United States Tax System (tax system in USA)
Overview of the United States Tax System
The term refers to the tax laws and collection management system of the United States of America, primarily centered around income tax.
Evolution of the United States Tax System
In 1775, the people of the 13 British North American colonies fought for national independence, declaring independence the following year. In 1783, Britain recognized the independence of the United States. From 1781 to 1787, these 13 states formed a confederation congress. At this time, this loose interstate alliance had no taxation authority. Some states only imposed tonnage taxes or limited tariffs on certain vessels. The proportion of tax revenue in total fiscal income was extremely low. In 1787, the United States established a new constitution, granting the federal government independent taxation authority. Tariffs became the main source of federal revenue, supplemented by a small amount of consumption tax and some direct taxes, while state governments primarily levied property taxes and head taxes. From the mid-19th century to the early 20th century, the federal government of the United States implemented policies to expand consumption taxes and increase tax rates, leading to a sharp rise in the proportion of consumption taxes, with tariffs relegated to a secondary position.
By 1902, consumption taxes accounted for as much as 95% of total federal tax revenue. At the state level, property taxes remained dominant. In 1913, the 16th Amendment to the United States Constitution granted the federal government the authority to levy income taxes, marking the beginning of a transition to an income tax-based system. Since then, the income tax law has undergone several adjustments and improvements, leading to a rapid increase in tax revenue. By 1982, individual income tax revenue accounted for 47.6% of total federal tax revenue, social insurance tax revenue with income tax characteristics accounted for 32.9%, and corporate income tax accounted for 7.5%, forming a tax system primarily based on these three types of income taxes.
Structure of the United States Tax System
Federal taxes primarily consist of individual income tax, social insurance tax, and corporate income tax, along with estate tax, gift tax, consumption tax (including general consumption tax and special purpose consumption tax), excess profits tax, and stamp tax. Tariffs are managed by the Customs Service. The tax systems at the state level are not entirely consistent, generally including sales tax, income tax, property tax, estate tax and inheritance tax, motor vehicle license tax, and state consumption tax. Local governments primarily rely on property taxes. Additionally, there are business taxes on hotel operations, electricity, and telephone usage, as well as license taxes. The total tax revenue of all levels of government in the United States stabilized at 26-28% of GDP in the 1980s. Tax revenue from all levels of government accounted for over 80% of total fiscal revenue, with federal tax revenue accounting for over 90% of fiscal income. In 1988, individual income tax accounted for 45.36% of total federal tax revenue, corporate tax accounted for 10.68%, and social insurance tax accounted for 37.26%. At the state level, in 1986, taxation on goods and services accounted for 59.62%, individual income tax accounted for 28.97%, and corporate tax accounted for 1.83%; at the local level, property tax accounted for 70.04%, taxation on goods and services accounted for 20.01%, and individual income tax accounted for 5.89%.
Individual Income Tax
The taxpayers for individual income tax include U.S. citizens, resident aliens, and non-resident aliens. U.S. citizens are defined as individuals born in the United States or those who have acquired U.S. citizenship. Resident aliens are non-U.S. citizens who have been legally recognized as having permanent residency under U.S. immigration law. Other aliens are classified as non-resident aliens. U.S. citizens and resident aliens are required to pay taxes on their worldwide income, while non-resident aliens only pay federal individual income tax on income sourced from the United States and certain income related to business operations in the United States.
Individual income tax is assessed on comprehensive income. Taxable items include: income from labor and wages, dividend income, rental income from property, business income, capital gains, and retirement income. Non-taxable items that should be excluded from income include: donations, alimony paid by one spouse to another in a divorce, income earned while residing abroad, allowances and pensions for military personnel and veterans, social security and similar allowances, small employee income deductions, interest from state and local tax-exempt bonds, life insurance proceeds, and small dividends within certain limits. Deductible items include: taxes paid abroad, state, and local taxes, medical expenses, charitable donations, interest on loans, casualty losses, and interest from government savings plans. Creditable items include: household energy efficiency expenses, child care and elder care expenses, and foreign income taxes paid. The balance after deducting these items from total income is the actual taxable income. Tax is calculated based on a progressive tax rate, assessed annually, and filed by self-declaration. Households may opt for joint filing by both spouses.
Corporate Income Tax
Taxable items for corporate income tax include: interest, dividends, rental income, royalties, labor income, trade and business income, capital gains, and other income not classified as personal income. Actual taxable income refers to total income after excluding non-taxable items and making statutory deductions. The taxable income is multiplied by the applicable tax rate, and after subtracting statutory credits, the actual tax payable is determined. Deductible items primarily include: ordinary and necessary business expenses and non-business expenses, such as operating costs, employee salaries, repair costs, depreciation, rent, interest, bad debts, legally deductible taxes paid, social security contributions, advertising expenses, etc.; amortization of startup costs; depreciation; losses and casualty losses; dividends between corporations; and research and development expenses. Creditable items include: credits for specific-use fuels and lubricants, credits for increases in research and development expenses, foreign tax credits, and property tax credits.
Corporate income tax taxpayers are divided into domestic corporations and foreign corporations. Domestic corporations refer to companies established or organized in the United States under federal or state law, including government-invested entities. Corporations other than domestic corporations are classified as foreign corporations. Domestic corporations are required to pay taxes on their worldwide income, while foreign corporations are taxed on income related to trade or business conducted in the United States, as well as income sourced from the United States, even if it is not related to their trade or business in the United States during the taxable year. Corporate income tax is assessed at a progressive tax rate.
Social Insurance Tax
The primary purpose of social insurance tax is to raise funds specifically for certain social security programs. The insurance programs include: retirement income; disability income; survivor income; and medical insurance. Taxpayers include all working employees, employers, and self-employed individuals. The tax base for employees is the total annual salary, including bonuses, commissions, and in-kind wages. The tax base for employers is the total salary of their employees. A proportional tax rate is applied (adjusted annually as appropriate). Salaries exceeding the specified maximum limit are not taxed.
Unemployment Insurance Tax
The unemployment insurance tax is levied on employers as taxpayers, using a proportional tax rate. The tax base is determined by the number of employees and the total wages paid to employees. Unemployment insurance tax is also collected at the state level, allowing for a deduction of the federal unemployment insurance tax paid from the state tax amount. The taxpayer for state unemployment insurance tax is the employer, although a few states also levy taxes on employees. The collected taxes primarily establish an insurance fund for unemployed workers. Additionally, there are specific "Railroad Retirement Tax" and "Railroad Unemployment Insurance Tax" applicable to railroad workers.
State Consumption Tax
State consumption taxes vary across the United States, with most states primarily imposing general consumption taxes, while some impose selective item consumption taxes, such as those on gasoline, tobacco, and alcohol, typically levied at the retail stage based on the sales price at a proportional tax rate, also known as sales tax or retail business tax.
Tax Administration System in the United States
The federal, state, and local governments in the United States implement a thorough tax division system based on the division of responsibilities. Federal and state governments legislate separately, while local taxes are determined by the state. The three levels of taxation are managed separately. This tax division system began to take shape in the early days of the United States. The fundamental law governing federal taxation is the Internal Revenue Code established in 1939, which was revised in 1954 and 1986.
The agency responsible for managing federal tax regulations in the United States is the Office of the Assistant Secretary of the Treasury, which oversees tax policy. This department assists the Secretary and Deputy Secretary in formulating and implementing international tax policies, liaises with Congress on tax legislation, analyzes economic conditions affecting taxation, provides estimates of future tax revenues for the President's budget message, and participates in international tax treaty negotiations. The legislative authority for taxation lies with the Senate and House of Representatives, where tax laws and regulations proposed by the Treasury Department take effect after being passed by Congress and approved by the President.
The tax collection agencies are the Internal Revenue Service and the Customs Service, with the Internal Revenue Service responsible for the collection of federal domestic taxes and the enforcement of domestic revenue laws. The Customs Service is responsible for tariff collection. The Commissioner of the Internal Revenue Service is appointed by the President and reports directly to the Secretary of the Treasury. Under the Commissioner, there are two main departments: administrative and legal, with three deputy commissioners leading the three types of work in the administrative department; the deputy commissioner in charge of business leads audits and inspections of tax returns, tax collection, supervision of exemptions, and cooperation with the judicial department in tax crime investigations; the deputy commissioner responsible for policy and management establishes long-term financial management plans, researches and handles the security and confidentiality of the Internal Revenue Service, supervises the distribution of tax publications, and employee training; the deputy commissioner responsible for data processing handles tax return data, collects and compiles background information, designs information flow systems, and supervises the Internal Revenue Service's computer systems. The legal department is headed by a chief counsel, who drafts regulations based on laws passed by Congress, issues public or non-public rulings on special cases of tax law, and represents the Internal Revenue Service in litigation in courts nationwide. The headquarters of the Internal Revenue Service provides general guidance and instructions for collection work, while actual collection work is managed by seven regional tax offices established nationwide. Regional tax offices have the authority to make decisions on issues in tax administration without needing approval from the headquarters. Each regional office has several district offices that directly manage tax collection. Due to the United States' system of self-reporting for individual income tax, the actual work at the district level primarily involves reviewing tax returns.
