Business Economic Project

Himanshu pradeepkumar raut

Sr. no. - 2021030120
Fybms/A
Topic

TAXATION OF AN INDIVIDUAL
INDEX

Introduction
State and local revenue
What income is taxed
Individual income tax
Advantages of paying taxes
Purposes of taxation
INTRODUCTION
The individual income tax (or personal income tax) is a tax levied on the wages, salaries,
dividends, interest, and other income a person earns throughout the year. The tax is generally
imposed by the state in which the income is earned. However, some states have reciprocity
agreements with one or more other states that allow income earned in another state to be
taxed in the earner’s state of residence.
In 2021, 41 states and the District of Columbia levied a broad-based individual income tax.
New Hampshire taxes only interest and dividends. Alaska, Florida, Nevada, South Dakota,
Tennessee, Texas, Washington, and Wyoming do not tax individual income of any kind.
(Tennessee previously taxed bond interest and stock dividends but the tax was repealed
 effective in tax year 2021.)
 STATE & LOCAL REVENUE
Taxes represent the largest single source of revenue for state and local governments.
Additional sources of state and local government revenue include intergovernmental
transfers from the federal government, or from state to local governments, selective sales
taxes, and direct charges for utilities, licenses, or entities such as higher education
institutions and insurance trusts. Since 1996 state and local governments derived
approximately 45 percent of revenues from taxes, 18 percent of revenues from the federal
government, and approximately 25 percent from service and utility charges.

State and local governments collect tax revenues from three primary sources: income,
sales, and property taxes. Income and sales taxes make up the majority of combined state
tax revenue, while property taxes are the largest source of tax revenue for local
governments, including school districts. Tax revenues fluctuate in response to changes in
economic conditions and tax policies. 
STATE AND LOCAL GOVERNMENT TAX
REVENUE BY SOURCE, 1997-2020
Which states rely on individual income
taxes the most?
Maryland collected 23 percent of its state and local general revenue from individual
income taxes in 2018, the most of any state. The next highest shares that year were in
Connecticut (22 percent), New York (21 percent), and Massachusetts (20 percent).

Among the 41 states with a broad-based individual income tax, North Dakota
relied the least on the tax as a share of state and local general revenue (4
percent) in 2018. In total, seven of the 41 states with a broad-based taxes
collected less than 10 percent of state and local general revenue from
individual income taxes that year. In 2018, New Hampshire and Tennessee
both taxed a very narrow base of income, and as a result their taxes provided
less than 1 percent of state and local general revenue that year. (Tennessee's
narrow income tax was eliminated in tax year 2021.
WHAT INCOME IS TAXED?

States generally follow the federal definition of taxable income. Thirty-two

states and the District of Columbia use federal adjusted gross income (AGI) as
the starting point for their state income tax. Federal AGI is a taxpayer’s gross
income after "above-the-line" adjustments, such as deductions for individual
retirement account contributions and student loan interest. Another five
states use their own definitions of income as a starting point for their tax, but
these state definitions rely heavily on federal tax rules and ultimately roughly
mirror federal AGI. Colorado, Idaho, North Dakota, and South Carolina go one
step further and use federal taxable income as their starting point
Federal taxable income is AGI plus the federal calculations for the standard or
itemized deductions (e.g., mortgage interest and charitable contributions) and
any personal exemptions (which the federal government currently sets at $0).
However, state income tax rules diverge from the federal laws in a few ways.
For example, unlike the federal government, states often tax municipal bond
interest from securities issued outside that state. Many states also allow a full or
partial exemption for pension income that is otherwise taxable on the federal
return. And in most states with a broad-based income tax, filers who itemize
their federal tax deductions and claim deductions for state and local taxes may
not deduct state income taxes on their state income tax itemized deductions.
INDIVIDUAL INCOME TAX

An individual income tax (or personal income tax) is levied on the

wages, salaries, investments, or other forms of income an individual
or household earns. The U.S. imposes a progressive income tax
where rates increase with income. The Federal Income Tax was
established in 1913 with the ratification of the 16th Amendment.
Though barely 100 years old, individual income taxes are the largest
source of tax revenue in the U.S.
ADVANTAGES OF PAYING TAXES

It is compulsory and beneficial for anyone who earns a taxable salary (which
is one that exceeds the basic exemption limit) to file their income tax returns.
This is the case even if the tax liability is zero after deductions. However,
even if your income is less than the basic exemption limit, there are
advantages to filing taxes.:
TAX ADMINISTRATION AND TAX RATES ARE PERCEIVED AS
LESS OF AN OBSTACLE IN ECONOMIES THAT SCORE
BETTER ON THE PAYING TAXES INDICATORS
HIGH TAX RATES DO NOT ALWAYS
LEAD TO GOOD PUBLIC SERVICES
PURPOSES OF TAXATION
During the 19th century the prevalent idea was that taxes should serve mainly to finance
the government. In earlier times, and again today, governments have utilized taxation for
other than merely fiscal purposes. One useful way to view the purpose of taxation,
attributable to American economist Richard A. Musgrave, is to distinguish between
objectives of resource allocation, income redistribution, and economic stability.
(Economic growth or development and international competitiveness are sometimes
listed as separate goals, but they can generally be subsumed under the other three.

In the absence of a strong reason for interference, such as the need to reduce pollution,
the first objective, resource allocation, is furthered if tax policy does not interfere with
market-determined allocations. The second objective, income redistribution, is meant
to lessen inequalities in the distribution of income and wealth. The objective of
stabilization—implemented through tax policy, government expenditure policy, 
monetary policy, and debt management—is that of maintaining high employment and 
price stability.
There are likely to be conflicts among these three objectives. For example,
resource allocation might require changes in the level or composition (or
both) of taxes, but those changes might bear heavily on low-income families
—thus upsetting redistributive goals. As another example, taxes that are
highly redistributive may conflict with the efficient allocation of resources
 required to achieve the goal of economic neutrality.

Thank you !