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Lesson 1: Introduction to Taxation and How to Research

How Is Tax Law Created?

With the constitutional ability to create income tax law, Congress immediately began. Many times people seem to think that it’s really the Internal Revenue Service behind all of the taxes and tax law, but it's not. Let’s review how a federal law is made with an oldie but a goody in Video 1.1. You may know this one.

Video 1.1. Length: 00:03:20, Schoolhouse Rock: I'm Just a Bill Video Transcript

INDIVDUAL SINGERS (SINGING): As your body grows bigger--Your mind must flower. It's' great to learn. Because knowledge is power.

EVERYONE (SINGING): It's school house rocking, a chip off the block of your favorite school house, school house rock.

BILL (SINGING): I'm just a bill.

KID: Phew, you sure got to climb a lot of steps to get this capitol building here in Washington. But I wonder who that sad little scrap of paper is.

BILL (SINGING): I'm just a bill. Yes, I'm only a bill. And I'm sitting here on Capitol Hill. Well, it's a long, long journey to the capital city. It's a long, long wait while I'm sitting in committee. But I know I'll be a law some day, at least I hope and pray that I will. But today I am still just a bill.

KID: Gee, Bill, you certainly have a lot of patience and courage.

BILL: Well, I got this far. When I started I wasn't even a bill, I was just an idea. Some folks back home decided they wanted a law passed, so they called their local Congressman and he said, you're right. There ought to be a law. Then he sat down and wrote me out and introduced me to Congress. And I became a bill. And I'll remain a bill until they decide to make me a law.

(SINGING): I'm just a bill, yes, I'm only a bill. And I got as far as Capitol Hill. Well, now I'm stuck in committee and I sit here and wait while a few key congressmen discuss a debate whether they should let me be a law. How I hope and pray that they will, but today I am still just a bill.

KID: Listen to those congressmen arguing. Is all that discussion and debate about you?

BILL: Yeah, I'm one of the lucky ones. Most bills never even get this far. I hope they decide to report on me favorably. Otherwise, I may die.

KID: Die?

BILL: Yeah, die in committee. Oh, but it looks like I'm going to live. Now I go to the House of Representatives and they vote on me.

KID: If they vote yes, what happens?

BILL: Then I go to the Senate and the whole thing starts all over again.

KID: Oh, no.

BILL: Oh, yes.

(SINGING): I'm just a bill, yes, I'm only a bill. And if they vote for me on Capitol Hill, well, then I'm off to the White House where I wait in a line with a lot of the bills for the president to sign. And if he signs me then I'll be a law. How I hope and pray that he will. But today I am still just a bill.

KID: You mean even if the whole Congress says you should be a law, the president can still say no.

BILL: Yes, that's called a veto. If the president vetoes me, I have to go back to Congress and they vote on me again. And by that time you're so old--

KID: By that time it's very unlikely that you'll become a law. It's not easy to become a law, is it?

BILL: No.

(SINGING): How I hope and pray that I will, but today I am still just a bill.

CONGRESSMAN: He signed you, Bill. Now you're a law.

BILL: Oh, yes!

 

That is how it's done. Tax law is created just like any other federal law. Figure 1.1 shows the process in a flowchart to help you grasp how tax law originates and progresses to its final passage. 

Figure 1.1. How a Tax Bill Becomes a Law.
Adapted from "Writing and Enacting Tax Legislation" by the U.S. Department of Treasury, 2010. Retrieved from https://www.treasury.gov/resource-center/faqs/Taxes/Pages/writing.aspx

The following process describes the flowchart in Figure 1.1 in a little more detail:

  1. To begin, the Department of Treasury drafts recommendations for tax laws from the president.
  2. Because all laws must originate in the House of Representatives, the Department of Treasury presents its recommendations to the House Committee on Ways and Means. This committee then creates what is known as the “House version” of the tax law, which it presents to the entire House of Representatives for a vote.
  3. With a vote, the House of Representatives passes its version of the tax law.
  4. The House version goes to the Senate Finance Committee. Two things can happen from here:
    1. Either the committee agrees with the House version and sends it to the Senate for a vote, or
    2. the committee makes amendments to the House version and sends the amended version to the Senate for a vote.
  5. With a vote, the Senate passes its version of the tax law:
    1. If it's the same as the House version, then it goes to the president to sign.
    2. If it's the amended version, then a Conference Committee is appointed to merge the two bills. This committee is made up of members from both the House of Representatives and the Senate.
      1. The Conference Committee modifies both bills into a single one that's likely to get the most votes from each house.
      2. With a vote, both the House and Senate pass the newly revised bill.
  6. Finally, the president signs the bill into tax law.

And that's the rest of the story. It was the acts of the Congresses and presidents over the past 100 years that have created the tax law as it stands today. The Internal Revenue Service doesn't come into it until the tax law is already ratified by Congress and the president. The Internal Revenue Service doesn't make the law, but it does organize and police it so that average taxpayers can pay their taxes and that those who don’t are identified.


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