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# Income taxation and business deductions The income tax system in the United States employs a progressive tax rate. For example, individuals and businesses filing an annual tax return and claiming a standard deduction would typically pay 10% of their gross income to the federal government. Individuals with higher incomes pay more than 10%. Unlike other countries that use a flat or proportional tax rate, over time this program becomes very costly for the federal government because it levies taxes on income from many levels in society. The US Constitution only allows income taxes at three levels: Congress, state governments, and local governments. In order to make up for this shortfall, Congress has allowed Americans to deduct expenses from their taxable income when filing their annual returns. This is called an itemized deduction. The most common are mortgage interest payments, state income taxes, student loan payments, and charitable contributions. Another itemized deduction is capital gains taxes that are charged when an individual sells stock or mutual funds. Since the inception of this tax program in 1913, Congress has steadily allowed more deductions in order to make up for the shortfall in taxes at this level of government. This system has evolved in several ways over time. For example, before World War II the standard deduction was only $200 per person or $400 for married people filing jointly. In 1954 it was raised to $2,000 with a credit for dependents who did not file. The current standard deduction for 2011 is $5,800 (single) and $11,600 (married filing jointly). The rate of taxation under the current income tax system is 30% due to the Bush tax cuts. For example, if you earn $50,000 annually you will pay $15,167 in taxes. This amount includes state and local income taxes, FICA taxes (Social Security and Medicare), and estimated taxes. A taxpayer who earns $75,000 will pay $18,750 in federal income tax. The more that the individual earns the less that their taxable income becomes. The idea behind tax rate progressivity is to make sure that everyone with an income pays their fair share of taxes. Over time this system becomes very costly because it brings resources away from the local level (state and local governments) with which to run programs. The federal government is left to make up for these shortfalls by taking resources away from other levels of government (Congress, state governments, and local governments). Because each level needs to raise taxes in order for the federal income tax program to continue, over time it becomes more difficult for Congress to raise taxes at all levels, which means they need an alternative way of raising revenues. A spending program is one that keeps the government operating regardless of how much revenue it generates. If federal spending exceeds revenues, Congress can undermine the tax program by passing a budget that allows deficits to be built up. If these deficits are not paid for by reductions in federal spending, Congress can run up the national debt and if this gets out of control, they can default on government loans to foreign countries. Deficits are used as an alternative to taxes because they place both pressure on state and local governments, as well as business owners to raise their property taxes (and property values) in order to offset proposed budget shortfalls. cfa1e77820
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