Taxation

D

4

Tariffs

Tariffs, also called duties or customs duties, are taxes levied on imported or exported goods. Import duties are considered consumption taxes because they are levied on goods to be consumed. Import duties also protect domestic industries from foreign competition by making imported goods more expensive than their domestic counterparts. In the United States, import duties were the largest source of federal revenues until the introduction of the income tax in 1913. Today they account for only a small portion of federal revenues.

For general information on tariffs, see Tariff. For a history of tariffs in the United States, see Tariffs, United States.

E

Property Taxes

In principle, a property tax is a tax on an individual’s wealth—the value of all of the person’s assets, both financial (such as stocks and bonds) and real (such as houses, cars, and artwork). In practice, property taxes are usually more limited. In the United States, state and local governments generally levy property taxes on buildings—such as homes, office buildings, and factories—and on land. There is no federal property tax. In 2000 property taxes accounted for 2.0 percent of state tax revenues and 72 percent of local tax revenues. The Canadian constitution allows the federal government to levy property taxes. However, currently only local and provincial governments collect property taxes. The property tax is by far the largest source of revenue for local governments.

The property tax is often unpopular with homeowners. One reason is that, because homes are not sold very often, governments must levy the tax on the estimated value of the dwelling. Some citizens believe that the government overvalues their homes, leading to unfairly high property tax burdens.

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F

Estate, Inheritance, and Gift Taxes

When a person dies, the property that he or she leaves for others may be subject to tax. An estate tax is a tax on the deceased person’s estate, which includes everything the person owned at the time of death—money, real estate, stock, bonds, proceeds from insurance policies, and material possessions. Most governments levy estate taxes before the deceased person’s property passes to heirs, although many governments do not impose an estate tax on property inherited by a spouse. An inheritance tax also taxes the value of the deceased person’s estate, but after the estate passes to heirs. The inheritors pay the tax. Estate and inheritance taxes are sometimes collectively called death taxes. A gift tax is a tax on the transfer of property between living people.

In the United States, the federal government imposes gift and estate taxes, and some states impose inheritance or estate taxes. However, they are usually minor sources of revenue because the taxes apply only to very large estates and gifts. Property transferred to a deceased person’s spouse is not taxed. Under the Economic Growth and Tax Relief Reconciliation Act of 2001, estate taxes were to be gradually lowered and then phased out altogether in 2010. Under the new law, the exemption for estate taxes was to rise from $1 million in 2002 to $3.5 million in 2009. However, the new law itself was due to be repealed on the eve of 2011, reverting to the legislation that existed prior to the passage of the act unless Congress agreed to extend it. These so-called “sunset” provisions are often enacted as a result of legislative compromises. Opponents of the provision agree to support a tax bill only if the provision is due to expire. Proponents of the provision agree to the compromise because they anticipate that the provision will prove popular and will be extended.

In 2002 less than 2 percent of the people who died in the United States had estates that were subject to the estate tax. In 2002 federal gift-tax law allowed each individual to give any other person up to $11,000 per year tax-free. The Tax Relief Reconciliation Act amended other provisions of the gift tax as well. In Canada, there are currently no death taxes, although both the federal and provincial governments levied estate taxes in the past.

Estate and gift taxes are controversial. Proponents argue that they are useful tools for distributing wealth more equally in society and preventing the rise of powerful oligarchies. Opponents argue that it is a person’s right to pass on property to his or her heirs, and the government has no right to interfere. If an individual has paid tax on his or her income while in the process of accumulating wealth, critics ask, why should it be taxed again when the wealth is transferred? Others argue that estate and gift taxes discourage individuals from working and saving to accumulate wealth to leave to their children. On the other hand, the presence of an estate tax might encourage people to accumulate greater wealth in order to reach a given after-tax goal. See Estate Tax. See also Gift Tax.

G

Other Taxes

A poll tax, also called a lump-sum tax or head tax, collects the same amount of money from each individual regardless of income or circumstances. Poll taxes are not widely used because their burden falls hardest on the poor. When the British government implemented a system of local poll taxes in 1990, citizens considered the tax so unfair that they held demonstrations—some violent—around the country. The extreme unpopularity of the tax contributed to the downfall of Prime Minister Margaret Thatcher. Her successor, John Major, repealed the tax in 1991. In the United States, the 24th Amendment, ratified in 1964, prohibited the payment of poll taxes as a requirement for voting in federal elections. Until that time, a number of Southern states had used poll taxes to deny poor blacks the right to vote. See Poll Tax.

A pollution tax is a tax levied on a company that produces air, water, or soil pollution over a certain level established by the government. The tax provides an incentive for companies to pollute less and thus reduce damage to the environment. The United States, France, Germany, and The Netherlands all levy taxes on some types of pollution. However, these taxes account for just a tiny amount of total tax revenue. In Canada, some provincial governments levy pollution taxes.

III

How Government Spends Taxes

Governments spend the revenues raised by taxation on an enormous variety of items, from atomic weapons to drug-abuse treatment programs. The annual budget published by the U.S. government requires more than 1,000 pages to list and describe all of the various programs it pays for.

Federal government spending comprises several major categories. One of the largest government expenditures is national defense. The most important nonmilitary program is Social Security, whose main function is to provide income to individuals during their retirement years. Another major program for the benefit of the elderly is Medicare, a health insurance program. Social welfare programs—which include unemployment insurance and payments of cash and food to the poor—also account for a large slice of the federal budget (see Welfare).

When the government borrows money from the public, it must pay interest like any other borrower. One popular way the federal government borrows money is by selling U.S. treasury bonds. By purchasing the bonds, individuals lend money to the government. At the end of a bond’s term, the government returns the investment plus interest.

State and local governments spend the largest share of their tax revenues on public school systems. Other important expenditures include welfare programs, police and fire protection, maintenance of roads and highways, and public hospitals.

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