personal property such as tires and gasoline, styling them as excises subject merely to uniformity. Significantly, it could impose a nationwide automobile or telephone usage tax. Low-income individuals pay a higher amount of taxes compared to high-income earners under a regressive tax system.
That's because the government assesses tax as a percentage of the value of the asset that a taxpayer purchases or owns. This type of tax has no correlation with an individual's earnings or income level.
Regressive taxes include property taxes , sales taxes on goods, and excise taxes on consumables, such as gasoline or airfare. Excise taxes are fixed and they're included in the price of the product or service. Sin taxes , a subset of excise taxes, are imposed on commodities or activities that are perceived to be unhealthy or have a negative effect on society, such as cigarettes, gambling, and alcohol. They're levied in an effort to deter individuals from purchasing these products. Sin tax critics argue that these disproportionately affect those who are less well off.
Many also consider Social Security to be a regressive tax. An individual's earnings above this base are not subject to the 6. Employers pay an additional 6. Higher-income employees effectively pay a lower proportion of their overall pay into the Social Security system than lower-income employees because it's a flat rate for everyone and because of this cap. Just as Social Security can be considered a regressive tax, it's also a proportional tax because everyone pays the same rate, at least up to the wage base.
A proportional or flat tax system assesses the same tax rate on everyone regardless of income or wealth. This system is meant to create equality between marginal tax rates and average tax rates paid. Other examples of proportional taxes include per capita taxes, gross receipts taxes, and occupational taxes. Proponents of proportional taxes believe they stimulate the economy by encouraging people to work more because there is no tax penalty for earning more.
They also believe that businesses are likely to spend and invest more under a flat tax system, putting more dollars into the economy. Taxes assessed under a progressive system are based on the taxable amount of an individual's income. They follow an accelerating schedule, so high-income earners pay more than low-income earners. Tax rate, along with tax liability , increases as an individual's wealth increases.
The overall outcome is that higher earners pay a higher percentage of taxes and more money in taxes than do lower-income earners. This sort of system is meant to affect higher-income people more than low- or middle-class earners to reflect the presumption that they can afford to pay more. The U. Its schedule of marginal tax rates imposes a higher income tax rate on people with higher incomes, and a lower income tax rate on people with lower incomes.
The percentage rate increases at intervals as taxable income increases. Each dollar the individual earns places him into a bracket or category, resulting in a higher tax rate once the dollar amount hits a new threshold.
Part of what makes the U. The amount of the standard deduction changes from year to year to keep pace with inflation. Taxpayers can elect to itemize deductions instead if this option results in a greater overall deduction. Many low-income Americans pay no federal income tax at all because of tax deductions.
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