The Crucial Role of Income Tax in Federal Revenue Generation

Income tax is the major source of income for the federal government. The Income tax is collected from both individuals and companies. Calculation of Income tax is done by finding out the taxable income by applying the allowable deductions on the total gross income and is collected annually.  But the treatments of individual and corporate income taxes are different on several counts. The following table shows the differences between the two on various criteria.

Criteria
Individual
Corporate
Applicable to
All US Citizens or residents
Corporations organized under the state laws
Taxable amount
Individuals total gross income less certain exclusions, exemptions and deductions
Gross income less allowable deductions and tax credits
Tax rates
Graduating slabs depending on the taxpayer’s status.

The rate schedules are broken into several ranges of income, known as income brackets, and the marginal tax rate increases as a taxpayer's income increases
Graduated rate from 15 to 35% based on slabs of taxable income.
Sources of income
Salaries and wages, compensation for services, interest ; dividends on investments, capital gains, rents received from properties and buildings, royalties, alimony, annuities and income from life insurance, pensions, gross profits from a trade or business, income in respect of a decedent, and income from S corporations#, partnerships, trusts or estates.

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Income derived from any source worldwide, including gross profit from the sale of goods and services to customers, rents from properties, machineries and buildings, royalties, interests and  dividends from investments, gains from the sale of business and investment assets, and other income.
Exclusions
death benefits from a life insurance contract, interest from government bonds, Benefits provided by employer such as health insurance and pension contributions
Nil
Deductions
business expenses, capital losses, contributions to certain retirement plan, contributions to individual retirement arrangements (“IRAs”), certain moving expenses, and alimony payments.

Ordinary and necessary business expenditures - salaries, wages, contributions to profit-sharing, pension plans, health insurance and other employee benefit programs, repairs of capital equipments and buildings, bad debts, other taxes, contributions to charity, advertising, interests paid, certain losses, selling expenses, and other expenses.
Exemptions
Personal exemptions for below tax threshold and standard deductions

( both annually indexed variable for single individuals, married individuals filing a joint return and surviving spouses, heads of households and  married individuals filing separate returns). Additional deductions for the elderly and blind.

Instead of standard deductions taxpayer can opt for an itemized deductions for State and local income or sales taxes, certain personal property taxes, home mortgage interest, charitable contributions, certain investment interest, medical expenses and casualty/theft losses*  and certain miscellaneous expenses*
Nil
Tax Credits
Certain business expenses, income tax paid abroad, certain health care and child care expenses
Production of fuels from nonconventional sources, certain investment tax credits, the research credit, the low-income housing credit, the enhanced oil recovery credit, the empowerment zone employment credit, the work opportunity credit, and the disabled access

credit .

# A corporation may elect, not to be subject to the corporate income tax. If an S corporation election is made, the income of the corporation will flow through to the shareholders and be taxable directly to the shareholders. So instead of corporate income tax, the government receives individual income tax from an S Corporation.

* based on certain conditions

References

Joint Committee on Taxation, Overview of the Federal Tax System as in Effect for 2008 (JCX-32-08), April 14, 2008.

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