US Income and Consumption Taxes (Essay Sample)

US INCOME AND CONSUMPTION TAXES
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In the United States, taxes are deducted at many levels. There are taxes on payroll, income, sales, property, imports, capital gains, dividends, gifts, estates and also various fees. Taxes are collected at all levels of the government that is federal, state and local governments. Taxes in the US are paid by both residents and non-residents. The general taxation system in the US is progressive that is the percentage that an individual or household pays as tax increases with increase in income. Those that earn higher incomes pay more taxes in total. Their rate of taxes is high. This is what is known as a progressive tax system, for instance, an individual that earns $100,000 per annum may pay $25,000 as taxes (25%) while those with an income of $30,000, for instance, pay $3,000, a 10% tax rate. The reason the US applies progressive taxation is because of the belief that those with high income can pay the taxes without sacrifices. The issue of taxation in the US brings us to look at different regimes of taxes in the nation. Among the three predominant tax bases in the US, this paper discusses income and consumption tax in respect to nature, structure and key characteristics. It also discussed the key similarities between the two tax regimes.[Leonard Burman and Slemrod Joel. Taxes in America: What Everyone Needs to Know? (New York: OUP USA, 2013), 90.]
The US federal income tax is the most complicated, visible and debated tax regime in the nation. It was established with the ratification of the 16th amendment to the nation’s constitution in 1913. Income tax is imposed by all three levels of government. It is imposed on salaries and wages and other income sources such as capital gains, interest, dividends and income from self-employment. Determination of income tax is done by applying a tax rate to a taxable income. The tax rates may increase with increase in income. Corporations, individuals are taxed directly while trusts and estates may be taxed on undistributed income. Income tax is not imposed on partnerships but the shares of partners. Residents are taxed on a global income. But, non-residents are taxed only on the income within the jurisdiction. Taxpayers in the United States assess income tax through filing tax returns. The paying of income tax is based on marginal tax brackets. Last year, the tax brackets were 10%, 15% 25% 28% 33% 35% and 39.6%. Income tax in the US is progressive. Those who earn large salaries pay a high tax rate than those with low earnings. In order to understand income tax in the US, two major issues must be considered; first, not all income is taxable. There are differences in ‘taxable income,’ ‘total income,’ and ‘adjusted gross income.’ Second, there is a distinction between an individual’s marginal tax rate and effective tax rate. Total income entails all the income that a couple or individual gets from all sources. Though, for many people, total income comes from salaries or wages, there are those who gain extra income from dividends and interest among others. After total income is calculated, some expenses are subtracted as nontaxable by tax filers. This gives the adjusted gross income where some expenses made by a tax filer are reduced from the total income. Much of the tax information presented by the Internal Revenue Service (IRS) is sorted by the adjusted gross income. Income taxes are not obtained based on adjusted gross income but on the taxable income, which is the adjusted gross income minus deductions and exemptions.[Stephen Bond and Gareth Myles, "Income and Consumption Taxation: An Equivalence Result." Mimeo, (2007): 1.] [Stephen Bond and Gareth Myles, 1.] [Zodrow George and Mieszkowski Peter, United States Tax Reform in the 21st Century. (London: Cambridge University Press, 2008), 112] [Zodrow George and Mieszkowski Peter, 120]
The second most prominent tax regime is the consumption tax. The United States require funds to run its departments and keep the society in good order for instance ensuring public safety, infrastructure, education, and transportation. In order to achieve this, individual states also charge consumption taxes in order to acquire enough revenue. Currently, the average revenue collected by states from consumption tax is 30%. Consumption tax is obtained when people spend their money, for example, tax obtained about purchasing items. Consumption tax is imposed on services and goods that are consumed. It is solely founded on consumption. Though this sounds similar to sales tax, a consumption tax does not become regressive like pure sales tax. A consumption tax cannot be increased on punitive or excessive levels. They are naturally limited since they will eventually discourage the economic activity if they are raised. Too much consumption taxes affect the economy through reducing consumer spending, business revenues and lowering the amount of tax collected. A consumption tax also provides tax-preferred savings accounts and retirement plans. There are more than twenty types of preferred savings accounts and plans. Each of these is subject to distinct eligibility rules, contribution limits and restrictions on withdrawals. Most importantly, a consumption tax does not tax savings. This allows investments to grow more quickly. Though consumption tax is preferred more than income tax because it is imposed on the income spent, a negative feature of this tax is that it is regressive. Therefore, it imposes an unfair burden to low-income earners who tend to spend all earnings. As such, all their income will be subjected to tax.[Robert Carroll and Viard Alan, Progressive Consumption Taxation: The X Tax Revisited. (USA: Rowman & Littlefield, 2012), 45.] [Robert Carroll and Viard Alan, 78.] [ Joseph Cordes, Ebel Joseph and Gravelle Jane, (The Encyclopedia of Taxation & Tax Policy. Washington: The Urban Institute, 2005), 94]
The two tax regimes are more different than similar. The relationship between income and consumption is that a consumption tax is obtained through adding labor earnings and current capital income then subtracting savings. Taxable income is the summation of current capital income and labor earnings. The current capital income is the average return rate multiplied by the existing capital at the beginning of the period. Income tax is imposed ...