Basics of the American tax system Forrest Davis, E.A. Davis Tax Services, LLP
Basics of the American tax system
Forrest Davis, E.A.
Davis Tax Services, LLP
Taypayers are confused
• The current political environment has confused many taxpayers
• Taxes: What is fair?
Quick history
• Income was 1st taxed for the Civil War, but the Supreme Court rejected it
• 16th Amendment created current income tax in 1913
• Enrolled Agents were instituted in 1884
Goals of the income tax
• Raise money to pay for government services
• Provide economic incentives for public policy
Economic incentives
• Mortgage interest: encourage home ownership
• Deduction for donations: encourage giving to charity
• Capital gains: encourage investing in businesses
• Salary deferral: encourage saving for retirement
• Depreciation: encourage businesses to buy equipment to be more productive
Progressive tax
• Higher income citizens should pay more tax
• Poorest citizens should be exempt• 6 tax brackets from 10% to 35%• Highest bracket is for income over
$388,350
Taxpayers today
• 46% of American households pay no income tax
• 1/4th of households still would pay no tax if all tax breaks were cut
• About half have no tax because of tax breaks
• Top 1% of filers pay 31% of total taxes
Earned Income Tax Credit
• 26 million filers receive Earned Income Credit (2009)
• "Negative income tax" for low-income workers
• Refundable -- get money from taxes instead of paying
• Many also get Child Tax Credit
How the US stacks up
• Americans pay less taxes than many other countries
Where does the money go?
• Mandatory spending 57%– Social Security 21%– Medicare 13%– Medicaid 7%– Other programs 17%
An alternative: Flat tax
• Premise: Everyone should contribute• Everyone should be equal
– Opposite of current progressive approach• Would eliminate nearly all tax breaks
– No incentives for public policy
An alternative: National Sales Tax• Often tied to eliminating income tax• Common in Europe• Sales tax hits lower income citizens
harder• Economic ups & downs affect sales tax
revenues
An alternative: Tax businesses more
• Premise: businesses generate the money for everybody
• Higher taxes could make companies move out of US
• Higher taxes might force some companies out of business
What's the answer?
• Congress doesn't know• No easy answers• Lots of different views
Davis Tax Services, LLP
• C. Forrest Davis, EA• Tax Planning, Preparation &
Representation• www.davis-tax.com• 4402 E. Brott St.• Tucson, AZ 85712