Income tax

An income tax is a tax levied on the financial income of persons or of corporations. Various income tax systems exist, ranging from a flat tax to a progressive tax system. A tax levied on the income of companies is often called corporate tax, corporate income tax or corporation tax. Individual income taxes generally tax the total income of the individual (with some deductions permitted), while corporate income taxes often tax net income, the difference between gross receipts and expenses.

Income tax in the USA

The powers of Congress, and the limitations set upon those powers, are set forth in Article I of the United States Constitution. Section 8 specifies both the power to collect, "Taxes, Duties, Imposts and Excises," and the requirement that, "Duties, Imposts and Excises shall be uniform throughout the United States."

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However, the Constitution specifically limited Congress' ability to impose direct taxes. It was thought that head taxes and property taxes (slaves could be taxed as either or both) were likely to be abused, and that they bore no relation to the activities in which the federal government had a legitimate interest. The fourth clause of section 9 therefore specifies that, "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken."

Related Topics:
Head tax - Property tax

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The courts have generally held that direct taxes are limited to taxes on people (variously called capitation, poll tax or head tax) and property. (Penn Mutual Indemnity Co. v. C.I.R., 227 F.2d 16, 19-20 (3rd Cir. 1960).) All other taxes are commonly referred to as "indirect taxes," because they tax an event, rather than a person or property per se. (Steward Machine Co. v. Davis, 301 U.S. 548, 581-582 (1937).) What seemed to be a straightforward limitation on the power of the legislature based on the subject of the tax proved inexact and unclear when applied to an income tax, which can be arguably viewed either as a direct or an indirect tax.

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In order to help pay for its war effort in the American Civil War, the United States government issued its first personal income tax, on August 5, 1861 as part of the Revenue Act of 1861 (3% of all incomes over US $800; rescinded in 1872). Other income taxes followed, although a 1895 Supreme Court ruling, Pollock v. Farmers' Loan & Trust Co., held that taxes on capital gains, dividends, interest, rents and the like were unapportioned direct taxes on property, and therefore unconstitutional.

Related Topics:
American Civil War - United States government - August 5 - 1861 - Revenue Act of 1861 - 1872 - 1895 - Supreme Court - Pollock v. Farmers' Loan & Trust Co. - Capital gains - Dividends - Interest - Rent

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The Sixteenth Amendment to the United States Constitution specifically gave Congress power to tax incomes. It states: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

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In 1913 the tax rate was 1 percent on taxable net income above $3,000 ($4,000 for married couples), less deductions and exemptions. It rose to a rate of 7 percent on incomes above $500,000.

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During World War I the top rate rose to 77 percent; following the war, the top rate was scaled down (to a low of 25 percent).

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During the Great Depression and World War II, the top income tax rate rose again, reaching 91% during the war; this top rate remained in effect until 1964.

Related Topics:
Great Depression - World War II - 1964

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In 1964 the top rate was decreased to 70% (1964 Revenue Act), and then to 50% in 1981 (Economic Recovery Tax Act or ERTA).

Related Topics:
1964 - 1981 - Economic Recovery Tax Act

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The Tax Reform Act of 1986 reduced the top rate to 28%, at the same time raising the bottom rate from 11% to 15% (in fact 15% and 28% became the only two tax brackets).

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During the 1990s the top rate rose again, standing at 39.6% by the end of the decade.

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In 2001 the top rate was cut to 35% and the bottom rate was cut to 10% by the EGTRRA, or Economic Growth and Tax Relief Reconciliation Act.

Related Topics:
2001 - EGTRRA

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In 2003 the JGTRRA, or Jobs and Growth Tax Relief Reconciliation Act, was passed, expanding the 10% tax bracket and accelerating some of the changes passed in the 2001 EGTRRA.

Related Topics:
2003 - JGTRRA - 2001 - EGTRRA

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