Formal Tax Legislation

Formal tax legislation is the process by which a proposed tax rule or tax reform becomes law in the United States. Formal tax legislation follows particular steps outlined in the United States Constitution. The act, like other federal laws, requires the approval of both houses of Congress - the Senate and the House of Representatives - as well as presidential approval.

Understanding Formal Tax Legislation

The proposed tax laws begin the formal tax legislative process as a bill before becoming law. The tax measure must be introduced in the House of Representatives since the House is designed to represent individual residents rather than entire states, as the Senate is. The formal tax legislation procedure involves the following steps:

  1. The tax bill is introduced in the House of Representatives and referred to the Ways and Means Committee.
  2. The proposed tax code is prepared once the committee members reach an agreement on the proposal.
  3. The tax bill now heads to the full House for debate, amendment, and passage.
  4. The tax bill is sent to the Senate for examination. The Finance Committee may revise the plan before it is presented to the entire Senate.
  5. Following Senate ratification, the tax measure is submitted to a joint committee of House and Senate members who work to establish a compromise version.
  6. The compromise version is now being considered by the House and Senate.
  7. Once passed by Congress, the bill is delivered to the president, who will either sign it into law or veto it. If the measure is signed by the President, the responsible agencies, such as the Treasury Department and the Internal Revenue Service (IRS), must take steps to carry it out. If he or she decides to veto the measure, he or she sends it to the House with a statement explaining why he or she opposes different provisions of the law.
  8. If the President vetoes the tax measure, Congress can either make the adjustments the President desires or override the veto with a two-thirds vote in each house; if successful, the tax bill becomes law without the President's signature.

Types of Formal Taxes

**Progressive tax: **A tax on high-income individuals that takes a higher percentage of their income than low-income individuals.

Proportional tax: A tax on all income levels that takes the same percentage of income.

Regressive tax: A tax that takes a bigger percentage of low-income income than high-income income.

Types of Taxpayers

Individuals, commercial entities, estates, trusts, and other kinds of organizations may all be taxed. Taxes may be levied on the sort of taxpayer for whom such a tax base is relevant, and may be based on property, income, transactions, transfers, imports of commodities, commercial operations, or a variety of other variables. As a result, property taxes are frequently levied against property owners.

Furthermore, certain taxes, notably income taxes, may be imposed on members of a business or other entity based on the entity's income. A partner, for example, is taxed on his or her allocable share of the revenue of a business that is or is not defined as a partnership under entity classification rules. Another case in point is the grantors or beneficiaries of trusts. Another case in point is the ownership of controlled overseas firms by US citizens.


One of the primary reasons to understand tax laws is to reduce your tax burden. By understanding tax laws, you can make informed decisions that can lower your tax bill.

For example, you can take advantage of tax deductions and credits that are available to you. You can also structure your investments in a way that minimizes your tax liability, and plan your retirement savings to take advantage of tax deferred or tax free options.

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