Tax Law Basics for the American Taxpayer

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No one likes taxes. After working long hours, it’s understandable to feel frustrated that part of your earnings go somewhere else. But taxes keep the community going. This idea has been formalized under the lifeblood doctrine, quoted in various Supreme Court rulings: “Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need.”

It is an exemplary manifestation of the symbiotic relationship between the state and its citizens. The government has the task of protecting and managing its citizens. And in return, every citizen who is able must contribute by sharing the government’s burdens. Taxation is the primary way every income-generating citizen contributes to society.

Why Can the Government Impose Taxes?

Taxation is an inherent power of the state. Without it, the government cannot operate nor endure. The good news is that the law ensures uniformity of contributions and a just apportionment of the government’s burdens.

Nonetheless, the system has its complexities. For example, an organization may be labeled “non-profit,” but it might not necessarily be exempted from tax. A non-profit organization still has to go to the Internal Revenue Service (IRS) and apply for a “tax-exempt” status, which can be easily done in coordination with lawyers specializing in tax exemption.

With no specialty lawyers to walk us through everyday taxes, it’s easy to despise the tedious annual filings. But that’s only because we have no idea where our money goes.

Where Does the Hate Come From?

Behavioral scientists say that one of the reasons Americans despise taxes is that we don’t understand them. Unlike in other countries, the American government seems absent in our daily lives, when, in reality, it is not. Political scientist Suzanne Mettler calls this phenomenon “submerged state,” wherein the citizens are unaware of the government’s benefits and grow hostile toward them. But they have, in one way or another, received these benefits.

Of course, it doesn’t help that by nature, most of the government’s projects are mandated to be hidden from the public. Efforts for national defense, anti-terrorism, and disaster preparations only come into view when they become needed, which isn’t exactly every day.

So Where Do Our Taxes Go?

Income tax is the primary revenue source for the government. Your tax money essentially pays for three things: 1) government debt, 2) mandatory/entitlement spending (veteran affairs, social security, etc.), and 3) discretionary spending (military, education, etc.).

In 2018, eight percent of taxes were spent on the interest on national debt ($325 billion), 61% ($2.5 trillion) went to mandatory spending, and 31% ($1.3 trillion) went to discretionary spending.

The 2020 pandemic took its toll on the national government’s debt, which now rivals Italy’s investor-dispelling records. The Congressional Budget Office expects the federal debt to reach 102% of the country’s GDP in 2021. The budget deficit will reach $2.3 trillion, set to be the second-largest deficit since 1945. A portion of taxes will go toward efforts to pay off the interest and prevent it from ballooning further.

tax documents on a desk

Where Exactly Are Taxes Written in the Law?

The Constitution vests upon Congress the power of taxation. Under Article I, Section 8, Congress has the “power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States…”

But Congress doesn’t necessarily enforce taxation, and bodies and bureaus take care of the particulars. The government apportions our annual tax by following special statutes that stipulate how, when, and how much tax money must be paid to local, state, and federal branches.

One of these special statutes is the Internal Revenue Code (IRC) or simply the tax code. The tax code originates from Congress who writes its rules and regulations. They stipulate the percentage for collection, the enforcement of the rules, and the issuance of rebates and credits.

However, the task of carrying out these rules—and interpreting them—is imposed upon the IRS. The IRS disseminates their official interpretations of the statute and its enforcement through treasury regulations.

The IRS drafts the treasury regulations and publishes the proposals in the Federal Register, the official journal of the federal government. Taxpayers may share reactions to the proposals by submitting comments or speaking at hearings held at the tax court. Then again, this right isn’t common knowledge.

Once the notice and comment period end, the final treasury regulations are published in the Federal Register and, later, in the Code of Federal Regulations. The IRS also publishes in the Internal Revenue Bulletin, which is accessible via the IRS site.

Limitations of the Power of Taxation

As the Constitution vests power, it also delineates the limits of said power. The Constitution limits Congress’s taxing powers in four ways:

  1. Congress may tax for public purposes only;
  2. The Export Clause prohibits taxing any article exported from any state;
  3. Direct taxes must be apportioned among states, according to their populations; and
  4. Indirect taxes must be levied at a uniform rate across the country.

Knowing Better

Knowledge curbs fear and frustration. Know the numbers and stay up to date. The IRS has a user-friendly site with answers to basic tax law questions. To be sure, you can always consult a tax attorney or auditor.

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