Income tax

An income tax is a tax levied on the financial income of persons or of corporations. Various income tax systems exist, ranging from a flat tax to a progressive tax system. A tax levied on the income of companies is often called corporate tax, corporate income tax or corporation tax. Individual income taxes generally tax the total income of the individual (with some deductions permitted), while corporate income taxes often tax net income, the difference between gross receipts and expenses.

History

The income tax was first introduced in Britain by William Pitt the Younger in his budget of December 1798 to pay for weapons and equipment in preparation for the Napoleonic wars. Pitt's new graduated tax began at a levy of 2d in the pound (0.8333%) on incomes over £60 and increased up to a maximum of 2s (10%) on incomes of over £200. Pitt hoped that the new income tax would raise £10 million but actual receipts for 1799 totalled just over £6 million.

Income tax was levied under 5 schedules—income not falling within those schedules was not taxed. The schedules were:

• Schedule A (tax on income from UK land)
• Schedule B (tax on commercial occupation of land)
• Schedule C (tax on income from public securities)
• Schedule D (tax on trading income, income from professions and vocations, interest, overseas income and casual income)
• Schedule E (tax on employment income)

Later a sixth Schedule, Schedule F (tax on UK dividend income) was added.

Pitt's income tax was levied from 1799 to 1802, when it was abolished by Henry Addington during the Peace of Amiens. Addington had taken over as prime minister in 1801, after Pitt's resignation over Catholic Emancipation. The income tax was reintroduced by Addington in 1803 when hostilities recommenced, but it was again abolished in 1816, one year after the Battle of Waterloo.

Finally, income tax was reintroduced in 1842 by Sir Robert Peel. Peel, as a Conservative, had opposed income tax in the 1841 general election, but a growing budget deficit required a new source of funds. The new income tax, based on Addington's model, was imposed on incomes above £150.

The income tax has changed over the years. Originally it taxed a person's income regardless of who was beneficially entitled to that income, but now a person only owes tax on income to which he or she is beneficially entitled. Most companies were taken out of the income tax net in 1965 when corporation tax was introduced.

Also the Schedules under which tax is levied have changed. Schedule B was abolished in 1988, Schedule C in 1996 and Schedule E in 2003, though the Schedular system and Schedules A, D and F still remain.

Rates peaked in the late 1970s at 99%.

Income tax in the UK

UK Income Tax and National Insurance as a % of Salary (2004-2005)

UK Income Tax and National Insurance (2004-2005)

Income tax is an annual tax, and is reimposed each year in the annual Finance Act.

The British income tax has a number of bands: 10% (lower rate), 20% (basic rate for interest), 22% (basic rate), 32.5% (higher rate for UK dividends) & 40% (higher rate for other income). There are also a number of allowances allowed before the tax bands apply.

History of income tax in the USA

The powers of Congress, and the limitations set upon those powers, are set forth in Article I of the United States Constitution. Section 8 specifies both the power to collect, "Taxes, Duties, Imposts and Excises," and the requirement that, "Duties, Imposts and Excises shall be uniform throughout the United States."

However, the Constitution specifically limited Congress' ability to impose direct taxes. It was thought that head taxes and property taxes (slaves could be taxed as either or both) were likely to be abused, and that they bore no relation to the activities in which the federal government had a legitimate interest. The fourth clause of section 9 therefore specifies that, "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken."

The courts have generally held that direct taxes are limited to taxes on people (variously called capitation, poll tax or head tax) and property. (Penn Mutual Indemnity Co. v. C.I.R., 227 F.2d 16, 19-20 (3rd Cir. 1960).) All other taxes are commonly referred to as "indirect taxes," because they tax an event, rather than a person or property per se. (Steward Machine Co. v. Davis, 301 U.S. 548, 581-582 (1937).) What seemed to be a straightforward limitation on the power of the legislature based on the subject of the tax proved inexact and unclear when applied to an income tax, which can be arguably viewed either as a direct or an indirect tax.

In order to help pay for its war effort in the American Civil War, the United States government issued its first personal income tax, on August 5, 1861 as part of the Revenue Act of 1861 (3% of all incomes over US $800; rescinded in 1872). Other income taxes followed, although a 1895 Supreme Court ruling, Pollock v. Farmers' Loan & Trust Co., held that taxes on capital gains, dividends, interest, rents and the like were unapportioned direct taxes on property, and therefore unconstitutional.

The Sixteenth Amendment to the United States Constitution specifically gave Congress power to tax incomes. It states: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

In 1913 the tax rate was 1 percent on taxable net income above $3,000 ($4,000 for married couples), less deductions and exemptions. It rose to a rate of 7 percent on incomes above $500,000.

During World War I the top rate rose to 77 percent; following the war, the top rate was scaled down (to a low of 25 percent).

During the Great Depression and World War II, the top income tax rate rose again, reaching 91% during the war; this top rate remained in effect until 1964.

In 1964 the top rate was decreased to 70% (1964 Revenue Act), and then to 50% in 1981 (Economic Recovery Tax Act or ERTA).

The Tax Reform Act of 1986 reduced the top rate to 28%, at the same time raising the bottom rate from 11% to 15% (in fact 15% and 28% became the only two tax brackets).

During the 1990s the top rate rose again, standing at 39.6% by the end of the decade.

In 2001 the top rate was cut to 35% and the bottom rate was cut to 10% by the EGTRRA, or Economic Growth and Tax Relief Reconciliation Act.

In 2003 the JGTRRA, or Jobs and Growth Tax Relief Reconciliation Act, was passed, expanding the 10% tax bracket and accelerating some of the changes passed in the 2001 EGTRRA.

Pete Hendrickson wrote an interesting book on the income tax in the United States called Cracking the Code.

Joe Banister won a major court case having to do with the income tax in 2005.

Income tax in Australia

Australia uses a form of progressive income tax. The current tax-free threshold is AUD6,000 and the highest marginal rate for individuals is 47% upon that part of income exceeding AUD95,000.

As with many other countries, income taxes are withheld from wages and salaries in Australia, often resulting in refunds payable to taxpayers. A nine-digit "Tax File Number" must be quoted to employers for employees to have withholdings calculated using the various tax brackets. In the absence of this number employers are required to withhold tax at the highest marginal rate from the first dollar.

The company tax rate is a flat 30%, though through the Dividend imputation system Australian residents effectively do not pay this company income tax upon the profits distributed as dividends Australian-resident corporations. When an Australian corporation pays corporate income tax, 'franking credits' are generated and can then be applied to dividend payments at a maximum rate of 30 cents per dollar of dividend. Shareholders may then use these credits to offset their own personal income tax payable, including claiming a refund for excess credits left over after offsetting all payable income tax.

Capital gains tax in Australia is part of the income tax system rather than a separate tax. After adjusting for various discounts and concessions, assessable capital gains for a financial year are added to assessable income and tax paid upon the total.

Australia is a federation of states. Since World War II the states no longer levy any income taxes but do levy taxes including land tax, stamp duty and payroll tax.

Income tax in Sweden

Sweden has a taxation system that combines a direct tax (paid by the employee) with an indirect tax (paid by the employer). In practice, the employer provides the state with both means of taxation but the employee only sees the direct tax on his declaration form. Below is a compilation of the taxes that compose the final income tax (2003):

• Tax on "gross" income "from the employer": 32,82% (indirect, fixed)
• Pension "fee" on "gross" income: 6.95% (indirect, fixed)
• "State tax" on, "gross" income less pension tax and a "base deduction": ~32% (direct, varies by state)
• "Federal tax" on, "gross" income less pension tax and a "base deduction": 0%, 20% or 25% (direct, progressive)

Nations with no personal income tax

• Andorra
• Bahamas
• Brunei
• Cayman Islands
• Kuwait
• Monaco
• Vanuatu

US states with no personal income tax

• Alaska
• Florida
• Nevada
• New Hampshire – does have tax on interest and dividends
• South Dakota
• Tennessee – does have tax on interest and dividends
• Texas
• Washington
• Wyoming

See also

• Tax rates around the world
  • Income tax in the Netherlands
  • Individual income tax in Singapore
• Dividend imputation
• Double taxation
• Fair Tax
• Flat tax
• Lifetime income tax
• Negative income tax
• PAYE
• Progressive tax
• Social security
• Tax
• Tax return
• Tax Freedom Day
• Tax withholding in the United States
• Jock tax

External links

• TaxAlmanac - Online tax collaboration A wiki created by tax professionals with detailed information on US IRS Tax Law