The history of American federal tax

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TAX ASSIGNMENT

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Table of Contents

Introduction

The history of American federal tax

Evolution of Income Tax in America

Recommendation on the kind of tax regime to be used if Bahrain is to apply tax concept next year

Government Operating Revenue

Homework

Assignment 1

Assignment 2

Reference

Introduction

Tax word is derived from the latin word “taxo” which means rate. Tax is a financial levy or charge obligatory upon an individual in a country who earns an income and hence can be termed as taxpayer by a country or a state and as it is mandatory by law, failure to pay is punishable by law. This is only the federal law as termed in United States. Besides the federal government taxes there are many other taxes imposed by many administrative divisions of different government taxes. Taxes can be direct as well as indirect taxes and in the olden days were paid monetarily or in a barter form such as its labour equivalent. Black's Law Dictionary defines tax as a monetary load weighed on singular person or owners of property to sustain government expenses and is a payment demanded by law-making authority. Income tax amount is utilized for the benefits, programs and services like military provided by the US government for the advantage and assistance to the people. These contain necessary service s such as national security, food security examinations, and federal assistance programs such as Social Security and Medicare would not have been possible without the federal income tax money. In 1913 the federal income tax was permanent levied, but tax in some kind has been eternal to American history.

The history of American federal tax

Evolution of Income Tax in America

The declaration and American war of Independence was fought due to taxes paid to Great Britain by American colonists, but founding Fathers of America recognized that the new country would require taxes for infrastructure development like roads and military defence. Section 7 of the Constitution, Under Article I, deals with the entire bills related with revenue and taxation should commence from the House of Representatives else, they need to pursue similar legislative procedure as the other bills.

  • Before the Constitution: prior to 1788 the federal government did not have the unswerving power to levy taxes and raise revenue. The Articles of Confederation dictated that the states as per the wealth and what they wanted to contribute paid the national debt. The Constitutional Convention in 1788 passed a law permitting full authority to federal administration to collect taxes.
  • Since Ratification of the Constitution: In spite of the authority the federal government levied taxes by way of taxes on goods and services like import duty taxes, excise taxes etc. The excise taxes were regressive but this were later stopped except for excise taxes on sales of fuels, motors, tobacco and alcohol and on activities, such as tanning gambling, or running commercial trucks on highways.
  • Early Income Taxes: The civil war from 1861 to 1865 made the government apprehend that tariffs and taxes would not bear the cost of the war hence in 1862 income tax for the first time was levied on people with more than $600 income but his was later eliminated in 1872 and tobacco and alcohol had higher excise taxes. In 1894 the income tax was re-levied but in 1895, the Supreme Court declared it unconstitutional.
  • 16th Amendment Forward: With World War I threatening, in 1913, the ratification of the 16th Amendment eternally instituted the income tax. This amendment provided Congress the power to enforce income tax both on individuals and corporations who earned. Income tax revenue exceeded $1 billion for the first time in 1918 and by 1920 it surpassed $5 billion. In 1943, the commencement of the obligatory withholding tax on employee wages was imposed and this augmented the tax revenue to reach $45 billion figure. The last recorded IRS revenue in 2010 was $1.2 trillion from income tax on individuals with an additional $226 billion from corporations.

Recommendation on the kind of tax regime to be used if Bahrain is to apply tax concept next year

Tax Policy

Tax guiding principle is an essential element of fiscal policy and its main goal should be for revenue raising which is the primary goal of a tax policy. In Bahrain tax should be utilized for social and economic objectives. Bahrain should keep competitive tax rates for both firms over and above individuals, as it will help to draw foreign investment and low individual rates will hearten people to work hard, and hearten entrepreneurship.

Government Operating Revenue

There should be three major foundation of government operating revenue

  • Tax revenue which can account for 70% of the operating revenue
  • fees – which can account for 12% of the Operating Revenue
  • charges for 12% of the OR
  • other receipts can account for 5 – 8%

The Tax revenue are number of taxes government collects, which are as follows.

  • Income tax - chargeable on individuals and corporate income.
  • Property tax - imposed on property owners on the anticipated property rental values.
  • Estate duty – tax imposed on the surplus of a threshold amount in case of a deceased's net assets.
  • Motor Taxes – taxes besides import duties levied on motor vehicles, mostly levied to restrain more cars and congestion on the road and pollution.
  • Excise & Custom Duties – To make Bahrain more of a free port few excise and import duties. Tobacco, petroleum products and liquors are the only products on which excise duty needs to be imposed. The import duties are also levied on tobacco, vehicles, petroleum products, and liquor.
  • Services & Goods Tax – a tax on consumption of any goods or services, including imported goods.
  • Betting Taxes – Taxed levied on private lottery, betting & sweepstake
  • Casino Tax – In case of casinos this tax is levied on casinos’ gross gaming revenue.
  • Stamp Duties – levied on commercial and legal documents for stocks, shares and fixed assets.
  • Others - The foreign worker levy and the airport passenger service are the two main taxes that can be additionally charged. The expats working in Bahrain are quite a lot and this can add to the revenue to develop skills in Bahrainis for employment.

Tax Expenditure

Bahrain can have the following expenditure pattern

Expenditure

%

Security and External Relations

40%

Social Development

40%

Administration

5%

Economic Development

15%

The two sectors of major expenditures are security and social development. Security expenses are necessary to protect the country from external as well as internal enemies. The social development includes spend on areas such as Education; Health; Social and Family growth; Information and Communications; customs, neighbourhood and Youth; Water and Environment Resources; National and Manpower progress.

Fiscal Policy

Bahrain should have a long term goal and should:

  • support and maintain continued, price steady economic growth;
  • preserve a reasonable budget, and
  • The government spending should be focused on distributing vital public goods and services, such as, healthcare, education, , housing, infrastructure and agenda to safeguard the environment.

Homework

The yearend income tax return will look like this

Homework

Household Taxpayer with 2 Children

Gross Income

1,37,500

Standard Deduction

6,750

Personal Exemption

4,650

Taxable Income

1,26,100

FICA Tax amount

23,888

SS tax @ 6.2%

7,818.20

Medicare Tax @ 1.45%

1,828.45

Total Tax paid

33,534.15

Tax rate payable

24.39%

For a gross income of 137500 and no other income he needs to pay $33534.15 which is 24.39% of his gross income.

Assignment 1

His yearend income tax return will look like the following

Assignment 1

Household Taxpayer with 2 Children

Gross Income

1,67,500

Cash a capital asset

2,35,000

Total gross income

4,02,500

Standard Deduction

6,750

Personal Exemption

4,650

Taxable Income

3,91,100

FICA Tax amount

1,07,193

SS tax @ 6.2%

24,248.20

Medicare Tax @ 1.45%

5,670.95

Total Tax paid

1,37,111.90

Tax rate payable

34.07%

Assignment 2

His income tax return would like the following if they file it jointly

Married Couple with No Children Filing Jointly

Husband

Wife

Gross Income

1,07,500.00

86,450.00

Cash a capital asset

2,45,000.00

Total gross income

4,38,950.00

Standard Deduction

6,750.00

5,125.00

Personal Exemption

4,650.00

3,865.00

Taxable Income

4,18,560

FICA Tax amount

116803.4

SS tax @ 6.2%

17,579.52

Medicare Tax @ 1.45%

8,036.16

Total Tax paid

142419.08

Tax rate payable

32.45%

The Income tax return will look different and as follows if the couple file it separately

Married Couple with No Children filing Seperately

Husband

Wife

Gross Income

1,40,000.00

86,000.00

Cash a capital asset

2,45,000.00

Total gross income

3,85,000.00

Standard Deduction

3,650.00

3,430.00

Personal Exemption

5,700.00

5,250.00

Taxable Income

3,75,650.00

77,320.00

FICA Tax amount

1,01,785.25

11,692.50

SS tax @ 6.2%

23,290.30

4,793.84

Medicare Tax @ 1.45%

5,446.93

1,121.14

Total Tax paid

1,30,522.48

17,607.48

Tax rate payable

33.90%

20.47%

Reference

Black's Law Dictionary, p. 1307 (5th ed. 1979).

United States Federal Unemployment Tax Act.

Atkinson A. B., (1977). Optimal Taxation and the Direct Versus Indirect Tax Controversy, 10 Can. J. Econ. 590, 592

Johnsson, Richard, 2004. "Taxation and Domestic Free Trade," Ratio Working Papers 40, The Ratio Institute, revised June 7, 2004.

Parkin, Michael (2006), Principles of Microeconomics, p. 134.

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