taxation

Raising of money from individuals and organizations by state and local governments, to pay for the goods and services they provide. Taxation can be direct (a deduction from income) or indirect (added to the purchase price of goods or services - that is, a tax on consumption).

The most common form of indirect taxation in the US is the sales tax, applied to the purchase price of items. The most common form of direct taxation is the income tax, withheld from paychecks and imposed by most of the states as well as the federal government. Federal taxes are collected by the Internal Revenue Service (IRS), which dates back to 1862, when income tax was first introduced.

Taxation can be an important economic and social policy tool. By themselves, taxes reduce economic activity by taking money out of circulation. The benefit of taxes, then, depends on the use to which the funds are put. A redistribution of resources takes place when funds collected from taxpayers are used to pay contractors to build housing or provide food or education for the poor. The tax structure helps determine the distribution of resources. For example, progressive taxes take an increasing percentage of income as it rises; proportional tax rates take the same percentage of income across all levels; and regressive rates take a higher percentage as income is reduced. Direct taxes tend to be proportional or progressive, whereas indirect taxes are generally regressive, since they take a higher percentage of income from the poor. Taxes have important social as well as economic purposes. High excise taxes, applied to specific commodities, can be used either to raise tax revenues or to try to discourage consumption of those items, examples being cigarettes, liquor, gasoline, and luxury items. In some states following the Civil War, poll taxes were used to disenfranchise poor blacks who could not afford to pay them. Corporate taxes must find a delicate balance, since rates that are too high can drive businesses from one state to another or, in extreme instances, force them to relocate in another country, or cease operating entirely. During the Reagan administrations, it was argued by supply-side economists that reductions in tax rates would actually produce increased revenues by stimulating a growth in overall economic activity. Conversely, it was held that increased tax rates would yield decreased revenue by discouraging growth. Federal taxation was simplified and rates reduced by Congress to some of the lowest rates among industrialized nations 1987.

Most state tax money in 1997 came from sales and income tax, according to the Tax Foundation. An average of the states showed the five main types of tax were general sales and use which provided 33.3% of a state's tax income, individual income tax at 32.1%, corporate income tax at 7%, licences at 6.4%, and motor fuels at 6.2%.