Public Finance, Foldvary

Anderson, 14, Income and payroll taxes



SEC. 26. (a) Taxes on or measured by income may be imposed on

persons, corporations, or other entities as prescribed by law.

   (b) Interest on bonds issued by the State or a local government in

the State is exempt from taxes on income.

   (c) Income of a nonprofit educational institution of collegiate

grade within the State of California is exempt from taxes on or

measured by income

California income tax law is based on federal income tax law.

This is accomplished by conforming to specific provisions of the Internal Revenue Code.

However, not all provisions of the IRC are applicable for California purposes.

California's six state income tax rates range from 1 percent to 9.3 percent.

The State also assesses a 1 percent surcharge on taxable incomes of $1 million or more.

For single and married filing separately taxpayers:

-- 1% on the first $6,622 of taxable income

-- 2% on taxable income between $6,623 and $15,698

-- 4% on taxable income between $15,699 and $24,776

-- 6% on taxable income between $24,777 and $34,394

-- 8% on taxable income between $34,395 and $43,467

-- 9.3% on taxable income of $43,468 and above.

For married persons filing joint returns and heads of households,

the rates remain the same but the income brackets are doubled.

1861 Congress placed a flat 3-percent tax on all incomes over $800.

Congress repealed the income tax in 1872.

P. 373: US Constitution prohibits direct federal taxes not apportioned in the states by population.

In 1894, Congress revised the income tax. The Act of 1894 was challenged in the Supreme Court, in the case of Pollock v. Farmer’s Loan & Trust, 157 U.S. 429, and 158 U.S. 601 (1895).

The 16th Amendment was intended to provide for an income tax, but that power was already provide by the Constitution.

"The provisions of the Sixteenth Amendment conferred no new power of taxation but simply prohibited the complete and plenary power of income taxation possessed by congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged..." S. Pacific v. Lowe, 238 F. 847 (US Dist. Ct. S.D., N.Y., 1917); U.S. 330 (1918)

The Internal Revenue Code is today embodied as Title 26 of the United States Code (26 U.S.C.)

“Income” has to involve profits, not just receipts or revenue.

The rationale of the income tax is ability to pay.

Those withe more income are able to pay a greater portion of their income in taxes.

The economic definition of income - Haig-Simmons

Consumption plus the change in net worth.

“All accretion to wealth.”

To tax economic income, the tax should be applied to all income, including unrealized gains, the rental value of owner-occupied housing, and fringe benefits, with no deductions other than for charity donations.

Since the US income tax does not do this, it implies there are other policy objectives.

We can judge the inefficiency of current income taxes by the economic income comparison.

The taxable unit in the US was at first the individual.

Since 1948, the family is the taxable unit.

Married couples with about the same income each, have a marriage penalty.

If the income tax were marriage neutral, one would pay the same tax regardless of marriage.

With a flat-rate income tax, there is no marriage penalty.

Personal income includes wages, taxable interest, dividends, alimony, business and partnership income, capital gains, distributions from retirement accounts, real estate rentals, royalties from oil etc, unemployment compensation, and social security income.

This is called “total income”.

Excluded: interest on state and local bonds, employee benefits, implicit rental income.

Then subtract adjustments: moving expenses, half of self-employment tax, alimony paid, IRA deduction. That yields adjusted gross income.

One then subtracts deductions, either itemized or the standard deduction:

$5150 for single or filing separately. $10,300 married jointly. $7550 head of household.

Itemized deductions include mortgage interest, property tax, state income tax, donations to charities. California deductions are similar but not identical.

You must decide whether you want to deduct the sales taxes you paid or your state income tax amounts.

You can deduct the amounts of sales tax you paid last year on your 2006 return that due in April. And any sale taxes you pay this year can be claimed on your 2007 return.

You may claim the amount you'll find in the sales tax tables for the state.

After that, though, it's back in the hands of Congress to continue this popular tax break.

Effect of deductibility is to lower the after-tax price of the item, thus subsidizing it.

Then subtract exemptions times $3300.

That yields taxable income.

One then obtains the tax from tax tables.

But then one has to calculate the alternative minimum tax AMT.

One then subtracts tax credits from the tax owed.

Foreign tax credit.

Low-income housing tax credits.

One then adds self-employment tax.

That is the total tax due.

One then subtracts taxes paid:

Withheld on wages, estimated tax payments, paid with extension to file.

One then also subtracts any income tax credit. EITC.

A refundable credit, created in 1975.

The credit gets phased out as income rises

which in effect inflicts a marginal tax rate of up to 40 percent.

EITC is not counted for welfare aid.

If total payments exceed total tax due, one gets a refund.

Otherwise, one pays the tax.

Some tax payments get audited.

The IRS gets some forms such as wages, but can require receipts for deductions.

The US income tax is graduated.

The marginal tax rate rises with increasing income bracket.

Each tax rate applies only to that income range.

Payroll taxes - Social Security and Medicare.

Federal Insurance Contributions Act - FICA.

The Social Security payroll tax is 12.4 percent of wages -

nominally paid equally by the employer and the employee (6.2 percent each).

The federal government has a $97,500 "cap" on taxable salary under Social Security,

but no cap for Medicare.

Social security income is reduced for income above the retirement earnings test exempt amount when the retired person is below the age of 67.

Social security for income above a base amount is subject to the income tax

If your combined income exceeds $44,000, 85% of your social security benefits are subject to income tax.

Tax reform proposals

National sales tax

Sales taxes tend to be regressive.

Value-added taxes are broad based.

“Flat tax” refers to flat-rate income tax.

Land value taxation.

There are strong vested interests in the status quo.