Over the years, the United States’ federal tax system has reformed to adapt to the changes of the role of the government. However, the rule on taxation has not changed. If not particularly freed from the responsibility by the law, earnings from all sources are subjected to tax.
All nations have a tax system that is partly responsible in financing their government. Nowadays, the tax collected in the US now is quite different from what it was some two hundred years ago. These changes were due to events such as wars, or as a result of the 16th Amendment which allowed Congress to impose a tax on personal income. Other modifications made were based on changes in the society, the economy, and in the function of the federal government.
Different Types of Taxes and Their Advantages and Disadvantages
For a government to be able to perform its functions, it has to look for revenue through taxation.
This is where the main revenue of the federal government comes from. According to the White House Office of Management and Budget, forty-six percent of the projected revenue of the government for Fiscal Year 2015 is from income tax. However, not all fifty states impose it. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming do not levy income tax, while New Hampshire and Tennessee collect tax not on wages but on dividend and interest income.
As stated in the book Individual Finance, the sources of income where taxes are imposed are wages; interest, dividends, and gains from investment; self-employment; property rental; rental of intellectual property; and gambling winnings or prizes.
An advantage of income tax is that households with low incomes will pay less compared to households who earn more. Howbeit, income tax may be difficult to evaluate.
Sales Tax or Consumption Tax
This tax is based on the expenditures financed through income. An example is buying furniture. The federal government does not levy sales tax. Only states, counties, and cities do since their budgets depend on it.
One benefit of sales tax is that the government can track it easily because the merchant collects the tax. Since it is considered regressive, sales tax affects mostly those who have the least ability to pay for it.
Like the sales tax, the use tax is imposed on utilities and services. An advantage of the use tax is that the government can easily track it since the vendor collects the tax. However, similar to the sales tax, the use tax is regressive.
Regarded as the luxury tax, the excise tax is utilized both by the federal government and the state. According to the White House Office of Management and Budget for the Fiscal year 2015, three percent of the projected revenue by the federal government will come from the excise tax. Some of the items that are levied by the excise tax are beer, liquor, cigarettes, firearms, and gasoline.
One benefit from the excise tax is that it is often used to dissuade the consumption of cigarettes and alcohol. Like the use tax and the sales tax, the excise tax is regressive.
Real Estate Tax
Real estate tax is the local government’s primary source of revenue. Properties that are covered by the real estate tax are homes, land, and business property ad valorem.
The advantage of a real estate tax is that it is a progressive tax and is easy to collect. However, homeowners tend to pay more if their new house was not annually reassessed by the Property Tax Assessor.
Personal Property Tax
A progressive tax, a personal property tax is only imposed by a few local governments on items such as vehicles, appliances, and furniture.
Tolls and Permits
These are fees charged in order to use public services such as public parks, highways, and parking lots. The good thing about this form of tax is that only those who avail themselves of the aforementioned services are charged. However, tolls and permits are considered regressive.
Estate, Gift, and Inheritance Taxes
An estate tax is levied on an estate, while an inheritance tax is imposed when a property is transferred after the owner dies. On the other hand, a gift tax is exacted on large gifts.
These kinds of taxes are considered progressive. Howbeit, there are instances where the sale of the whole or part of a property is needed in order for the death tax to be paid.
Tariffs are imposed in imports and exports. These taxes are regressive. However, these taxes make local products attractive since tariffs increase the price of foreign goods.
Value Added Tax (VAT)
Burdened by the consumers, VAT is regressive and is added to the cost of manufacturing, producing, and distributing a product or a material.
How Does the Government Spend the Collected Taxes?
As reported by the Center on Budget and Policy Priorities, twenty-four percent of the entire budget goes to Social Security, which provided the benefits for retired workers, spouses and children of retired workers, deceased workers’ surviving spouses and children, and for disabled workers and their dependents.
Health insurance programs, such as Medicare and Medicaid, account for another twenty-four percent of the federal budget.
Eighteen percent of the collected taxes are allocated to defense and international security assistance, while 11 percent is distributed to safety net programs. The rest of the federal budget goes to pay the interest on debt (7%), benefits for federal retirees and veterans (8%), transportation and infrastructure (3%), education (2%), science and medical research (2%), non-security international (1%), and others (2%).