Tax court, United States,
Is a federal court that and les disputes involving income, estate, gift, and other taxes. Taxpayers who cannot reach an agreement with the Internal Revenue Service may file a petition with the U.S. Tax Court. The court has offices in Washington, D.C., but it holds sessions at locations throughout the country for the convenience of taxpayers.Taxpayers
may choose to take a case involving $10,000 or less to the court’s Small Tax Division. This division provides simplified procedures for handling cases, and its decisions are final. All other Tax Court rulings may be appealed to the U.S. Court of Appeals and then to the Supreme Court of the Unites States.
The Tax Court was established in 1924 as the U.S. Board of Tax Appears. It received its present name in 1969.
Taxation is a system of raising money to finance government services and activities. Governments at all levels-local, state, and national-require people and businesses to pay Taxes. Governments use the tax revenue to pay the cost of police and fire protection health programs, schools, roads, national defense, and many other public services.
Taxes are as old as government. The general level of taxes has varied through the years, depending on the role of the government. In modern times, many governments-especially in advance industrial countries—have rapidly expanded their roles and taken on new responsibilities. As a result, their need for tax revenue has become great.Through the years
, people have frequently protested against tax increase. In these situations, taxpayers have favored keeping services at current levels or reducing them. Voters have defeated many proposals for tax increases by state and local Governments.
Governments levy many kinds of taxes. The most important kinds include property taxes, income taxes,
and taxes on transactions. Property taxes
are levied on the value of such property as farms, houses, stores, factories, and business equipment. The property tax first became important in ancient times. Today, it ranks as the chief source of income for local governments in the United States and Canada. Most states of the United States and provinces of Canada also levy property taxes. Property taxes are called direct taxes
they are levied directly on the people expected to pay them.Income taxes
are levied on income from such sources as wages and salaries, dividends, interest, rent, and earnings of corporations. There are two main types of income taxes--individual income taxes and corporate income taxes.
Individual income taxes, also called personal income taxes,
are applied to the income of individuals and families. Corporate income taxes are levied on the earnings of estates and trusts. Income taxes generally are considered to be direct taxes.
Most nations in the world levy income taxes. In the United States, income taxes are levied by the federal government, most state governments, and some local governments. Many people and businesses in the United States also pay special income taxes that help fund Social Security programs. These taxes are known as Social Security contributions or payroll taxes.
In Canada, income taxes are levied by the federal government and by the country’s 10 provincial governments.
Taxes on transactions
are levied on sales of goods and services and on privileges. There are three main types-general sales taxes, excise taxes, and tariffs.
General sales taxes apply one rate to the sales f many different items. Such taxes include state sales taxes in the United States and the Federal sales tax in Canada. The value-added tax
is a general sales tax levied in France, The United Kingdom, and other European countries. It is applied to the increase in value of a product at each stage in its manufacture and distribution.
Excise taxes are levied on the sales of specific products and on privileges. They include taxes on the sales of such items as gasoline, tobacco, and alcoholic beverages. Other excise taxes are the license tax, the franchise tax and the severance tax.
The license tax is levied on the right to participate in an activity, such as selling liquor, getting married, or going hunting or fishing. The franchise tax is a payment for the right to carry on the processing of natural resources, such as timber, natural gas, or petroleum.
Tariffs are taxes on imported goods. Countries can use tariffs to protect their own industries form foreign competition. Tariffs provide protection by raising the price of imported goods, making the imported goods more expensive than domestic products.
General sales taxes and taxes on gasoline and other products are called indirect taxes
because they tax a service or privilege instead of a person. Manufacturers and business owners pay these taxes, than add the cost to the prices they charge. These taxes may be called shifted taxes
because manufactures and business owners shift the cost of the tax their customers.Other taxes
include estate taxes, inheritance taxes
, and gift taxes.
An estate tax is applied to the value of property before it has been given to heirs. An inheritance tax is levied on the value of property after it has been given to heirs. A gift tax is applied to the value of property that is given away during a donor’s lifetime. The donor pays the tax.
In the United States, the federal government and some state governments levy estate and gift taxes. Only state governments levy inheritance taxes. In Canada, only the province of Quebec levies gift and inheritance taxes. Canada has no estate taxes.
A good tax system must satisfy several general principles of taxation. The main principles include productivity, equity, and elasticity. Productivity.
The chief goal of a tax system is to generate the revenue a government needs to pay its expenses. When a tax system produces such revenue, it satisfies the principle of productivity. If a tax system fails to produce the needed revenue, government may have to ad to its debt by borrowing money.Equity.
Most people agree that a tax system should be equitable (fair)
to the taxpayers. Economists refer to two kinds of equity-horizontal and vertical.
Horizontal equity means that taxpayers who have the same amounts of income should be taxed at the same rate. Vertical equity implies that wealthier people should pay proportionately more taxes than pooper people. This is sometimes called the principle of ability to pay.
Governments often try to achieve tax equity by making their taxes progressive.
A progressive tax has a rate that depends on the sum to which it is applied. The rate increases as that sum increases. For example, the U.S. individual income tax is a progressive tax because it applies a higher rate to larger taxable incomes than it does to smaller ones.Elasticity.
a tax system should be elastic (flexible)
so that it can satisfy the changing financial needs of a government. Under an elastic system, taxes help stabilize the economy. For example, taxes increase during periods of economic growth and thus help limit inflation (
rapid price increases). Increasing taxes would leave less money for consumers to spend to send process up. Similarly, taxes decrease during a decline in economic activity to help prevent a recession. This action would leave consumers more money to spend and encourage economic growth.Other principles of taxation.
People agree that taxes should be convenient and easy to pay, and that they should be inexpensive for governments to collect. In addition, taxpayers should know in advance when a tax has to be paid, so that they can save enough money to cover the payment.
Some economists believe a tax system should also satisfy the principle of neutrality
. According to this principle, tax laws should not affect taxpayers’ economic decision, such as how to spend, save, or invest their money. But other economists believe a tax system must defy the principle of neutrality to achieve tax equity or to stabilize economic growth. Still other economists believe a tax system should play an active role in redistributing wealth. They support taxing the wealthy at highly progressive rates and using the collected revenue to finance services for the poor.
The Constitution of the United States gives Congress the sole right to levy federal taxes. Congress first used its tax powers in 1789, when it began to levy a tariff. Tariffs were the chief sources of federal revenue until the outbreak of the American Civil War in 1861. Then the cost of the war prompted the government to levy a series of excise taxes and other new taxes.
In 1894, the federal government levied a tax on individual incomes. But the tax was abolished in 1895 because it violated a section of the Constitution that required any direct tax to beapportioned (divided) among the states according to population. In 1913, the 16thAmendment removed this restriction. Later that year, the first modern income tax took effect.
During the early 1900’s, the income tax became the main source of federal revenue. Local governments relied chiefly on property taxes. State governments also depended heavily on property taxes during the early 1900’s. But by the 1930’s, state governments received a rapidly growing percentage of their tax revenue from income taxes and sales taxes.
During the Great Depression of the 1930’s, the role of the federal government grew tremendously. The new Deal program of President Franklin D. Roosevelt greatly increased federal services and activities in order to help bring economic relief to the country (see New Deal).
The federal government continued to expand its activities during and after World War II (1939-1945). As a result, the nation’s tax system also grew to pay for the new federal programs. For example, during the 1920’s, revenue from local taxes was about half of the total U.S. tax revenue. But today, local taxes account for only about a sixth of the country’s tax revenue, while federal taxes account for about two-third of the total. The main federal taxes are individual and corporate income taxes and Social Security contributions. Some revenue from these taxes goes to state and local governments to finance such project as road building and public housing.