Principles of Taxation
This article examines the basic principles of taxation and how the current tax structure in the United Sates was first initiated. Five categories of taxes are reviewed including income, property, and sales tax, import tariffs and social program taxes. Tobacco and alcohol taxes are used to illustrate how policy makers attempt to promote social and behavioral changes along with a review of how successful these efforts have been. The evolution of e-commerce and Internet transaction taxes are also examined.
Keywords: Deduction; Earned Income; Exemption; Import Duties; Income Tax; Negative Income Tax; Property Tax; Sales Tax; Social Policy; Social Security System; Tax Administration; Taxing Entity; Tariffs; Tax Policy
Taxation is a method for governments to raise the funds necessary to pay for operations, capital building projects, and social programs. Some form of tax or another can be traced back to well over 3,000 years ago ("A Short History of Taxation," 2008). Taxes have also been levied to meet increases in demand for revenue and during World War I in the United States, Congress raised taxes to help pay for the cost of the war (Tausig, 1917). The cost for a tax administration system is carried both the governments that levy taxes and by tax payers who must maintain records of taxable activities and file their taxes with the taxing entity ("Tax Policy: Summary," 2005).
Types of Taxation
There are several forms of taxation that fall into five major categories:
- Income taxes
- Property taxes
- Consumption (Sales) taxes
- Fees, duties and tariffs, and
- Specialized taxes
Taxes on income are levied against individuals and corporations on income they derive from a wide variety of sources. Income taxes have been used by governments to generate revenue to pay for government operations. In the United States the income tax was first used to help pay for the cost of the Civil War ("Story of the Income Tax," 1944). During the 1800s several state and local governments also started taxing income in a variety of manners (Kinsman, 1909). Income is earned from a numerous sources including sale of goods or services, interest on bank accounts or bonds, sale of assets, and sale of stocks to name just a few. These sources of income can be taxed at different rates depending on the policies of the taxing entity.
Taxes on property are charged by governments on real estate holdings, business assets and equipment, and personal property owned by private citizens. Property taxes are levied by state and local governments on real estate holdings, business assets and equipment, and personal property owned by private citizens (Hale, 1985). Property tax has become the primary source of revenue for most local governments and provides more revenue than income taxes or sales taxes. In most states property taxes are collected on all property with the exception of that owned by religious and charitable organizations or on property owned by government entities. If property taxes are not paid by the owners the taxing government places a lien on the property. The past due property taxes must be paid before title of the property can be transferred and in cases where large sums of overdue taxes are owed, the government can seize the property and sell it to raise the owed taxes (Fisher, 1997).
Consumption (Sales) Taxes
Taxes on economic activities are often referred to as consumption taxes which are levied on the purchase of goods and services. Consumption taxes, which are levied on the purchase of goods and services, have been used by governments for centuries ("A Short History of Taxation," 2008). In the United States the first consumption tax was levied in 1791 on distilled spirits ("The Story of Federal Taxation," 1936). Since then most states have instituted some form of sales taxes when property, goods, or services are purveyed or transferred (Watts, 1938). The general sales tax became popular at the state level in the 1930s and in most transactions sales tax is collected by businesses and then submitted to the state departments of revenue on a periodic basis (Cornia, et al., 2000). Currently there are more than 7,000 government entities in the United States that levy some type of sales tax (Haas, 2004).
Taxes on the international movement of many products are often referred to as customs fees, duty, or tariffs ("A Short History of Taxation," 2008). The United States first started collecting duty on imported goods in 1789 when the Customs service was established. The country then needed money to pay for the formation of the new government ("A Continuing Tradition..," 2009). Prior to the implementation and maturation of the income tax programs in the United States import duties accounted for one of the largest sources of income for the government. More than $25 billion per year was collected on imported items in the early 21st century ("International Trade," 2006).
Specialized Program Taxes
Finally, there are specialized taxes that have been instituted to pay for government programs. The social security system in the United States is one of the largest programs for which a specific tax is levied. It was started as a result of the great depression of the 1920s and 1930s by President Franklin D. Roosevelt (Martin & Weaver, 2005). The program provides retirement benefits for the elderly and a wide variety of benefits for people that are disabled ("Social Security Act of 1935," 2009). The Social Security Act also established Medicare, which is the largest health insurance program in the United States ("Medicare," 2008). Although popular among benefit recipients, it has long been known that Social Security systems in several countries will face fiscal strains in the future as the number of workers paying in their social security taxes declines compared to the number of people receiving benefits (Börsch-Supan, 1991).
At the national level in the United States, the Internal Revenue Service (IRS) is responsible for collecting taxes based on income. The IRS was established under President Lincoln in 1862 to collect taxes to help pay for the Civil War. Ratified in 1913, the 16th Amendment to the Constitution gave Congress the authority to pass laws which permanently created the Federal income tax ("Brief History of IRS," 2009). The IRS is currently organized into several major divisions that focus on tax administration activities ("At-a-Glance," 2009).
In 2008, the IRS processed over 230 million tax returns ("Tax Stats," 2008) and in 2005 American tax payers paid over $2 trillion per year in Federal taxes ("Summary of Estimates," 2005). In addition, there are over $300 billion in taxes that are due to the Federal government every year that are not paid. This unpaid amount is often referred to as the tax gap ('Reducing the Tax Gap," 2005).
The collection of state taxes is most often managed by the State Departments of Revenue. A similar structure is also found in counties across the United States. The organization of state and local revenue collection functions depends on the types of taxes that are being collected. As with the federal government, tax monies collected by the tax administration agency are turned over to the treasury department or a function of thaat government entity.
Taxation is not just a means of raising money to pay for wars or government operations. Taxation has evolved into a method of implementing social policy and has been used to influence business practices as well as individual behavior (Berliant & Rothstein, 2003).
Several tax laws in the United States are designed to either provide rewards or penalties for the way corporations or individuals behave. One such tax policy is known as the negative income tax, which simultaneously helps to support poor families while providing an incentive for heads of households to work in paying jobs (Moffitt, 2003). In both of these cases, tax policy is addressing the disparate distribution of wealth and resources in modern societies (Steinmo, 2003).
The social and political debate about the design of the tax system and the purpose and effectiveness of various taxes is endless. The principles behind tax policies can be very complex as well as riddled with bias ("Understanding the Tax Reform Debate," 2005). In the United States there are opposing forces that attempt to influence tax policy for their advantage or in line with philosophical or political points of view. Corporations of course attempt to influence policy makers that they should not pay high taxes or they work to pressure local governments to reduce corporate property taxes. Republicans and Democrats are often opposed in their views on tax policy, as are religious conservatives and social liberals (Peele, 2005). There are also various non-economic social factors that influence tax payers' viewpoints about the fairness of tax laws (Ackert, Martinez-Vasquez & Rider, 2004).
Several theories have been put forth as to how and why humans consume addictive substances. Likewise, there are conflicting theories about the relationship between the cost of consuming addictive substances and patterns of consumption. Some of these theories have been adopted by individuals, social agencies, and government policy makers in efforts to use economics as a deterrent to the consumption of addictive substances. They believe that if taxes are increased on legalized addictive substances, more people will consume fewer of these substances. As a result, numerous tax laws have been passed to heavily tax tobacco and alcohol (Andersson, Bask, & Melkersson, 2006).
Tobacco Taxes for Revenue
Tobacco taxes have historically been a very good source of revenue for local, state, and federal governments. However, since the United States Surgeon General's report on the harmful health effects of tobacco use was released in 1964, governments have been steadily increasing tobacco taxes to reduce smoking and to offset the negative impact of tobacco-related illness on healthcare costs (Meier & Licari, 1997). The public sentiment towards tobacco has shifted since the 1964 Surgeon General's report, but not without considerable debate and lobbying efforts by those supporting tobacco and those opposing tobacco (Givel, 2006).
The goal of the World Health Organization (WHO) has been to get countries around the world to address tobacco usage and the health problems that result. The WHO supported the Framework Convention on Tobacco Control (FCTC), an agreement among the 192 member countries of the WHO designed to decrease tobacco use. The WHO has presented evidence that in countries that have increased the tobacco tax, support public awareness programs on the hazards of smoking, and place restrictions on where people can smoke have succeeded in reducing tobacco use (Chaloupka, Jha, et al, 2003).
Although taxes on cigarettes vary from country to country, they generally comprise thirty to fifty percent of the cost of cigarettes. Policy makers have hoped that higher taxes on cigarettes would deter people from smoking by increasing their personal smoking costs (Hoang Van, et al, 2006). There is however, debate as to the long-term effectiveness of higher taxes to reduce tobacco consumption. Since these efforts have been in place for less than two decades it may be difficult to determine if higher tobacco taxes will actually reduce consumption (Sugarman, 2003).
Alcohol Taxes for Revenue
Over the last several decades many health officials and law enforcement agencies have taken the position that alcohol causes considerable health and social problems. Like higher tobacco taxes, the effectiveness of higher alcohol taxes for the purpose of decreasing consumption is heavily debated ("Alcohol Tax," 1987). In fact, distilled spirits were among the first items to have a consumption tax in the United States ("The Story of Federal Taxation," 1936). When the impact of the rise and fall of alcohol prices on consumption have been studied no clear relationships between price and consumption could be found. It also seems that national cultures impact the consumption patterns more than price (Mäkel, Bloomfield, et al., 2008).
Even though the debate over whether or not higher alcohol taxes and thus high alcohol prices will deter consumption seems to be unsettled, there is still the debate about the economic impact of higher alcohol taxes. Producers of alcoholic beverages as well as purveyors of alcoholic beverages such as liquor stores, bars, and restaurants of course want to protect their economic interest. They do not want consumption to decrease because it will negatively impact their sales and their profits (Cook, 1982; Giesbrecht, Greenfield, et al., 2004).
Alcohol taxes have also been turned into a competitive tool for adjoining jurisdictions at the state, county, and local level. The government entities that restrict alcohol consumption or heavily tax alcohol consumption are frequently bordered or are in close vicinity to other communities or states that use liberalized consumption laws and lower taxes to attract consumers (Rinaldi, 2007). In this situation tax policy is being used to influence consumptive behavior from two different directions. One side wants to reduce consumption while the other side wants to increase consumption and thus gain tax revenues from the direct sales of alcohol as well as other products or services that may be consumed along with alcohol.
Taxation in the Internet Age
The Internet has created a tax debate at the local, state, national, and international levels. The primary issue is the collection of sales tax on e-commerce transactions that occur across international borders and state lines. There are also debates about charging taxes for Internet access services as well as web-based services provided by a variety of pay-per-use web sites (Haas, 2004; Stanton, 2007). In an effort to promote e-commerce and the growth of the Internet the United States Congress passed the Internet Tax Freedom Act (ITFA) which expired in 2003, theoretically leaving states and other jurisdictions free to pursue their own sales tax issues (Haas, 2004). However, the taxation of Internet access services met with intense opposition was again delayed by congressional action (Schroeder, 2007).
At the heart of the debate over Internet taxes is the taxation of sales across state lines in the United States. In 1992 the United States Supreme Court decided in the Quill Corporation versus North Dakota case that sellers could not be required to collect sales or use taxes for transactions unless they had physical sales locations within that state. Government entities that collect sales taxes have been opposed to this proposition even though buyers are often legally required to voluntarily submit the sales tax that is due to the state (Vadum, 2000).
As the amount of such uncollected sales tax grew into the billions of dollars, various government associations started to aggressively lobby to gain access to those tax dollars ("Alliance," 1999). Although it has been difficult to estimate lost tax dollars because of Internet sales, local governments remained steadfast in their desire and their efforts to tax Internet transactions (Meisler, 1998; Miller, 2004)....
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