What is the US tax system? US tax system review

Federal taxes mainly include personal income tax, social insurance tax, and corporate income tax. In addition, there are estate tax and gift tax, consumption tax (including general consumption tax and special-purpose consumption tax), windfall profit tax, stamp duty, etc.

Tax reform

In 1775, the people of the 13 British North American colonies fought a revolutionary war for national independence and declared independence the following year. In 1783, Britain recognized the independence of the United States. From 1781 to 1787, these 13 states formed the Confederation Congress. At this time, this loose interstate alliance did not have the right to levy taxes. Some states only levied tonnage taxes or restricted tariffs on some ships. In all fiscal revenues, the proportion of taxes was extremely low. In 1787, the United States enacted a new constitution, stipulating that the federal government enjoyed independent taxation rights. Tariffs became the main source of federal revenue. In addition, a small amount of consumption tax and some direct taxes were levied. State governments mainly levied property taxes and head taxes. From the mid-to-late 19th century to the early 20th century, the US federal government implemented a policy of expanding consumption taxes and raising tax rates. The proportion of consumption taxes rose sharply, and tariffs took a back seat.

By 1902, consumption tax accounted for 95% of the total federal tax revenue. Property tax still occupies a dominant position in state-level tax revenue. In 1913, the 16th Amendment to the U.S. Constitution gave the federal government the power to levy income tax, and the U.S. tax system began to transition to an income tax-based system. After that, the income tax law was adjusted and improved several times, and tax revenue increased rapidly. By 1982, personal income tax revenue accounted for 47.6% of the total federal tax revenue, social insurance tax revenue with income tax nature accounted for 32.9%, and corporate income tax accounted for 7.5%, forming a tax system with the above three types of income tax as the main body.

Tax structure

Tariffs are taxes that are levied by the Customs Administration. The tax systems at the state level are not completely consistent. Generally, there are sales tax, income tax, property tax, estate tax and inheritance tax, motor vehicle license tax, state consumption tax, etc. Local taxes are mainly property taxes. In addition, there are business taxes and license taxes levied on the use of hotel business power supply and telephone. In the 1980s, the total tax revenue of governments at all levels in the United States accounted for 26-28% of GDP. Tax revenue of governments at all levels accounted for more than 80% of total fiscal revenue, and tax revenue of the federal government accounted for more than 90% of fiscal revenue. In 1988, personal income tax accounted for 45.36% of the total federal tax revenue, corporate tax accounted for 10.68%, and social insurance tax accounted for 37.26%. Of the total tax revenue at the state level, in 1986, taxes on goods and services accounted for 59.62%, personal income tax accounted for 28.97%, and corporate tax accounted for 1.83%; of the total tax revenue at the local level, property taxes accounted for 70.04%, taxes on goods and services accounted for 20.01%, and personal income tax accounted for 5.89%.

Personal income tax

Individual income tax payers are U.S. citizens, resident aliens, and non-resident aliens. U.S. citizens refer to people born in the U.S. and naturalized U.S. citizens. Resident aliens refer to people who are not U.S. citizens but have legally recognized permanent residency under U.S. immigration law. Other foreigners are non-resident aliens. U.S. citizens and resident aliens are subject to tax on their worldwide income, while non-resident aliens only pay federal individual income tax on their investment income from the U.S. and certain income actually related to business operations in the U.S.

Individual income tax is levied on comprehensive income. The taxable items include: income from labor and wages, dividend income, property rental income, business income, capital gains, and retirement annuity income. Non-taxable items that should be excluded from income include: donations, child support paid by one spouse to the other spouse in a divorce, income from long-term residence abroad, military and veterans' allowances and annuities, social insurance and similar allowances, small employee income benefits, state and local prize bond interest, life insurance income, and dividends within a small limit. Deductible items include: taxes paid abroad, in the state, and in the local area, medical expenses, charitable donations, interest paid on loans, unexpected losses, and interest from government savings plans. Items that can be deducted include: household energy-saving expenses, child and elderly care expenses, and foreign income taxes paid. The balance after deducting these items from the total income is the actual taxable income. The tax is calculated based on the progressive tax rate of the difference, and is levied annually and reported by the individual. Families can adopt the joint reporting method of the couple.

Corporate income tax

The taxable objects of corporate income tax include: interest, dividends, rental royalties, labor income, trade and business income, capital gains, and other income that is not personal income. Actual taxable income refers to the income after the total income that is not included in the company's income items is deducted as legal deductions. The actual tax payable is the amount of tax multiplied by the applicable tax rate and then deducted from the legal deduction amount. Among them, the deductible items mainly include: operating expenses and non-operating expenses that meet the regular and necessary conditions, such as operating costs, employee wages and salaries, repair costs, depreciation, rent, interest, bad debts, legally deductible taxes paid, social insurance funds, advertising expenses, etc.; limited amortization of company start-up costs; depreciation; losses and unexpected losses; dividends between legal persons; research and development expenses, etc. The deductible items include: special purpose fuel and lubricant credits, research and development cost growth credits, foreign tax credits, property tax credits, etc.

Corporate income tax taxpayers are divided into domestic legal persons and foreign legal persons. Domestic legal persons refer to companies established or organized in the United States in accordance with federal or state laws, including legal persons invested by the government. Legal persons other than domestic legal persons are foreign legal persons. Domestic legal persons shall pay taxes on their worldwide income, while foreign legal persons shall pay taxes on their income related to trade and operations in the United States, as well as income derived from the United States, although not related to their trade and operations in the United States during the taxable year. Corporate income tax adopts a progressive tax rate.

Social Security Tax

The purpose of social insurance tax is to raise funds to pay for specific social security projects. Its insurance projects include: pension income; disability income; survivor income. Social insurance taxpayers include all employed employers, self-employed persons, etc. The tax base for employees is the total annual salary, including bonuses, handling fees, in-kind wages, etc.; the tax base for employers is the total salary of their employees. A proportional tax rate is adopted (adjusted annually as appropriate), and no tax is levied on salaries exceeding the prescribed maximum limit.

Unemployment Insurance Tax

Unemployment insurance tax is a proportional tax rate with employers as the taxpayers. The tax base is determined by the number of employees and the amount of wages paid to employees. Unemployment insurance tax is also levied in each state, and the state tax amount is allowed to be deducted from the federal unemployment insurance tax paid. The state unemployment insurance tax taxpayers are employers, but a few states also levy it on employees. The collected taxes are mainly used to establish an insurance fund for unemployed workers. In addition, there are "railroad retirement insurance tax" and "railroad unemployment insurance tax" specifically for railway workers.

State sales tax

State consumption tax: The tax systems of various states in the United States are different. Most of them are based on general consumption tax, while some choose to impose individual consumption tax, such as on gasoline, tobacco, alcohol, etc.; most of them are levied on the sales price at a proportional rate at the retail stage of goods, also known as sales tax or retail business tax.

Tax management

Tax administration system

The federal, state, and local governments in the United States implement a thorough tax separation system based on the division of power and responsibility. The federal government and the state legislate separately, and local taxes are determined by the state. The three levels of taxation are separated and each is responsible for collection and management. This tax separation system began to take shape in the early days of the founding of the United States. The basic law for federal taxation is the Internal Revenue Code enacted in 1939, which was revised in 1954 and 1986 respectively.

The power to legislate on taxation lies with the Senate and the House of Representatives. Tax laws and decrees proposed by the Ministry of Finance are passed by Congress and take effect after being approved by the President.

Taxation Administration

The agency responsible for the administration of federal tax laws and regulations in the United States is the Office of the Assistant Secretary for Tax Policy within the Treasury Department. This department assists the Secretary and Deputy Secretary in formulating and implementing international tax policies, is responsible for contacting Congress on tax bills, analyzes economic situations that affect taxation, provides estimates of future taxation for the President's budget message, and participates in the negotiation of international tax agreements.

The specific tax collection and management agencies are the Internal Revenue Service and the Customs Service. The Internal Revenue Service is responsible for the collection of federal internal taxes and the enforcement of the Internal Revenue Act, while the Customs Service is responsible for the collection of customs duties. The Director of the Internal Revenue Service is appointed by the President and reports directly to the Secretary of the Treasury. Under the leadership of the Director, the Internal Revenue Service consists of two major departments, the Administrative Department and the Legal Department. The three Deputy Directors lead three types of work in the Administrative Department respectively: the Deputy Director in charge of business leads the audit and inspection of tax returns, tax collection, supervision of tax exemptions, and cooperation with the judicial department in tax crime investigations; the Deputy Director in charge of policy and management is responsible for establishing long-term financial management plans, researching and handling the security secrets of the Internal Revenue Service, supervising the issuance of tax publications and employee training; the Deputy Director in charge of data processing is responsible for processing tax return data, collecting and compiling background data, designing information flow systems, and supervising and inspecting the computer systems of the Internal Revenue Service. The Legal Department is headed by the Chief Counsel. The department drafts detailed rules based on the laws passed by Congress, issues public or private rulings on special cases of tax laws, and participates in litigation in courts across the country on behalf of the Internal Revenue Service. The headquarters of the Internal Revenue Service only provides general guidance and instructions for tax collection, while the actual tax collection work is handled by the seven regional tax bureaus located throughout the country. The regional tax bureaus have the right to make decisions on issues in tax collection and management without the approval of the General Administration. The regional bureaus have several district bureaus under them to directly carry out tax collection and management work. Since the United States implements a tax system that mainly relies on active declaration and payment of personal income tax, the actual work of the regional bureaus is mainly to review tax returns.