Page 54 - Calculating Agriculture Cover 20191124 STUDENT - A

4-16 Percentages, Ratios and Relationships CH 4]

INCOME TAXES
Income taxes are levied by a government directly on income, as an annual tax. This tax
is applied to both the individual and business concerns. The tax is levied on the “net taxable
income.” Government entities that can and do tax income include City, States and the
Federal Government. Know also that our Federal Tax Laws are written to advantage the
individual who is in business for themselves and do not advantage the individual who only
works for a salary from an employer.
Since governments cannot operate without revenue, a tax is levied on income which is
generally based on how much money is earned in a year less any deductions government
deems appropriate. For the individual, all of their revenue is subject to taxation. This
includes wages or salary, interest earned, dividends from stocks, rents, royalties, lottery
winnings, and unemployment compensation less, for now, allowable deductions. For a
business the same applies however, it will have more opportunities to reduce its income tax
liability with interest deductions, depreciation, and normal expenses incurred for conducting
business. Income taxes are the single biggest source of revenue for the federal government
in the United States.

Purpose of income taxes
Supreme Court Justice Joseph Story in his “Commentaries on the Constitution”, stated
that taxes collected by the federal government were to be used only for running the
2
government and any other purpose is unwarranted.
According to the Congressional Budget Office, individual income taxes collected are the
federal government's top source of revenue. Total federal revenues are derived from three
3
major sources:
1. Income taxes paid by individuals: 47% of all tax revenues.
2. Payroll taxes paid jointly by workers and employers: 34% of all tax revenues.
3. Corporate income taxes paid by businesses: 11% of all tax revenues.

At the state level, the percentage of revenue that income taxes provide can vary greatly
since each state imposes different tax rates and has other sources of revenue such as sales
taxes, property taxes and federal assistance (your Federal tax dollars being doled out to the
individual states as they apply for it).
The Internal Revenue Service, which updates Income Tax Regulations and writes the
interpretation to the tax codes it writes, establishes that an individuals income tax liability
is calculated as indicated by the rates illustrated in Figure 4.2 and Figure 4.3 on pages 4-
17and 4-18.

Tax Rate
A tax rate is the percentage at which an individual or corporation is taxed. The tax rate is a
percentage taken of the taxpayers taxable income imposed by the federal government, some
states and some cities; for corporations this is the taxable corporate earnings. The United
States uses a progressive tax rate system, where the percentage of tax increases as taxable
income increases.
The tax rate that is applied to an individual’s earnings depends on the marginal tax
bracket that the individual falls under. The marginal tax rate is the percentage taken from
the next dollar of taxable income above a pre-defined income limit. The marginal tax rate
used by the US government is indicative of the progressive tax system and a progressive tax
rate results in a higher dollar amount collected from individuals with higher incomes.

2. Commentaries on the Constitution, Story, Joseph, Justice SCOTUS ; 1833, Hilliard, Gray and Co., Boston, Ma. Page 351.

3. Federal Revenue: Where Does the Money Come From, https://www.nationalpriorities.org/budget-basics/federal-budget-101/
revenues/#endnotes; Internal Revenue Service, "Data Book 2014" , accessed 19 October 2019

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