In the United States, federal, state and local governments cover their expenses mainly through taxation, with each level of government depending chiefly on one or two types. In general, local governments have received most of their tax revenues from property taxes, while state governments traditionally have depended on sales and excise taxes. Since World War II, however, state income taxes have grown more important.

The federal government's chief source of revenue has been the income tax, which in recent years has brought in about two-fifths of total federal revenues. Other federal taxes include the corporate profit tax and social insurance (Social Security) taxes.

The federal income tax is levied on the worldwide income of U.S. citizens and resident aliens, and on certain types of U.S. income of non-residents. The first U.S. income tax law was enacted in 1862 in order to support the Civil War. A forerunner of the modern income tax, it was based on the principle of graduated, or progressive, taxation. The 1862 tax law also established the Office of the Commissioner of Internal Revenue, which was given the power to assess, levy and collect taxes, and the right to enforce tax laws through property and income seizures and through prosecution. The commissioner's powers and authority have remained much the same.

The income tax was declared unconstitutional by the Supreme Court in 1895 because it was not apportioned among the states in conformity with the Constitution. It was not until 1913, with the passage of the 16th Amendment to the Constitution, that Congress was authorized to levy an income tax without apportionment. The 16th Amendment resulted in a revenue law that taxed both individual and corporate incomes; but, except during World War I, the income tax system was not a major source of federal revenue until the 1930s.

In fiscal year 1918 annual internal revenue collections passed the billion dollar (thousand-million-dollar) mark for the first time. During World War II, the modern system for managing federal income taxes was introduced, income tax rates were raised to very high levels, and these taxes became the principal sources of federal revenue. The withholding tax on wages was introduced in 1943, and this was significant in increasing the number of taxpayers to 60 million and tax collections to $43 thousand-million by 1945.

In October 1986, the president signed into law the Tax Reform Act of 1986 -- perhaps the most massive reform of the U.S. tax system since the beginning of the income tax. With this act, Congress promised individuals and businesses lower tax rates on their income, provided they gave up or reduced many popular income tax deductions.

The Tax Reform Act replaced the previous law's 15 tax brackets, which had a top tax rate of 50 percent, with a system that had only two tax brackets -- 15 percent and 28 percent. Increases in the personal exemption, or the amount of income exempted from taxes for each person dependent on the income tax filer, and the standard tax deduction, which is used by filers who do not itemize deductions, was designed to eliminate taxes for millions of low-income Americans. In fact, most filers with taxable incomes of less than $20,000 pay a lot less in taxes; so do high-income filers, who have an effective tax rate of 31 percent due to the phasing out for the wealthy of the personal exemption and the portion of income taxable at the 15-percent rate.

A major feature of the tax reform is that many itemized tax deductions that were permitted under the previous law were reduced or eliminated, including sales tax deductions and deductions for interest paid on credit cards, store charge cards, installment loans or auto loans. Deduction of up to $2,000 put in an Individual Retirement Account is still permitted, but -- under the new law -- it is limited to filers not covered by a retirement plan at work, or filers whose annual income is below $25,000 for individuals or $40,000 for married couples. In addition, a minimum tax of 21 percent will be imposed on any individuals or businesses who would seek to make extensive use of deductions to reduce their tax liability.

Many supporters of the 1986 Tax Act say that reform was driven by a desire to improve the fairness of the federal income tax system. Although the federal income tax had been implemented by Congress according to the principle of progressivity, the proliferation of tax exemptions, exceptions and loopholes had made progressivity an illusion -- one allowing many rich people and businesses to pay lower taxes than less affluent ones. The new law sharply reduces progressivity but aims to restore confidence in the system by eliminating inequities. The new law reasserts the objective of collecting tax revenue fairly, deemphasizing the idea of using taxes to accomplish some other social or economic good.