Tax Law in the United States
Introduction
Tax law in the United States is a complex body of law that governs the imposition of taxes on individuals, businesses, and other entities. It encompasses federal, state, and local tax systems, each with its own set of rules and regulations. The primary purpose of tax law is to generate revenue for government operations, but it also serves to influence economic behavior and redistribute wealth. The Internal Revenue Code (IRC) is the primary statutory basis for federal tax law, while state and local taxes are governed by their respective codes and regulations.
Federal Tax System
The federal tax system is administered by the Internal Revenue Service (IRS), a bureau of the Department of the Treasury. The system is primarily based on income tax, which is imposed on individuals, corporations, estates, and trusts. The federal tax system also includes payroll taxes, excise taxes, estate and gift taxes, and other miscellaneous taxes.
Income Tax
Income tax is the largest source of federal revenue. It is imposed on the taxable income of individuals and corporations. The progressive tax system means that tax rates increase as income increases. Individual income tax is calculated based on adjusted gross income (AGI), which is total income minus specific deductions. Taxpayers may also claim credits to reduce their tax liability.
Corporations are taxed on their net income, which is gross income minus allowable deductions. The corporate tax rate has been subject to significant changes, most notably with the Tax Cuts and Jobs Act of 2017, which reduced the corporate tax rate to a flat 21%.
Payroll Taxes
Payroll taxes fund Social Security and Medicare programs. These taxes are imposed on both employers and employees. The Federal Insurance Contributions Act (FICA) mandates these taxes, which are calculated as a percentage of wages. Self-employed individuals pay a similar tax under the Self-Employment Contributions Act (SECA).
Excise Taxes
Excise taxes are imposed on specific goods and activities, such as gasoline, tobacco, alcohol, and air travel. These taxes are often included in the price of the product and are used to fund related government programs.
Estate and Gift Taxes
The federal estate tax is imposed on the transfer of the taxable estate of a deceased person. The gift tax applies to transfers of property by gift during the donor's lifetime. Both taxes are unified, meaning they share a common exemption amount and rate structure.
State and Local Tax Systems
State and local governments impose their own taxes to fund public services. These taxes vary widely across jurisdictions and can include income taxes, sales taxes, property taxes, and others.
State Income Taxes
Most states impose an income tax on individuals and corporations. State income taxes can be progressive or flat, depending on the state. Some states, like Florida and Texas, do not impose a personal income tax.
Sales and Use Taxes
Sales taxes are imposed on the sale of goods and services. Use taxes complement sales taxes and apply to goods purchased out of state but used within the state. The Wayfair decision by the U.S. Supreme Court in 2018 allowed states to require online retailers to collect sales tax, even if they do not have a physical presence in the state.
Property Taxes
Property taxes are a major source of revenue for local governments. They are imposed on real property and sometimes on personal property. The tax is based on the assessed value of the property and the tax rate set by the local government.
Other State and Local Taxes
Other taxes imposed by state and local governments include excise taxes, severance taxes on natural resources, and various fees and licenses.
Tax Policy and Legislation
Tax policy in the United States is shaped by economic, social, and political factors. Legislation is enacted by Congress and signed by the President. Major tax legislation often reflects broader policy goals, such as economic growth, income redistribution, and deficit reduction.
Tax Expenditures
Tax expenditures are provisions in the tax code that provide special benefits to certain activities or groups. These include deductions, credits, and exemptions that reduce tax liability. Examples include the mortgage interest deduction and the earned income tax credit.
Tax Reform
Tax reform efforts aim to simplify the tax code, improve fairness, and enhance economic efficiency. Notable reforms include the Tax Reform Act of 1986, which broadened the tax base and lowered rates, and the Tax Cuts and Jobs Act of 2017, which made significant changes to individual and corporate taxes.
Tax Administration and Compliance
The IRS is responsible for enforcing federal tax laws and ensuring compliance. This includes processing tax returns, collecting taxes, and conducting audits. Taxpayers are required to file annual tax returns and pay any taxes owed.
Tax Audits
The IRS conducts audits to verify the accuracy of tax returns. Audits can be conducted through correspondence or in-person examinations. The IRS uses a variety of methods to select returns for audit, including random selection and computer screening.
Tax Penalties and Interest
Failure to comply with tax laws can result in penalties and interest. Common penalties include the failure-to-file penalty, failure-to-pay penalty, and accuracy-related penalties. Interest is charged on unpaid taxes from the due date until payment is made.
International Taxation
International tax law addresses the taxation of cross-border transactions and the taxation of foreign income. The United States taxes its citizens and residents on their worldwide income but provides mechanisms to avoid double taxation, such as the foreign tax credit and tax treaties.
Transfer Pricing
Transfer pricing rules govern the pricing of transactions between related entities in different countries. These rules aim to ensure that income is properly allocated and taxed in each jurisdiction. The OECD Transfer Pricing Guidelines provide a framework for these rules.
Controlled Foreign Corporations
Controlled Foreign Corporation (CFC) rules are designed to prevent the deferral of income earned by foreign subsidiaries. U.S. shareholders of a CFC must include certain types of income, known as Subpart F income, in their taxable income.
Conclusion
Tax law in the United States is a dynamic and multifaceted field that impacts nearly every aspect of economic life. It requires careful navigation by individuals, businesses, and policymakers to ensure compliance and achieve desired policy outcomes. As economic conditions and political priorities evolve, tax law will continue to change, presenting ongoing challenges and opportunities.