The income tax in the united states is an example of a

U.S. Taxation

The U.S. tax system is set up on both a federal and state level. There are several types of taxes: income, sales, capital gains, etc. Federal and state taxes are completely separate and each has its own authority to charge taxes. The federal government doesn�t have the right to interfere with state taxation. Each state has its own tax system that is separate from the other states. Within the state there may be several jurisdictions that also charge taxes. For example, counties or towns may charge their own school taxes that are in addition to state taxes. The U.S. tax system is quite complex.

Income Tax

Income tax is probably one of the most well known forms of taxation. If any of you earn income in the U.S. you will see the deductions on your paycheck. Every person who earns income in the U.S. is supposed to pay income tax on both the federal and state level. Federal taxes include social security and FICA. Each state also has its own form of income tax that employers also withhold from your paycheck. If you earn over a certain amount, $6,750, you must file both federal and state taxes before April 15th of each year.

For more information on federal taxes, go to http://www.irs.gov.

Sales Tax

Another form of tax that you will become very familiar with is sales tax. This is the tax that is charged on your purchases, such as if you buy a pack of gum. Sales tax is a state tax and varies from state to state as well as within the state. For example, NY State Sales Tax is 7% and NJ is 3%, but Albany has 8% sales tax while Syracuse has only 7%. Within the state, municipalities have the right to raise the sales tax above the state limit. There are also other rules surrounding sales tax, such as which items are taxed and which are not. For example, in NY gum is taxed, but milk is not. In NJ food is taxed, but clothes are not. As you can see the tax system in this country is quite complex.

In addition to the many types of taxes, there are also discrepancies between individuals and businesses.

We discussed briefly last week how the different business entities were taxed. Hopefully, we can now discuss that in a little more detail. As stated above, individuals must file their income tax before April 15th. If the person has a sole proprietorship, those earnings will be included on their personal income tax form. If a person is part of a partnership, their earnings from the partnership will be included on their personal income tax form. There are no taxes on the partnership as a whole, but on the earnings passed down to the partners. Partnerships are required to file a tax return, but it is only an informational return.

Corporations are a separate legal entity and are subject to corporate tax on taxable income. Corporate tax rates are different than personal tax rates. Corporate earnings are subject to double taxation. What this means is that corporations� pay taxes on their earnings and then with after tax income they pay stockholders dividends, which are subject to capital gains tax. The dividends must be reported on the stockholder�s personal tax form and are taxed at capital gains tax rates. This is what is commonly called double taxation. I�m sure you will hear about this concept again.

Overview

In 1913, the Sixteenth Amendment to the U.S. Constitution was ratified. It states: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

Case Law Prior to the Sixteenth Amendment

Article I, Section 9 of the U.S. Constitution states: "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken." In 1894, Congress passed the Wilson-Gorman Tariff, which created an income tax of 2% on income of over $4,000. Charles Pollock contested that the tax was unconstitutional under Article 1, Section 9. As such, the Supreme Court granted certiorari to hear this issue in Pollock v. Farmers’ Loan and Trust Company, 157 US 429 (1895). 

In Pollock, the Court held that the Wilson-Gorman Tariff was unconstitutional under Article I, Section 9 of the Constitution, as the act created a direct taxation on property owners, not a tax apportioned among the states.

Passage of the Sixteenth Amendment

In 1913, the passage of the Sixteenth Amendment effectively overturned the holding in Pollock. The Revenue Act of 1913, passed after the Sixteenth Amendment's ratification, reinstated the federal income tax.

Income Tax Today

The Internal Revenue Code is today embodied as Title 26 of the United States Code (26 U.S.C.) and is a lineal descendant of the income tax act passed in 1913, following ratification of the Sixteenth Amendment. Most states also maintain an income tax, while some do not. However, all residents and all citizens of the United States are subject to the federal income tax. Not everyone, however, must file a tax return. The requirements for filing are found in 26 U.S.C. § 6011. As the largest contributor, its purpose is to generate revenue for the federal budget. In 1985 for example, the government collected over $450 billion in income tax from a total of $742 billion in total internal revenue receipts. What an individual pays in income tax is subject to what that person's income is. 

Some terms are essential in understanding income tax law. "Gross income" can be generally defined as "all income from whatever source derived;" a more complete definition is found in 26 U.S.C. § 61. Other important definitions like "taxable income" and "adjusted gross income" can also be found in 26 U.S. Tax Code Part I.

Paying the Federal Income Tax

While everyone is subject to the federal income tax, the Supreme Court has carved out possible exceptions. One example of note comes from Cheek v. United States, 498 U.S. 192, (1991). In Cheek, the petitioner was charged with failing to file a federal income tax return, violating §7203 of the Internal Revenue Code, as well as willfully attempting to evade his income taxes, violating § 7201. Cheek admitted that he did not file his returns, but testified that he had not acted willfully because he sincerely believed, based on his indoctrination by a group believing that the federal tax system is unconstitutional and his own study, that the tax laws were being unconstitutionally enforced and that his actions were lawful. The Supreme Court held that if a jury accepts Cheek's assertion that he truly believed that the Code did not treat wages as income, then the Government would not have proved that Cheek willfully violated the tax code, however unreasonable the belief might appear to a court. 

Internal Consistency Test

The Internal Consistency Test is a test that the Supreme Court created in Container Corp. v. Franchise Tax Bd., 463 U.S. 159 (1983) which states that a tax formula used by a state must "be such that, if applied by every jurisdiction, it would result in no more than all of the [entity's] income's being taxed." Basically what this means is that two states may not tax an individual for the same portion of that individuals's income. The Supreme Court upheld this test in Comptroller of Treasury of Md. v. Wynne, 575 US ___ (2015). At issue was a tax scheme in Maryland which taxed residents (here, the Wynns) for income earned via stocks owned in a corporation that does business in multiple states. Maryland taxed the Wynnes for income earned in other states, even though the Wynnes already paid taxes on that money. The Court used the Commerce Clause of the United States Constitution to justify the Internal Consistency Test, finding that Congress, not individual states, holds the the power to "regulate Commerce . . . among the several States," and that States are precluded from "subjecting interstate commerce to the burden of multiple taxation."

Corporations

Individuals are not the only ones required to file income tax returns, corporations do as well. While they are subject to may of the same rules as are individual taxpayers, they are also covered by an intricate body of rules addressed to the peculiar problems of corporations. See here for more on the corporate tax. 

Further Reading

For more on income tax, see this Northwestern Law School article and this University of Chicago Law Review article.

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