What is Taxation and tax law?

Taxation in the United States is a complex system which
may involve payments to at least four different levels of

* Local government, possibly including one or more of
municipal, township, district and county governments
* Regional entities such as school, utility and transit
* State government
* Federal government

The federal government is now financed primarily by
personal and corporate income taxes. While it was
originally funded via tariffs upon imported goods, tariffs
now represent only a minor portion of federal income.
There are also non-tax fees to recompense agencies for
services or to fill specific trust funds such as the fee
placed upon airline tickets for airport expansion and air
traffic control. Often the receipts intended to be placed
"trust" funds are used for other purposes, with the
government posting an IOU ('I owe you') in the form of a
federal bond or other accounting instrument, then
spending the money on unrelated current expenditures.

The federal government collects several specific taxes in
addition to the general income tax. Social Security and
Medicare are large social support programs which are
funded by taxes on personal earned income. Estate taxes
are taxes on inheritance. Net long-term capital gains,
including certain types of qualified dividend income, are
taxed preferentially.

Federal excise taxes are applied to specific items such as
motor fuels, tires, telephone usage, tobacco products, and
alcoholic beverages. Excise taxes are often, but not
always, allocated to special funds related to the object or
activity taxed.

Local government is typically financed by value-based
property taxes, mainly on real estate. Additional taxes may
be in the form of fixed sales taxes. Local government fees
such as building permit fees may reflect the added capital
cost and operating costs of services such as schools and
parks. Local governments may also collect fines (parking
and traffic tickets), income tax, gross receipts or gross
payroll tax, or a portion of sales taxes (such as meal taxes)
collected by the state. In California, seeds, bulbs, starter
plants and trees obtained from a garden center are taxed if
adjudged for decorative purposes while plants for food
production are untaxed, as is food in California.

Tax Law

The federal tax code is complex. This complexity generally
arises from two factors: the use of the tax code for
purposes other than raising revenue, and the feedback
process of amending the code.

While its main intent is to provide revenue for the federal
government, the tax code is frequently used to direct the
behavior of businesses and individuals in an attempt to
achieve social, economic, and political goals. For example,
the tax law provides a deduction for mortgage interest in
order to encourage home ownership. A theoretically pure
income tax would not allow this deduction, which is not an
expense incurred for the production of income. The
allowance of the mortgage interest deduction is seen by
some as discrimination against taxpayers who rent, rather
than own, their home: the payment of rent for one's home
is not deductible. Of course in theory, landlords generate
tax savings on their mortgage interest payments, and pass
these savings on to renters.

Because the government uses the tax code as an
instrument of social policy, the code as a whole appears to
lack a coherent organizing principle. This lack of a
coherent organizing principle has become magnified over
time, due to the interplay between successive legislative
amendments and regulatory changes to the law and the
private sector responses to those amendments and
changes. For instance, suppose that Congress enacts a
tax credit to encourage a particular type of activity. In
response, a group of taxpayers who are not the intended
beneficiaries of the credit re-order their affairs, or the
superficial aspects of their affairs, to qualify for the credit.
Congress responds by amending the code to add
restrictions and target the credit more effectively. Certain
taxpayers manage to use this change to claim additional
benefits, so Congress acts again, and so on. The result is a
feedback loop of enactment and response, which, over an
extended period of time, produces significant complexity.

In general, the U.S. income tax is highly progressive, at
least with respect to individuals that earn wage income. As
of 2001, the top 1 percent of individual taxpayers paid
approximately 23 percent of all federal taxes. The top 5
percent paid approximately 39 percent, and the top 10
percent paid 50 percent of all federal taxes. The bottom 20
percent of taxpayers paid a little over 1 percent of all
federal taxes. Moreover, the progressively of the U.S. tax
system has gradually increased over recent decades. The
top 20 percent of taxpayers paid approximately 56 percent
of all taxes in 1980, and this figure gradually has risen to 65
percent, as of 2001. In recent years, however, a reduction
in the tax rates applicable to capital gains has significantly
reduced the income tax burden on non-wage income. In
this regard, the general structure of the U.S. tax system
has begun to resemble a partial consumption-tax regime.t
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