The United States Tax System

1. The United States Tax System

2. Corporate Individual International Company Taxes Investment Tax Expatriate Tax Sales Tax

3. Do Now: Why Tax? Group Activity • Background: • In a very unusual act of bipartisanship, the members of Congress have agreed to wipe the slate clean and reinvent the tax code. As part of this unprecedented act, Congress has invited focus groups to Washington D.C. to share in the development of a new and improved tax code for the United States. • Your Task: • Propose a new tax code for Individual, Corporate, and International Business • Identify and describe the implications of your choices • Prepare to defend your choices and describe how each citizen of the U.S. will benefit from the new tax code. • Refer to worksheet to complete activity.

4. History of Taxation in the United States • In United States, the tax system evolved dramatically through the nation's history. • Tariffs provided the main source of revenue for the government. • New taxes were often introduced during times of war to raise additional revenue, and they were generally allowed to expire once the war was over. • Taxation in the United States can be traced to the colonists, when they were heavily taxed by Great Britain on many things from tea to legal and business documents that were required by the Stamp Tax. • Most colonists objected to this form of taxation, since they had no political voice or input about the creation of new taxes, giving rise to the term "taxation without representation.“

5. History of Taxation in the United States • Since the King of England ignored demands by the colonist to abolish taxes, some colonists participated in protests such as the Boston Tea Party. However, that is not the only stamp act that existed in America's history.  • Toward the end of the 1700’s, after the colonies obtained their independence from Britain, Congress passed the Stamp Act of July 6, 1797, that levied taxes on wills, personal estates, and the transferred possessions of the deceased. Estate and so-called death taxes were some of the earliest additions to the tax code. The tax only lasted 5 years, and was repealed in 1802. 

6. History of Taxation in the United States Income Taxes in America • The first income tax was created in 1861 during the Civil War as a mechanism to finance the war effort. • Congress passed the Internal Revenue Act in 1862 which created the Bureau of Internal Revenue, an eventual predecessor to the IRS. The Bureau of Internal Revenue placed excise taxes on everything from tobacco to jewelry. However, the income tax did not last and was not renewed in 1872.

7. History of Taxation in the United States • In 1894 Congress passed the Wilson-Groman tariff which was an income tax at the rate of 2% for income over $4,000 but it was overturned by the Supreme Court in 1895. • In early 20th century the income tax enjoyed renewed support, and in February of 1913 the Sixteenth Amendment was ratified to the Constitution, thus granting Congress the power to collect taxes on personal income. The new system collected the income tax at the source, it is done today, where taxes are initially withheld before the income reaches the recipient. • In 1914 The Bureau of Internal Revenue released the first income tax form, called Form 1040. This still remains the main income tax form and it has been re-issued almost every year since then.

8. The Bush Tax Cuts The Economic Growth and Tax Relief Reconciliation Act of 2001 Jobs and Growth Tax Relief Reconciliation Act of 2003 First, the evolution of taxes… The U.S. has a progressive income tax system, which means that lower-income taxpayers pay a lower percentage of their income than do higher-income taxpayers. For example, those with income up to $100,000 might pay 15% of their income; those with income from $100,001 to $250,000 might pay 28%; and those with income over $250,000 pay 35%. Those reporting under $30,000 might not pay any tax at all.

9. The Bush Tax Cuts The Process • President Bush and the Congress voted to reduce the tax percentage rates from those of a previous administration. • Taxpayers from top to bottom have paid a lower income tax rate for about 10 years. • That the Bush administration changed the income tax rates was not unusual; income tax rates have moved up and down numerous times for various reasons under both Democrat and Republican Presidents.

10. The Bush Tax Cuts The Process • To secure the votes required to pass the tax rate reduction, the Bush administration agreed to a time limit; the rates would remain at the lower level for a specific time period, subject to renewal. • The law establishing the lower rates is set to expire at the end of this year (Dec.31, 2011). • Unless an agreement is reached, the tax rates will return to the levels at which they were prior to the reduction.

11. The Bush Tax Cuts The Economic Growth and Tax Relief Reconciliation Act of 2001 TTYN: Working with your neighbor, answer the following questions • Extending the current tax rates is a “tax cut for the rich. • Failing to extend the rates will result in a tax increase • Extending the current tax rates will not “cost” the government $700 billion (estimate). • Extending the current tax rates will add $700 billion to the federal deficit

12. The Bush Tax Cuts Proponents of the Bush Tax Cuts ''By ensuring that Americans have more to spend, to save and to invest, this legislation is adding fuel to an economic recovery,''  - President George Bush Conservatives believe extending the tax cuts is key to fostering job growth and healing a wounded U.S. economy. Many economists believe that it doesn’t make sense to raise any federal taxes during the uncertain economy we are struggling through. In other words, the more money we leave in private hands, the quicker economic recovery will happen Needed to boost investor confidence and create jobs Reduce the uncertainty in America and help small businesses Not extending the Bush Tax cuts would clearly increase taxes on the American people

13. Obama’s Takes Action Do Now: What will President Obama do about the Bush Tax cuts? "the right thing to do" – President Obama • Obama extends Bush Tax cuts for two years for all earners -- both those making above and below $250,000 annually, while also continuing current tax rates on dividends and capital gains, also for two years. • In addition, the estate tax, which expired in 2009, would be temporarily set at 35 percent with a $5 million exemption, while extended unemployment benefits would continue for 13 months. • Obama also said that negotiators had agreed to a one-year, 2-percent cut in the payroll tax for all workers. 

14. The Impact of the Bush Tax Cuts

15. The Impact of the Bush Tax Cuts

16. The Impact of the Bush Tax Cuts

17. Corporate Taxes • According to the CBO - The corporate income tax is a significant part of the United States’ tax system. CBO – Congressional Budget Office • Federal corporate income tax revenues in 2004 were $189.4 billion, or 1.6 percent of gross domestic product (GDP); 2010 147B and 1%; 2011 266B and 1.8% • TTYN: Why do we even need corporate taxes? • Revenues, Revenues, Revenues • Acronym that you should know (OECD) The Organization for Economic Co-operation and Development

18. Revenues, Revenues, Revenues

20. One reason revenues are so low

21. OMBINED CORPORATE TAX RATES First Name Last Name Email Address Zip Code • Download

22. Small Group Activity • If you were establishing a new business whose products would be produced and sold worldwide, would you set it up in the United States? If not, what country, from a purely economic standpoint would you select? • Do you agree or disagree with the following statement? Please explain • Resolved - “From a purely economic standpoint, it makes no sense to tax corporations at all, because only people pay taxes, not legal entities. The corporate tax is paid by customers in terms of higher prices, by suppliers in terms of lower volumes of business, by employees in terms of lower wages and by stockholders in terms of lower returns.” • Read the following statement and respond. • Resolved - “Countries realized they were losing business — and jobs — to countries with lower rates; so most countries have been reducing their corporate-tax rates to attract new businesses and global firms.” • Response: In light of the previous statement. What should the U.S. do and why?

23. Obama Administration Response: “The Obama administration has said that any corporate-tax rate reduction must be "revenue neutral," by which it means that rates can only be lowered if corporate "loopholes" are closed. It is true that some companies do benefit from certain deductions that have little or no economic benefit (except to the companies); hence, eliminating the "loophole" and reducing the corporate rate by an equivalent amount would be a tax-revenue wash. There are other so-called "loopholes," such as accelerated depreciation and foreign-tax deferral, which, if eliminated, would do far more economic damage by discouraging new investment and job creation than any benefit from the short-term revenue gain that might be obtained by their elimination”

24. Partisan Politics “We are not going to raise taxes on the American people. We’re not going to raise taxes on the very people that we expect to reinvest in our economy and to help grow jobs,” - John Boehner, R-Ohio, said.  President Barack Obama is expected to seek a new base tax rate for the wealthy to ensure that millionaires pay at least at the same percentage as middle income taxpayers. The "Buffett Rule" for Warren Buffett, the billionaire investor who has complained that rich people like him pay a smaller share of their income in federal taxes than middle-class taxpayers.