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Taxation in the United States Report

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Updated: Jul 3rd, 2019


Payments of taxes in the US are made up of four levels, which can make the whole system a complex matter. The tax code of the US is possibly the most composite compared with other countries, and each day the Congress includes additional pages for tax regulation. These four levels normally include federal government, state government, regional government and local government (Economicwatch.com).

The forms of tax levied at every government level vary partly as a result of constitutional restrictions; income tax, for instance, is levied at state and federal government levels.

Property taxes are normally levied only at local government level, though there might be numerous local jurisdictions which levy similar properties. Various state governments as well as federal government impose excise taxes while the local and state governments impose sales taxes, it is only the federal government that imposes the tariffs or custom duties (Economicwatch.com).

Other various taxes like the licence fees are also imposed (Economicwatch.com). Taxes are normally levied on the natural persons (individuals), estates, business entities, trusts or any other types of organization. US taxes are based on income, property, business activity, importation of products, transactions, or other things and are normally levied on the relevant taxpayer for whom these factors are relevant.

For instance, property owners are levied property taxes, individuals and business activities are levied income taxes; with some exceptions, one government level cannot impose taxes on the other government level. The subsequent section of this paper will focus on the US’s Federal taxation.

Historical overview of taxation in US

Ever since 1862 disbursing income tax to the federal government was made compulsory in the US. This was important in order to fund Civil War during that time, all the income level above $600 was taxed at a 3% income tax rate and a 5% tax rate was taxed in case the income was more than $10,000 (Economicwatch.com).

But these rates were amended in 1864, and in the fiscal year 1895 the Supreme Court changed property taxes and affirmed that any income from the property would be taxed. Currently, a range of Federal government activities are financed by income earned from personal and corporate income taxes. In the past, these activities were funded by tariffs, but presently tariffs play an irrelevant role in offering financial support for the Federal government activities (Economicwatch.com).

Tax code

There is a tax code in the US’s taxation that is commonly called Internal Revenue Code of 1986; the main objective of this code is to collect revenues. In addition, the code is used to fulfil the social, economic and political objectives of the Federal government (Economicwatch.com).

Tax progressivity

The taxation system in the US is progressive, this means that as income increases the tax also increases meaning the taxpayer with superior income pays huge amount of taxes as well as superior tax rates. For instance, an individual earning $120,000 per year may pay 25% of his/her income as tax ($30,000 as total tax per year), while another individual earning $50,000 per annum may only pay at rate of 10% ($5,000 as tax per year) (Roach 11).

The system of tax may also be proportional or regressive; a regressive system of tax is one when the tax paid decreases and an individual income increases at the same time; a proportional system of tax means that all taxpayers pay equal tax rate in spite of their income level (Roach 11).

There are a number of reasons why the government uses progressive system of tax. First, this system represents an idea that those having high incomes must pay more taxes as a result of their superior capability to pay taxes without any crucial sacrifices. Second, the system addresses some economic inequalities existing in the society. The inequality is lessened through the use of high tax rate for those individuals with high income levels and a lower rate for those with low income levels (Roach 12).

Finally, the system of progressive tax may yield a certain public income level with the smallest amount of economic impact. For instance, if there is a tax cut of $100, the individuals with low income may spend the whole amount in purchasing services and goods while the high income earners may spend a proportion of the $100 on services and goods and invest or save the rest.

The saved or invested amount does not include additional demand level for services or goods in the economy. Thus, collecting more taxes from high earners maintains a superior and effective demand as well as more activity in the economy (Roach 12).

Residency status

In order to file tax return in the US an individual must determine whether he/she is a non-resident or resident for tax purposes. Thus, if an individual is a non-resident and resident in one year, he/she is an alien with dual status, which means special rules are applied.

The description of a resident for the purpose of taxes is completely different from the immigration status; this is because one may qualify to be a resident for the purpose of taxes, but still remain to be an alien for immigration purposes (Carter 1). A non-resident files a particular tax form and pays the tax only on the income earned in the US and he/she is subjected to particular rates where one may qualify for the treaty exemptions.

On the other hand, US residents for the purpose of taxes are subjected to similar rules and thus file similar forms as US citizens. This means that the worldwide income is reported instead of just incomes from the US sources (Carter 1).

The US has treaties on the income tax with various foreign nations. In these treaties, foreign nations’ citizens resident in the US are levied at a lower rate or may be exempted from the income taxes of the US on specific items of the income they earn from sources. These decreased rates as well as exemptions differ amongst the nations and particular items of the income.

In case a specific type of income is not covered by the treaty, or there exists no treaty between one nation and the US, the individual should pay tax on his/her income in similar manner and similar rate as shown in Form 1040NR’s instructions. Treaties on taxes decrease the tax paid by the foreign nations’ citizens resident in US; with specific exceptions, these treaties do not decrease taxes levied on the residents or US citizens (Unclefed.com).

Advantages and disadvantages

The benefits of levying tax on income are several;

  1. Individuals are levied depending on their total earnings, therefore individuals who earn less in theory pay a smaller amount of tax on their earnings.
  2. Individuals do not consume at equal rate, thus tax on incomes is an equitable manner of evaluating tax compared with the consumption tax.
  3. Individuals with lower levels of earnings would be mainly affected by direct tax on the consumption, because even essential things such as motor vehicles would considerably be more expensive.
  4. Earnings are a simple way to impose taxes as well as decide deductions.

Whilst individuals may contend with a small number of pay stumps they ought to save, in the consumption tax, individuals may save the receipts for each acquisition they made throughout the year so as to qualify for tax breaks (Wisegeek.com).

On the other hand, taxation disadvantages include; first, the tax collection on the income is mainly thought to be harder than consumption tax that would be taxed at particular sale’s point. Second, taxation on income puts the lower class and middle class individuals on financial hardship, in spite of the total amount of income.

Third, some individuals deem that the tax on the income is an infringement of the individual freedom of citizens. Particularly Libertarians contend that income tax infringes the right of the individual to make a decision on how to utilize the money that one receives. Finally, individuals reimbursed “under the table” might be capable of evading payment of the income taxes (Wisegeek.com).


Income tax is the main federal tax followed by the taxes on social insurance. The equality of federal tax is a significant issue in the system of the US taxation. The income tax is one of the major progressive constituents of the US system of tax and other types of taxes such as social insurance and sales taxes are normally regressive.

Works Cited

Economicwatch.com. , 2010. Web.

Roach, Benard. “Progressive and Regressive Taxation in the United States: Who’s really paying (and not paying) their fair share?” 2003. Global Development Environment Institute, Working Paper No. 03-10.

Unclefed.com. US Tax Treaties, 2006. Web.

Wisegeek.com. 2011. Web.

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IvyPanda. "Taxation in the United States." July 3, 2019. https://ivypanda.com/essays/taxation-in-the-united-states-report/.


IvyPanda. 2019. "Taxation in the United States." July 3, 2019. https://ivypanda.com/essays/taxation-in-the-united-states-report/.


IvyPanda. (2019) 'Taxation in the United States'. 3 July.

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