Starting in colonial times, the U.S. federal government satisfied their revenue needs by receiving money from the colonies. The colonies imposed taxes on import and exports (tariffs) and eventually, real estates taxes, excise taxes and occupational taxes. In 1788, the federal government received the right to tax its citizens. Most of these taxes were excise taxes on liquor and tobacco products. In 1861, the U.S. Congress imposed tax on personal incomes or the first time, but that tax was eventually abolished. When the U.S. Congress ratified the 16th Amendment in 1912, the United States again received the power to tax incomes. Though the system has undergone some changes, this basic structure of the American tax system remains in place today.
Federal tax comes from several sources, but has two different classifications. The federal government levies direct taxes that a taxpayer cannot shift to another person or entity such as income tax or personal property tax. A taxpayer can shift an indirect tax to others. The most common example of indirect taxation occurs when the government mandates that a business charges customers sales tax or take a percentage of employees' wages or salaries to pay taxes.
According to the 2009 IRS Data Book, "During fiscal year 2009, the IRS collected more than $1.9 trillion in taxes." Thirty-two percent of each dollar the IRS receives comes from Social Security, Medicare, unemployment and retirement taxes; 43 percent from personal income taxes; 13 percent from corporate income taxes and 6 percent from a combination of excise, customs, estate, gift and other miscellaneous taxes.
Federal income taxes pay for the operation of the federal government as well as the services it provide. The largest portion of federal income tax goes to Social Security, Medicare and other plans that provide income for qualifying retirees. National defense takes the next highest amount, while social programs, community and human development programs, interest payment on the national debt, and funding for law enforcement consume the remainder.
The U.S. federal government imposes taxes on individual U.S. citizens whether they earn money in the U.S. or abroad. Income includes tips, money earned on interest on bank accounts, retirement plans. Self-employed individuals, businesses, charities, and other government entities also pay federal taxes. The IRS allows deductions, tax credits and exemptions, which can reduce a taxpayer's liability.
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