Taxing

I. Sources of Federal RevenueA. Key Constitutional Provisions

1. Tariffs must be uniform. 2. Direct taxes must be apportioned to the states on the

basis of population.

B. In the past: 1. Tariffs and excise taxes were the major sources of

federal revenue. 2. Income tax of 2% passed in 1894 was ruled

unconstitutional by Supreme Court (Pollock v. Farmers' Loan and Trust Company-1894) since it was not proportional to state populations. Passage of 16th Amendment in 1913 took care of that problem.

Current Income Tax Brackets

C. Presently (2010 figures): 1. Individual income taxes (progressive taxes):

41.6% of all federal revenue. 2. Social insurance taxes: 40% of all federal

revenue. 3. Corporate taxes: 8.9% of all federal revenue. 4. Excise taxes: 3% of all federal revenue. 5. Other: 6.5%

D. When revenue does not meet expenditure, we borrow money.

D. Tax revolt. 1. California's Prop 13 in 1975 was a stimulus to the tax

revolt movement. It spread throughout the states. 2. Reagan’s tax cuts in 1981. 3. Bush’s “no new taxes” promise as a symptom of how

politically volatile the tax issue had become. 4. Two additional (and higher) tax brackets added during

Clinton’s 1st term. 5. Tax cut proposals by both parties in 1997. 6. With surpluses of late 90s/early 00s, Republicans

preferred tax cuts, whereas Democrats preferred bolstering the Social Security system.

7. $1 .36 trillion tax cut (over 10 yrs.) in Bush’s first year, 2001.

Tax systems/typesIncome TaxProgressive: Those with higher incomes pay a higher proportion of income.

(We have this currently)Regressive: Those with lower income pay the same or greater proportion of

their income. (Flat tax)

Consumption TaxSales tax: Imposed at the point of sale (Some have suggested increasing it

and replacing income tax with it).Value Added Tax (VAT): Tax is paid on goods and services at each stage of the

production process. (Results in more expensive goods when consumer finally gets them).