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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 the supposed corruption of the government.

Having said that, we’re going to take a look at federal taxation in the United States of America: what it’s really about, how it currently works, and the many ways through which we are taxed by our federal government. By looking at and understanding these, we may be able to judge for ourselves what is and is not fair about our current federal tax codes (because the federal taxes are of course there to ensure that the whole of the American people are protected and served properly by the government with the best of their ability), giving us the power to make educated suggestions for making things better.

So the first thing we would look at would be the current United States Tax Code. The current United States Tax Code is the Internal Revenue Code of 1986 – as we all know, the federal tax laws are handled by an arm of the Treasury that we know as the Internal Revenue Service or the IRS – it is also known as title twenty-six of United States Code. The Internal Revenue Code of 1986 is very difficult to master in one go; a very complex law, the Internal Revenue Code of 1986 is the way it is now because it has functions that are beyond that of generating revenue for the federal government and because it requires a sort of process that allows it to receive feedback, an essential part of democracy because it gives people the power to have the code amended or changed.

Of course, despite the “functions that are beyond that of generating revenue”, we have to remember that the current Federal Tax Code is still primarily about raising revenue. Still, wouldn’t hurt to know more about the “functions that are beyond that of generating revenue”. The Internal Revenue Code of 1986 has public policy goals that they wish to achieve by means of creating tax rules that favor certain social, economic and political statuses. Examples include the deductions of mortgage interest expense on debt that primary residences have. Couple this with the rule that individuals who rent their homes (whether the property is a house, condominium or apartment) would not be allowed deductions for their rent, and you have a system that encourages more Americans to own their own home so that they would not have to pay a substantial amount for domestic property that they own. In short, the Internal revenue Code of 1986 as a tax system of America not only raises revenue for the federal government but also encourages certain activities by means of credits and deductions.

Of course, this system has some opposition, as there seems to be little unity and organization with all these seemingly scrupulous provisions and subclauses on top of it having a degree of unfairness in terms of favored statuses and actions. Furthermore, every time there is a change in the law and legislation, there would be a snowball of tax policy amendments that would add yet more subclauses to the code – making it more confusing and harder to understand by the layman. In many ways, the Internal Revenue Code of 1986 has stuck itself in a kind of cycle of actions and reactions that may eventually get the taxpayers lost in a sea of paperwork (in an attempt to keep up with provisions, credits and the like). Still, as was mentioned before, if enough of the people understand how this works, perhaps a solution and alternative code may be worked out in order to breakout of this seemingly endless tax policy amendments brought about by the apparently arbitrary favor of the federal government.

Departing from that, we go on to discuss one of the major elements of taxation. Remember much of the issues of taxation stem from either one or both of these questions: “What is being taxed?” and “Who is paying the taxes?” So now, let us take a look at who’s paying the federal taxes (because while we may do it indirectly sometimes, there are those who don’t pay taxes because of exemptions – which shall be tackled later) and how much they are paying. At the moment, there are about one hundred and seventeen million taxpayers in the United States of America – a mere fraction of the entire population of the nation. Most of them are individuals who work and earn a specific amount of money annually.

Income tax is, of course, one of the important means of acquiring revenue for the federal government and, currently, it affects people of various income levels. Despite how people feel about having to pay the income taxes, however, there is a semblance of fairness in that the income tax system at this time is progressive – that is to say, the smaller an individual’s income is, the less percentage of their income they would have to pay. The tax rates are determined by tax brackets which are, in turn, indexed to wage inflation – albeit the indexing is rarely accurate. Still, this means that once an individual’s income shoots up to the next bracket, he or she will be subject to the rates paid by that particular bracket. Of course, there is is the matter of alternative income tax, which is for people who owe personal income tax (pertaining to compensation unrelated to ordinary payroll) or corporate income tax. This will be discussed in a different article.

Currently (that is, 2008), income tax brackets for a single person’s income is as follows: those earning eight thousand and twenty-five dollars and below have a marginal tax rate of ten percent, while those earning income from eight thousand and twenty-six dollars to thirty-two thousand five hundred and fifty dollars are required to pay fifteen percent. Twenty-five percent would be the marginal tax rate levied on income between thirty-two thousand five hundred and fifty dollars and seventy-eight thousand eight hundred and fifty dollars, while twenty-eight percent is levied on incomes between seventy-eight thousand eight hundred and fifty-one and one hundred and sixty-four thousand five hundred and fifty dollars. Incomes that range from a hundred and sixty-four thousand five hundred and fifty-one dollars and three hundred fifty-seven thousand and seven hundred dollars are levied a marginal tax rate of thirty-three percent. Thirty-five percent marginal tax rate is levied on single individual incomes of three hundred fifty-seven, seven hundred and one, and above. Even then, these rates could be modified be means of the various different exemptions (that include civil status, which will be discussed much later).

While this may seem disproportionate to those who earn a substantial amount of money every year, it has to be said that in terms of economic percentages, the progressive system of income taxation could bee seen as more just than a flat rate tax system (because, if one really thinks about it, the ratio of income left would still be vastly different when applied to different amounts). And, taking into consideration the matter of net wealth (which involves not only income, but real estate, stocks, cars and the like), this particular tax system evens out.

Of course, tax distribution is also affected by other things such as legal tax avoidance – because once we understand how the system works, we can actually use it to our advantage without getting on the wrong side of the law. After all, as soon as we recognize how certain statuses are being favored in terms of deductions, then we can find ways and loopholes that would allows us to fall under the category of that particular status. An example would be taking on the status of the head or breadwinner of the family, which entitles you to different tax bracket system. (To be continued in next article)