Internal Revenue Code (IRC)
The Internal Revenue Code (IRC) is a comprehensive framework that governs taxation in the United States, encompassing various forms of taxes such as excise, gift, estate, payroll, and income taxes. Established primarily by the IRC of 1986, this code is pivotal as it delineates both corporate and personal income taxes, which together serve as the largest sources of federal revenue. The IRC has undergone numerous revisions since its inception, with significant updates occurring in 1926, 1939, 1954, and 1986, following a recognized need for a structured tax system.
Today, the U.S. tax system is regarded as one of the most complex in the world, impacting business operations significantly. The federal income tax is structured progressively, meaning individuals with higher incomes are subject to higher tax rates, a concept that raises debate regarding fairness and economic growth. Critics argue that this progressive nature can hinder economic expansion, while supporters contend that the economic impact is minimal. Moreover, the complexity of the IRC has led to the emergence of a substantial accounting industry and has enabled wealthier individuals and corporations to exploit loopholes, often resulting in lower effective tax rates. Despite ongoing discussions about tax reform, substantial changes have yet to be implemented, leaving many to navigate an intricate and often burdensome tax landscape.
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Subject Terms
Internal Revenue Code (IRC)
The Law Main domestic statutory tax law of the United States
Date 1986
The Internal Revenue Code is so complex that it forces many businesses to spend large amounts on tax-related accounting; critics argue that this creates a large negative impact on business in the United States.
Formally known as the Internal Revenue Code of 1986, this law covers the statutory excise taxes, gift taxes, estate taxes, payroll taxes, and income taxes in the United States. The income taxes are divided into corporate income taxes and personal income taxes and are the largest sources of revenue for the United States. As such they have the greatest impact on the economic aspects of business of any laws in the United States.
Tax laws were not codified prior to 1874. Although revisions occur almost every year, the major comprehensive revisions have occurred in 1926, 1939, 1954, and 1986. The structure of the income tax code in the first decade of the twenty-first century continues to be the 1986 version, an effort made in the administration of President Ronald Reagan. As a result of all these changes, the United States has the most complex tax structure of any country in the world. It is widely acknowledged that the complexity of this code has a major impact on the conduct of business in the United States. Although this complexity has spawned a massive accounting industry in the United States, the main impact on business is negative, no matter what the rate of taxation is.
The federal income tax is categorized as a progressive tax, in which those with higher incomes pay a higher percentage in taxes than those with lower incomes. This is justified on the theory that those with higher incomes are better able to pay the higher taxes. Some economists and many upper-income individuals argue that such higher rates are unfair and act as an impediment to the maximum economic growth of the country. Supporters of the progressive features of the income tax maintain that the drag on economic activity from the progressive features of tax is not significant. Some observers even argue that the highest-income Americans end up paying relatively small percentages in taxes compared to their incomes, even if the figure seems high.
Despite ongoing complaints from corporations and upper income individuals that the progressive feature of the income tax is unfair, many corporations and individuals have in fact had sufficient influence on Congress to have had provisions enacted that enable them to avoid paying tax on substantial amounts of income. These provisions have produced much of the complexity in the income tax code and have frequently led to calls for substantial tax reform. However, these calls for reform have so far proved largely ineffective. The wealthy are also often able to hire teams of lawyers and other professionals to devise strategies to minimize the amount of taxes paid by taking advantage of the complexity of the tax code and available loopholes, something most Americans cannot afford.
Bibliography
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Willis, James. Explorations in Macroeconomics. 5th ed. Redding, Calif.: North West Publishing, 2002. Print.