The American Tax System Governments raise revenues through tax

The American Tax System
   Government budgets deal not only with expenditures, but with revenues. Governments raise revenues through taxation.
   A tax is a compulsory payment to government.
   Taxes can be levied and classified in may ways. In the United States and many other Western countries there are three principal types of taxes: taxes on income, taxes on wealth and taxes on activities.
   Taxes on Income
   Income taxes are based on net income—what remains after certain items are deducted from gross income. The items that can be deducted and the tax rates that are applied are specified by law and differ between the personal income tax and the corporation income tax.
   Personal Income Tax
   Every year in April, millions of American taxpayers begin to sort their previous year’s income and expense records in order to prepare individual income tax returns. This is the first step that must be completed to determine the personal income tax.
   In calculating this tax you would be allowed to take specific types of deductions and exemptions. For instance, some deductions that may be made (within limits) from your income are donations to the Red Cross, to your alma mater, and to various other nonprofit organizations. You may also deduct some payments for doctors’ bills, X rays, and medicine; taxes paid to state and local governments l interest paid on loans; and various other outlays. In addition, tax allowances or exemptions are permitted for support of yourself, your family, and your dependents. In this way the government acknowledges the fact that larger families require more funds than smaller ones to meet their living costs.
   The amount of income tax you would have to pay at a given income level depends on several things. These include whether you are single or married and what the particular tax rates happen to be at the time. The rates are usually revised by Washington every few years. Nevertheless, certain features of a tax-rate schedule never change.
   Corporation Income Tax
   The federal government’s second largest source of revenue is the corporate income tax. (Many states also tax corporate incomes, but at lower rates.) The corporate income tax is simple to calculate because it is based on the difference between a company’s total income and its total expenses—its net recent decades it has averaged close to 50 percent.
   Taxes on Wealth
   Property taxes are levied primarily on land and buildings. The taxes vary from low rates in some rural areas where services are minor to high rates in localities with good streets, schools, and public safety facilities.
Death taxes are levied on estates by the federal government and on inheritances by some state governments. The rates depend on values and amounts. Like income taxes, death taxes exempt small estates and inheritances but tax the unexempt portions at progressive rates. Many wealthy people would try to avoid these taxes by distributing most of their property before death. Therefore, gift taxes are imposed on the transfer of assets beyond certain values. However, various legal devices, such as trust funds and family foundations, have enabled many wealthier individuals to lighten the weight of these taxes.
Taxes on Activities
   Sales taxes are imposed by many state and local governments. These taxes are flat percentage levied on the retail prices of items. In some states or cities such commodities as food, medicine, and services are exempt. In other places they are not. The federal government imposes no "general" sales tax on the final sale of goods. However, it does impose special sales taxes, called excise taxes, on the manufacture, sale, or consumption of liquor, gasoline, and other products. From time to time, in order to raise more money, political and economic efforts are exerted to introduce a value-added tax (VAT). This is a type of national sales tax paid by manufacturers and merchants on the value contributed to a product at each stage of its production and distribution. However, this form of tax, although common in Europe, has not yet gained sufficiently wide acceptance for adoption in the United States.
   Social security taxes are payroll taxes levied by the federal government. The taxes finance our compulsory social insurance program covering old-age and unemployment benefits. The contributions come from both employees and employers and are based on the incomes of the former. Social security tax should not be confused with the income tax which is also a tax on earnings. Social security taxes are used for a specific purpose. Income taxes are used for many purposes.