Indirect taxes In USA

Economics report
BBA-IT (A)

Indirect taxes in USA

Prepared By:

Vinitha Reddy : 18031022033

S. Priyanka : 18031022066
Timothy Wilfred Dsilva : 18031022087
Tanish Changia : 18031022086
Aditya Agrawal : 18031022098

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 Indirect taxes In USA

Introduction

The United States does not have a national sales tax system. Rather, indirect taxes are imposed on a
subnational level. Each state has the authority to impose its own sales and use tax, subject to US
constitutional restrictions. In many states, local jurisdictions (e.g. cities and counties) also impose
sales and use taxes. Depending on the jurisdiction, taxpayers may be subject to property taxes,
excise taxes, business license responsibilities and unclaimed property reporting requirements.

Unlike direct taxes such as income tax or corporate tax that taxpayers pay directly to the
government, consumers pay indirect taxes when they buy goods and services. Intermediaries such
as retailers collect indirect taxes from consumers who bear the tax’s ultimate economic burden.
Sales tax, value added tax (VAT), and goods and services tax (GST) are examples of indirect taxes
th at are applied to the sale of goods and services.

Definition of Indirect Tax

Indirect Tax is referred to as a tax charged on a person who consumes the goods and services and is
paid indirectly to the government. The burden of tax can be easily shifted to the another person. The
tax is regressive in nature, i.e. as the amount of tax increases the demand for the goods and services
decreases and vice versa. It levies on every person equally whether he is rich or poor. The
administration of tax is done either by the Central Government or the State government.There are
several types of Indirect Taxes, such as:

• Central Sales Tax

• VAT (Value Added Tax)
• Service Tax
• STT (Security Transaction Tax)
• Excise Duty
• Custom Duty
• Agricultural Income Tax

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History of taxes in USA

Before 1776, the American Colonies were subject to taxation by the United Kingdom, and also
imposed local taxes. Property taxes were imposed in the Colonies as early as 1634. In 1673, the
English Parliament imposed a tax on exports from the American Colonies, and with it created the
first tax administration in what would become the United States. Other tariffs and taxes were
imposed by Parliament. Most of the colonies and many localities adopted property taxes.

Under Article VIII of the Articles of Confederation, the United States government did not have the
power to tax. All such power lay with the states. The United States Constitution, adopted in 1787,
authorized the federal government to lay and collect taxes, but required that some types of tax
revenues be given to the states in proportion to population. Tariffs were the principal federal tax
through the 1800s.

By 1796, state and local governments in fourteen of the 15 states taxed land. Delaware taxed the
income from property. The War of 1812 required a federal sales tax on specific luxury items due to
its costs. However, internal taxes were dropped in 1817 in favor of import tariffs that went to the
federal government. By the American Civil War, the principle of taxation of property at a uniform
rate had developed, and many of the states relied on property taxes as a major source of revenue.
However, the increasing importance of intangible property, such as corporate stock, caused the
states to shift to other forms of taxation in the 1900s.

Income taxes in the form of "faculty" taxes were imposed by the colonies. These combined income
and property tax characteristics, and the income element persisted after 1776 in a few states. Several
states adopted income taxes in 1837. Wisconsin adopted a corporate and individual income tax in
1911, and was the first to administer the tax with a state tax administration.

The first federal income tax was adopted as part of the Revenue Act of 1861.[113] The tax lapsed
after the American Civil War. Subsequently enacted income taxes were held to be unconstitutional
by the Supreme Court in Pollock v. Farmers' Loan & Trust Co. because they did not apportion taxes
on property by state population. In 1913, the Sixteenth Amendment to the United States
Constitution was ratified, permitting the federal government to levy an income tax on both property
and labor.

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The federal income tax enacted in 1913 included corporate and individual income taxes. It defined
income using language from prior laws, incorporated in the Sixteenth Amendment, as "all income
from whatever source derived". The tax allowed deductions for business expenses, but few non-
business deductions. In 1918 the income tax law was expanded to include a foreign tax credit and
more comprehensive definitions of income and deduction items. Various aspects of the present
system of definitions were expanded through 1926, when U.S. law was organized as the United
States Code. Income, estate, gift, and excise tax provisions, plus provisions relating to tax returns
and enforcement, were codified as Title 26, also known as the Internal Revenue Code. This was
reorganized and somewhat expanded in 1954, and remains in the same general form.

Federal taxes were expanded greatly during World War I. In 1921, Treasury Secretary Andrew
Mellon engineered a series of significant income tax cuts under three presidents. Mellon argued that
tax cuts would spur growth .Taxes were raised again in the latter part of the Great Depression, and
during World War II. Income tax rates were reduced significantly during the Johnson, Nixon,
and Reagan presidencies. Significant tax cuts for corporations and all individuals were enacted
during the second Bush presidency.

In 1986, Congress adopted, with little modification, a major expansion of the income tax portion of
the IRS Code proposed in 1985 by the U.S. Treasury Department under President Reagan. The
thousand-page Tax Reform Act of 1986 significantly lowered tax rates, adopted sweeping
expansions of international rules, eliminated the lower individual tax rate for capital gains, added
significant inventory accounting rules, and made substantial other expansions of the law.

Federal income tax rates have been modified frequently. Tax rates were changed in 34 of the 97
years between 1913 and 2010. The rate structure has been graduated since the 1913 act.

The first individual income tax return Form 1040 under the 1913 law was four pages long. In 1915,
some Congressmen complained about the complexity of the form. In 1921, Congress considered but
did not enact replacement of the income tax with a national sales tax.

By the 1920s, many states had adopted income taxes on individuals and corporations.Many of the
state taxes were simply based on the federal definitions. The states generally taxed residents on all
of their income, including income earned in other states, as well as income of nonresidents earned
in the state. This led to a long line of Supreme Court cases limiting the ability of states to tax
income of nonresidents.

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The states had also come to rely heavily on retail sales taxes. However, as of the beginning of World
War II, only two cities (New York and New Orleans) had local sales taxes.

The Federal Estate Tax was introduced in 1916, and Gift Tax in 1924. Unlike many inheritance
taxes, the Gift and Estate taxes were imposed on the transferor rather than the recipient. Many states
adopted either inheritance taxes or estate and gift taxes, often computed as the amount allowed as a
deduction for federal purposes. These taxes remained under 1% of government revenues through
the 1990s.

All governments within the United States provide tax exemption for some income, property, or
persons. These exemptions have their roots both in tax theory, federal and state legislative
history,and the United States Constitution.

Taxation in the United States

The United States of America has separate federal, state, and local governments with taxes imposed
at each of these levels. Taxes are levied on income, payroll, property, sales, capital gains, dividends,
imports, estates and gifts, as well as various fees.

However, taxes fall much more heavily on labor income than on capital income. Divergent taxes
and subsidies for different forms of income and spending can also constitute a form of indirect
taxation of some activities over others. For example, individual spending on higher education can
be said to be "taxed" at a high rate, compared to other forms of personal expenditure which are
formally recognised as investments.

Taxes are imposed on net income of individuals and corporations by the federal, most state, and
some local governments. Citizens and residents are taxed on worldwide income and allowed a
credit for foreign taxes. Income subject to tax is determined under tax accounting rules, not
financial accounting principles, and includes almost all income from whatever source. Most
business expenses reduce taxable income, though limits apply to a few expenses. Individuals are
permitted to reduce taxable income by personal allowances and certain non-business expenses,
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including home mortgage interest, state and local taxes, charitable contributions, and medical and
certain other expenses incurred above certain percentages of income. State rules for determining
taxable income often differ from federal rules. Federal marginal tax rates vary from 10% to 39.6%
of taxable income. State and local tax rates vary widely by jurisdiction, from 0% to 13.30% of
income, and many are graduated. State taxes are generally treated as a deductible expense for
federal tax computation, although the 2017 tax law imposed a $10,000 limit on the state and local
tax ("SALT") deduction, which raised the effective tax rate on medium and high earners in high tax
states. Prior to the SALT deduction limit, the average deduction exceeded $10,000 in most of the
Midwest, and exceeded $11,000 in most of the Northeastern United States, as well as California and
Oregon.[5] The states impacted the most by the limit were the tri-state area (NY, NJ, and CT) and
California; the average SALT deduction in those states was greater than $17,000 in 2014.

The United States is one of two countries in the world that taxes its non-resident citizens on
worldwide income, in the same manner and rates as residents; the other is Eritrea. The U.S.
Supreme Court upheld the constitutionality of imposition of such a tax in the case of Cook v. Tait.

Payroll taxes are imposed by the federal and all state governments. These include Social Security
and Medicare taxes imposed on both employers and employees, at a combined rate of 15.3%
(13.3% for 2011 and 2012). Social Security tax applies only to the first $106,800 of wages in 2009
through 2011. However, benefits are only accrued on the first $106,800 of wages. Employers must
withhold income taxes on wages. An unemployment tax and certain other levies apply to employers.
Payroll taxes have dramatically increased as a share of federal revenue since the 1950s, while
corporate income taxes have fallen as a share of revenue. (Corporate profits have not fallen as a
share of GDP).

Property taxes are imposed by most local governments and many special purpose authorities based
on the fair market value of property. School and other authorities are often separately governed, and
impose separate taxes. Property tax is generally imposed only on realty, though some jurisdictions
tax some forms of business property. Property tax rules and rates vary widely with annual median
rates ranging from 0.2% to 1.9% of a property's value depending on the state.

Sales taxes are imposed by most states and some localities on the price at retail sale of many goods
and some services. Sales tax rates vary widely among jurisdictions, from 0% to 16%, and may vary
within a jurisdiction based on the particular goods or services taxed. Sales tax is collected by the
seller at the time of sale, or remitted as use tax by buyers of taxable items who did not pay sales tax.
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The United States imposes tariffs or customs duties on the import of many types of goods from
many jurisdictions. These tariffs or duties must be paid before the goods can be legally imported.
Rates of duty vary from 0% to more than 20%, based on the particular goods and country of origin.

Estate and gift taxes are imposed by the federal and some state governments on the transfer of
property inheritance, by will, or by lifetime donation. Similar to federal income taxes, federal estate
and gift taxes are imposed on worldwide property of citizens and residents and allow a credit for
foreign taxes.

Levels and types of taxation

The U.S. has an assortment of federal, state, local, and special-purpose governmental jurisdictions.
Each imposes taxes to fully or partly fund its operations. These taxes may be imposed on the same
income, property or activity, often without offset of one tax against another. The types of tax
imposed at each level of government vary, in part due to constitutional restrictions. Income taxes
are imposed at the federal and most state levels. Taxes on property are typically imposed only at the
local level, although there may be multiple local jurisdictions that tax the same property. Other
excise taxes are imposed by the federal and some state governments. Sales taxes are imposed by
most states and many local governments. Customs duties or tariffs are only imposed by the federal
government. A wide variety of user fees or license fees are also imposed.

A federal wealth tax would be required by the U.S. Constitution to be distributed to the States
according to their populations, as this type of tax is considered a direct tax. State and local
government property taxes are wealth taxes on real estate.

Types of taxpayers
Taxes may be imposed on individuals (natural persons), business entities, estates, trusts, or other
forms of organization. Taxes may be based on property, income, transactions, transfers,
importations of goods, business activities, or a variety of factors, and are generally imposed on the
type of taxpayer for whom such tax base is relevant. Thus, property taxes tend to be imposed on
property owners. In addition, certain taxes, particularly income taxes, may be imposed on the
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members of organizations for the organization's activities. Therefore, partners are taxed on the
income of their partnership.

With fewer exceptions, one level of government does not impose tax on another level of
government or its instrumentalities.

State variations

Forty-three states and many localities in the U.S. impose an income tax on individuals. Forty-seven
states and many localities impose a tax on the income of corporations. Tax rates vary by state and
locality, and may be fixed or graduated. Most rates are the same for all types of income. State and
local income taxes are imposed in addition to federal income tax. State income tax is allowed as a
deduction in computing federal income, but is capped at $10,000 per household since the passage of
the 2017 tax law. Prior to the change, the average deduction exceeded $10,000 in most of the
Midwest, most of the Northeast, as well as California and Oregon

State and local taxable income is determined under state law, and often is based on federal taxable
income. Most states conform to many federal concepts and definitions, including defining income
and business deductions and timing thereof. State rules vary widely regarding to individual itemized
deductions. Most states do not allow a deduction for state income taxes for individuals or
corporations, and impose tax on certain types of income exempt at the federal level.

Some states have alternative measures of taxable income, or alternative taxes, especially for
corporations.

States imposing an income tax generally tax all income of corporations organized in the state and
individuals residing in the state. Taxpayers from another state are subject to tax only on income
earned in the state or apportioned to the state. Businesses are subject to income tax in a state only if
they have sufficient nexus in (connection to) the state.

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Advantages of Indirect Tax in USA

1. Indirect tax constitutes a very huge source of revenue for government since the tax net
covers a much wider area. Unlike the direct tax which is limited to only income earners,
indirect tax does not limit itself to only a specific group of people. Whether you are an
income-earner or not, you pay indirect tax the moment you buy a taxed commodity. This is
the reason why indirect tax is considered a huge source of revenue for governments all over
the world. This is particularly important to countries where unemployment is high.
2. Paying indirect tax is not as inconvenient to the tax payer as direct tax is. The reason this is
so is simply because the tax payer often doesn’t even know that he is paying tax unlike the
direct tax where the tax payer is well aware of the fact that he is paying tax and how much
of his income is taxed.
3. Indirect taxes can be used to control the consumption of certain harmful goods. For
example, when the government wants to discourage the consumption of a harmful good such
as cigarettes, all the government does is to raise the duties (indirect tax) on cigarettes in
order to increase the price. When the price is massively increased, consumers can’t afford to
buy it like before and this therefore reduces the consumption of cigarettes. This is
considered one of the biggest advantages of indirect taxation.
4. Another advantage associated with indirect tax is the fact that it i easy to collect. Indirect tax
is collected as soon as goods are bought and sold.
5. Indirect taxes do not discourage people from working hard unlike direct taxes do. One of the
biggest disadvantages of direct tax is that it encourages people not to work hard since direct
taxes are normally progressive in nature, meaning the more income you make, the more tax
that one pays. But indirect taxes do not behave this way.
6. Indirect taxation can be a very powerful tool in protecting infant or home industries against
foreign competition. It can also be used to prevent the dumping of certain undesirable
commodities in the country. The government does this by placing very high tariffs, which is
an example of an indirect tax on imported goods. This raises the prices of these imported
goods and discourages people from consuming them. The end result is that local industries
are protected and the dumping of certain commodities in the country is mitigated.

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7. Indirect taxes are very difficult to avoid. The only time you can avoid paying indirect tax is
by refusing to buy commodities that are taxed, which is something that is pretty difficult to
achieve in the real world. The government therefore generates a lot of revenue from indirect
taxes.

DisAdvantages of Indirect Tax in USA

1. Indirect tax is regressive in nature and this is considered one of the biggest disadvantages
with it. When a tax is regressive, what happens is that the poor pay higher proportion of
their income as tax or they pay the same amount of tax as the rich. This is what indirect
taxation does to the poor. For example if the tax on a commodity is 10% of the price of the
commodity, whether you are rich or poor, you are going to pay the same amount – the same
10%. This therefore hits the poor very hard since the poor have to use a much greater
percentage of their money to pay the tax. The rich, on the other hand, barely feel the tax on
the commodity.
2. Indirect taxation normally leads to inflation – especially if it is high. Basically what indirect
tax does is that it increases the prices of goods and services. This is another very big
disadvantage of the indirect tax.
3. Another disadvantage with indirect tax is the fact that it can be very difficult for tax
authorities to project exactly how much they are going to get from tax proceeds since the
amount of money that is generated from indirect tax largely depends on the strength of
demand for the taxed commodities. And of course as we might all know, it can be quite
difficult to determine the strength of demand for certain commodities.
4. Indirect tax can negatively affect the consumption of certain types of commodities. Since the
indirect tax raises the prices of taxed commodities, it can prevent people from consuming
the taxed commodities. This is even worse for the poor or low income workers.

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Bibliography

https://en.wikipedia.org/wiki/Taxation_in_the_United_States#History

https://www.taxpolicycenter.org/briefing-book/what-are-major-federal-excise-taxes-and-how-much-

money-do-they-raise

https://www.infoplease.com/business-finance/taxes/history-income-tax-united-states

primary sources

Name - Jay

Age - 18

student of penn state university

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