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(Continued from previous article) Now, another thing we have to take up in discussing gift taxes would have to be the differences between the gift tax as an American transfer tax and the federal income tax treatment of gifts – because there IS a difference, and sometimes they can get confused for each other.

One important thing we have to remember is that according to US federal tax laws, most gifts are excluded from the computation of income tax; that is to say, an individual’s gross income does not at all include the value of any property they received by means of gifting, inheritance, legacy or testament. But, should said property generate ANY INCOME AT ALL, then tax must be paid by the recipient of the gift or inheritance. Also, any gift (in general) received from one’s employer – for the benefit of one’s self – is to be considered income. There are, of course, certain statutory exemptions to this rules, such as the de minimis fringe amounts and as awards or awards for achievement. Nevertheless, on the whole, gifts cannot [Read more →]

(Continued from previous article) Having understood what credits are in the context of federal estate taxation, we can now move on to discuss the exemptions and tax rates that are applicable to this particular federal transfer tax. Before we move on, however, we should address the fact that there are still some people out there who are quite confused with regards to the difference between estate tax exemptions and estate tax credits – the difference while having a rather complex basis, is really quite simple: the estate tax credits are always subject to change value-wise, whereas the estate tax exemptions are fixed (which means that it is rarely, if ever, subject to increasing or decreasing based on the value of the property).

Moving on: it was mentioned before that a fraction of the value of the estate is not subject to taxation (that is, excluded) by the federal government, and for the past two years and going on to the present – 2008 – the exclusion amount is set at two million American dollars. Any property whose total taxable value happens to be above two million American dollars [Read more →]

(Continued from previous article) Now that we’ve determined what makes up the value of the taxable estate – that is to say, the gross value of the estate minus the various deductions, it’s time to figure out what we call the “tentative tax base” from which we will determine the tentative value that needs to be paid once the fate of the decedent’s property is determined.

Calculating the tentative tax base is deceptively easy, although it could be a bit confusing if you’re not quite used to it. Essentially, it’s the taxable estate added to what we call the “adjusted taxable gifts” (that is to say, taxable gifts made after 1976), then determining tax liability based on predetermined tax rates. At the moment, the tax rates are as follows: for sums that fail to be over ten thousand dollars, a tax liability of eighteen percent of the amount is to be levied; for amounts between ten thousand dollars and twenty thousand dollars, the tentative tax is one thousand eight hundred dollars plus twenty percent of the excess over ten thousand dollars; amounts between twenty thousand dollars and forty thousand [Read more →]

(Continued from previous article) So far, what has been discussed is how one is federally taxed as a regular individual; that is to say, we have learned what taxes are levied and withheld based on the normal individual person. That being said, it is only right that we move on to taxes that are rather specialized, taxes that are levied on corporations, the wealthy and certain products. So what are these subjects of federal taxation and how are they taxed, exactly? Well, perhaps it is best to start with something easy: let’s talk about excise taxes.

Excise taxes, also known as excise duty, is one of those indirect taxes that are levied on certain items – usually, said items are thought of as vice items (examples of which are tobacco and certain firearms) or fuels used by modes of transportation (particularly diesel gasoline). Essentially, what this “indirect tax” means is that individuals buying these items are immediately charged extra, thus paying a tax to the federal government by means of the simple act of buying. It is an [Read more →]

(Continued from previous post) So: we have come to establish that one of the most important means of gathering federal funding involves income taxation, the taxing of individuals by means of requiring them to allot a portion of their annual earnings for the sake of the central or federal government. We have also come to establish that in trying to be fair, the current federal tax code has adopted a progressive income tax system that taxes larger percentages of income on larger incomes. But we also mention that in this very same attempt at fairness, the code has created several tax provisions that create tax deductions and credits that an individual (who has full understanding of how the current taxation of the United States of America works) may use as a loophole, granting him or her little to no responsibility in paying taxes. An excellent means of understanding this is by taking a look at tax withholding in the United States (which is pretty much part of income taxation).

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Federal taxation in the United States of America is pretty hard to understand if you just decide to skim through the details instead of sitting down and really trying to get a sense of what it’s all about. Again, it is essential that we know the basics and essentials of taxation so we would not only feel apprehension at the though of paying them, but also come to understand how it works and how we could help it evolve for the better – because taxation, despite what many people think, can actually be a feature of democracy. Taxation as an ideal is meant to allow an individual to feel as if he or she is contributing to the betterment of the nation he or she calls home. And we all have to admit that much of the tax reforms that the federal income tax policies of the United States of America were brought about because of the number of individuals expressing their concern over the fairness of certain provisions. It just goes to show that once we understand how this works, we shall be able to contribute more fully in the economic balance and future of the United States of America – and perhaps, more people will come to take pride in paying taxes instead of finding it to be an act that supports [Read more →]

The taxation system of the United States of America, at first glance, may seem incredibly complicated. While it is very surely a complex system, it is not that hard at all to understand, once you take some time off to understand it. After taking up much of the history of federal taxation of the United States of America, we have come to understand much of the mechanics of the evolution of taxation, particularly in this country. Now, we will attempt to find simpler means of identifying and understanding the many elements of the taxation system that were are currently engaged in today.

As has been evident in the previous discussions of the history of taxation, there are many ways that an individual may be taxed by his or her government – there are many ways that we are made to contribute to the budget that will eventually come back to us in the form of public services (like social services and national security measures), public structures (such as public parks and public roads) and the like. These taxes range from taxes that we pay as soon as we buy a certain item [Read more →]

(Continued from previous article) In 1932, the crashing economy some major changes in the taxation system, which, by that point, helped bring the importance of income tax to the forefront of federal taxation. The government hoped that the Revenue Act of 1932 would generate one point one billion dollars worth of new revenue by means of lower personal income tax exemptions – the abundance of which at that point became a major problem – and steeper income tax rates, as well as new and raised excise taxes.

The consumer products taxed in 1932 seemed to be incredibly arbitrary, although one can see a pattern once one observes carefully. For example, certain industries in which have a certain degree of political influence were given tax rates that are more reasonable than others. Barring that, items that are less needed in everyday life are taxed – flour and table salt, being somewhat essential, are not included in that particular category for example. Given that, it’s no surprise at all that [Read more →]

(Continued from previous article) By March 1917, Congress had made some pretty big changes in the federal tax system, one of which is the corporate excess profits tax. The corporate excess profits tax essentially taxed any profit or income generated by a corporation that is greater than what is deemed reasonable in terms of return rates. When this tax law was first passed and then implemented, the reasonable return rate was determined to be eight percent – meaning that if corporate owners’ return rate was eight point five percent or even eight point one percent, they were required to pay taxes “according to a steep rate schedule”. The corporate excess profits tax also taxed individuals who are in professional positions requiring high education and intelligence; those who earn six thousand dollars annually are required to eight percent of the earnings.

This particular tax actually generated the most money for the cause of the war, even though businessmen were very much against the law because it threatens the way businesses were managed – and with good reason, as the tax was also used by the government at the time to control and regulate businesses. Other critics of this tax law termed the taxes levied on the individuals as a “tax on brains”. The tax had many supporters, however, and there have been some plans to retain this tax law even after the war has ended.

Regular income tax also hiked up that year – the War Revenue Act of 1917 stated that a two percent tax would be imposed on annual incomes that were in excess of one thousand dollars (or two thousand dollars for married couples). The 1917 War Revenue Act also included graduated surtaxes that could go as high as sixty percent, and four percent more on the corporate income tax at the time.

The big changes in the tax system unsurprisingly caused a lot of problems for the Bureau of Internal Revenue – after all, the Federal revenues suddenly shot up and averaged at almost three billion dollars worth within the 1915-1926 period. In order to deal with the sudden influx of tax to be collected, the agency had to hire more people to process the taxes relating to the areas of estate, munitions, and capital stock taxes on top of expanding the staff to a number in the thousands, in order to manage war taxation. This sudden expansion almost destroyed the Bureau of Internal Revenue as it was flooded with paperwork – not only were the new income tax returns coming in in 1918, but the 1916 and 1917 papers were far from being fully processed. And the tax increases just made it worse – the returns increased by one thousand percent between 1916 and 1921.

1918 and 1919 saw very little major change in the tax system of America, although for corporate and individual income, estates and corporate excess profits, the rates were raised. Normal and surtax rates at that point could go up to seventy-seven percent for incomes that are considered among the highest. Corporate bodies had to pay twelve percent of their net taxable income and were given an exemption of two thousand dollars. All in all, there were attempts to fix any mistakes in tax laws that were placed without due consideration.

At this point, the federal revenue system has come to rely on income tax, turning it into the most important source of federal finance. And the Bureau of Internal Revenue struggled to try and keep up with the changes, hiring thousands of personnel and attempting making up for the late printing of tax forms and instructions by extending the filing deadlines. Eventually, it was deemed that the incredibly high taxes that were prompted by the war cannot at all be sustained anymore. President Woodrow Wilson and tow of his Treasury secretaries – Carter Glass and David Houston – began working on the possibility of lowering the taxes.

There were many supporters of the wartime tax reforms, however, proving that the tax may not be as easy as one would hope. After all, the progressive nature of the revenue policy back then had beneficial aspects; progressive Republicans and Democrats rather liked certain policies, even the excess profits tax. One of the main arguments for the retention of the profits tax (which imposes a graduated levy on profits that exceed the “normal” return rate on capital) is a good way to fight egalitarianism (the idea that everyone should be treated as equal from birth, which, at certain times, could be ironically unfair); at the time, egalitarianism is seen as a threat to certain American ideals.

Despite the contentions, tax cuts and reforms were still made and implemented. The tax cuts and changes started in 1921, and this included many changes like the removal of the excess profits tax from the system, a slight increase in the corporate income tax and some decrease in personal income tax rates. Much of the wartime excise levies, however, were retained. There were also changes that increased exemptions for dependents and heads of the family, allowing middle class earners some relief, and preferential treatment was introduced to capital gains income.

In 1924, Secretary of Treasury Andrew Mellon began to argue for more tax cuts (he has made himself a name in the defense of lowered tax rates), insisting that they could actually increase revenue that way because fewer people would be avoiding the payment of taxes. His proposals, which involved dropping the top rate of taxes to twenty-five percent, a twenty-five percent reduction for wage and salary income, and a decrease in excess taxes, were of course met with significant and sometimes harsh resistance. His opposition, for the most part, won – the 1924 Act got the top marginal income tax rate down to forty percent (less than the cut Mellon wanted), and a fifteen percent rise in estate tax rates even though he was allowed the twenty-five percent earned income credit.

Two years later, another attempt to lower the taxes was mobilized. This time, Mellon suggested that the estate tax be gradually be eliminated, that the gift tax be removed, and that individual income taxes by broadly reduced in order to lower the top marginal rate to twenty percent. The new proposal Mellon presented was supported by a lot of lobbying and, eventually, Congress. So this time around, Andrew Mellon managed to score a significant victory over his opposition. While it was true that the estate tax remained in place, it suffered a fifty percent cut in rates and Mellon’s opposition had to agree to a credit for state inheritance taxes.

However, income tax exemptions were also raised at this point, and more people were removed from the tax rolls. Unfortunately for Mellon, this was something that he vehemently opposed since the tax base was too small as it was and the whole point of his argument for change was to get more people to pay their taxes. He firmly believed that by getting people to pay their taxes, they will feel that they are responsible for what happens to the revenues – placing their eyes on the government and ensuring little corruption. Mellon’s critics, particularly those in the lower classes, were offended at the suggestion that the sales taxes levied on ordinary men’s and women’s consumer products were not enough to generate their interest in the usage of government revenue.

Still, 1926 heralded a host of tax cuts that included the exemptions, which Mellon eventually accepted with resignation. The tax cuts continued well into 1928, which the year when Mellon once again made an attempt to get the estate tax repealed on top of cutting down rates of corporate income tax. While many liked the idea of making corporate income tax cuts, but they were once again reluctant to remove the estate tax from lawful taxation. Nevertheless, the overall state of taxation at the time was satisfactory: less Americans were burdened by taxes, and income tax became the most important central source of federal income.

In 1929, however, the Great Depression claimed the United States of America. A year later, the dwindling state of the revenues was alarming enough to make lawmakers realize that they will be soon suffering from a significant deficit and a fiscal gap to rival the extent of Grand Canyon. Strangely enough, President Herbert Hoover and Andrew Mellon were very much reluctant to increase taxes until the national income met with so much trouble that they had no choice in the matter any longer.

In 1932, Mellon himself asked for a tax hike, a very painful decision for a man of his reputation. It was also at this point that Mellon had decided to end his service in the Treasury, becoming an ambassador to London. His replacement, Ogden “Little Oggie” Mills, was a known tax expert who immediately assessed the several problems with not only the collection of taxes, but also the expenditures on which the budget was being spent on. He concluded that the major problem really lies on the fact that the revenue system was functioning on a depressingly narrow base, and that tax receipts tend to vary according to a myriad of business conditions. The fact that income tax at the time was progressive (that is, the tax rate increases as the income increases) apparently just made things worse – because large incomes, which supported the revenue, tend to be more sensitive to the economy, they crash when the economy crashes just as quickly as they hurtle upwards in times of prosperity.

After determining this, Mills advised against radically increasing the rates, since they would probably not raise enough revenue anyway. He acknowledged that there would indeed be the need to raise rates on the richer Americans, but also pointed out that more people should actually be paying the taxes – meaning, of course, less exemptions. Broadening the tax base is, in his opinion, a priority, and citizens should thus be duly encouraged to contribute to the federal revenue – of course, with their ability to pay taken into consideration. To this end, Mills suggested that they restore the 1924 tax rates, increase the surtax (topping at forty percent) and, most importantly, reduce the tax exemptions.

Still, the new Democratic Congress decided not to pursue the decreased exemptions and instead went with a new federal sales tax. The move inspired a rebellion among the Democratic masses, forcing the Congress to scrap the idea and instead go with largely relying on excise taxes, and raised rates of estate taxes and income taxes. This was reflected on the Revenue Act of 1932, which relied heavily on new or increased excise levies and only fractionally on steeper rates and lower income tax exemptions. (To be continued)

As was mentioned before, many individuals have some form of discomfort, some form of trepidation, at the thought of taxation and taxes, in that the numbers begin to blur and all the rules and regulations tend to become dizzying in their quantity. Nevertheless, it must be taken into account that despite the relationship of taxation with numbers and rules, taxation in PRINCIPLE is a tool that is used to ensure that the public receives benefits that befit a society that is comprised of human beings. In order to steer thoughts of taxation from being simply a matter of numbers and finance (which are, at best, boring to most people and at worst nightmarish to those who are at war with maths and structures), it is best that we take a short detour into the history of taxation – in particular, Western and American taxation because much of modern taxation was based on them – so there will be an understanding of the evolution of this function, and the fact that it’s MORE than just numbers and a reason to be angry at one’s government. It is something that inspires change and is likewise inspired by change.

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