Tax Analysis Paper

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Tax Analysis Paper

History of Income Taxes

To understand taxes that are imposed on individuals and companies, it helps to first look back and sees when taxes first appeared in American history. Taxation is what leads to the Boston Tea Party; this is when colonist's dumped tea instead of paying the tax burden placed on the American colonies by Great Britain.

Americans did fight for independence from British and the taxes they imposed, however, when the United States government was formed, customs and excise taxes were placed in order to supply revenue to the government. In 1863, the federal government collected the first income tax. (Roos, n.d.). There was a three percent rate on those who earned $600 to $10,000 a year. Anyone earning over $10,000 paid a higher rate. It wasn't until 1913, that income tax was a permanent part of the U.S. government.

Income Tax Brackets in the United States

The United States has six different income brackets as of 2012. They determine how much an individual or a couple pays on their income. The lowest tax bracket is for couples filing jointly and individuals. For couples, they must have joint earning of less than $17,400 and an individual must make less than $8.700 annually. Here they would both fall into the 10 percent tax bracket. Which means that they must pay 10 percent of their earnings to federal income tax.

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The middle tax bracket, which is the bracket that most taxpayers are included in. In 2012 couples filing jointly earn between $70,700 and $142,700, and individuals earn between $35,350 and $85,650. They are in the 25 percent bracket. While still considered to be in the middle class tax bracket, the tax bracket for married couple's jumps to 28 percent when they earn $142,700 through $217,450 and individuals who earn between $85,650 and $178,650. (Steensma, 2012).

In 2012, the highest tax brackets were 33 and 35 percent. For married couples filing jointly and earning between $217,450 and $388,350 and for individuals who are making from $178,650 through $388,350 they are in the 33 percent bracket. The 35 percent bracket includes couples filing jointly who earn more than $388,350 and individuals who are earning more than $388,350.

In 2012, the 15 percent tax bracket included 26 percent of all taxpayers. Less than 1 percent was included in the highest tax bracket. In the United States, less than 3 percent of taxpayers were included in the top three tax brackets which range from 28 to 35 percent.

For 2013 unless you earn more than $400,000 as a single filer and if you are a couple filing jointly who earn more than $450,000, taxes will stay the same for the near future. Tax cuts from the Bush era were extended for income levels that threshold and the American Opportunity Tax Credit, Child Tax Credit and Earned Income Tax Credit all received a five year extension. (Wang, n.d.). Appendix A is the 2013 Official Tax Bracket.

Proposals for the Fiscal Cliff

There are three proposals for the fiscal cliff:

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* Current Law: The current law goes into effect; this is where the Bush-Era tax cuts expire.

* Obama Budget: President Obama's Fiscal Year 2013 Budget Proposal is passed.

* Bush Era Cuts: The current brackets are extended; the Bush-Era tax cuts are extended.

To explain a little of each scenario the current law would put us back to the tax brackets that we knew during the Clinton Administration. These would be the highest rates for filers. If the Bush Era Cuts are extended it would be of a benefit for everyone. The last option is the Obama Budget. This one would increase rates on the highest income earners. The Current law bracket is in Appendix B, Obama FY 2013 is Appendix C and Bush Era cuts are Appendix D.

Policy options to Force Low Income People to Pay Federal Income Taxes

There have been several policy options suggested in order that would force those who are in the low income bracket to pay federal income taxes, first on the list is to cut EITC and/or the Child Tax Credit. This would most probably reduce incentives for the low income person to work and it would also increase welfare use and child poverty.

The next policy that has been suggested is to tax Social Security Benefits. This would not be a good policy as most of the elderly are on a limited income and would probably be forced to use some type of state aid to supplement what their checks would not cover.

The last suggested policy is to tax disability, veterans' and similar benefits or make students and long-term jobless individuals borrow to pay taxes on their meager incomes. ((Marr & Huang, 2012).

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All of these policies would lead to more people seeking government assistance, as they are already on a strict budget and for the government to suggest that the jobless borrow to pay taxes is pretty much ridiculous. Any of these policies would make the situations worse than what they are already.

There are members of Congress who have other policy suggests. For example, Senator Toomey (R-PA), "has proposed that the Bush tax cuts be extended with a 20 percent rate cut across-the-board". (Mickelson, 2012). With this proposal tax rates would fall in all tax brackets by the same percentage. However, this policy would mainly benefit the wealthy. Another plan would be one that has been suggested by Paul Ryan (R-WI). His proposal is to do away with the middle income tax bracket and go to a two tiered tax bracket, 10 percent for the lower income and 25 percent for higher income. Here again the wealthy would again benefit. The wealthy would see a 14.1 percent decline in their tax rate, on average, and the lower income taxpayers would see only 0.06 percent tax savings.

So with all of the tax policy suggestions, someone needs to come up with a policy that does not only benefit one group of taxpayers. In my personal opinion I would think that the lower income bracket would need the tax break more than the highest income bracket taxpayers.

Individual Taxpayers vs. Other Entities