A tax code is a set of laws that governs taxation in a given jurisdiction. In the U.S., the Internal Revenue Code contains all federal tax laws, including those pertaining to income, estates, employment, gifts, and sales.
Learn what tax codes are and how they work, as well as some common criticisms of tax codes.
Definition and Example of a Tax Code
A tax code is a unified set of laws that provide the statutory basis for all tax systems within a nation or other jurisdiction.
- Alternate definition: In certain contexts, the term “tax code” is used to refer to a code—that is, a series of numbers and letters—that has some significance for indirect tax, payroll tax, or other tax purposes. However, this usage is less common than the primary definition.
For example, Title 26 of the United States code, known as the Internal Revenue Code, contains all of the United States’ federal tax laws and is therefore its tax code. It covers taxation related to income, employment, estates, gifts, sales, and more.
The Internal Revenue Code’s official name is the Internal Revenue Code of 1986, because that was the year of the last major overhaul. It was originally compiled in 1939 and also received extensive updates in 1954.
How Tax Codes Work
Since tax codes are an organized set of laws for a particular jurisdiction, they are often created by the legislative body of that jurisdiction. Over time, they may receive both minor and major revisions.
For example, in the United States, tax laws originate as bills in Congress. When passed by both the House of Representatives and the Senate, these bills go to the president for approval and signature to become laws.
Like many bodies of law, tax codes are often organized into different sections. For example, the Internal Revenue Code is divided into the following 11 subtitles:
- Subtitle A: Income Taxes
- Subtitle B: Estate and Gift Taxes
- Subtitle C: Employment Taxes
- Subtitle D: Miscellaneous Excise Taxes
- Subtitle E: Alcohol, Tobacco, and Certain Other Excise Taxes
- Subtitle F: Procedure and Administration
- Subtitle G: The Joint Committee on Taxation
- Subtitle H: Financing of Presidential Election Campaigns
- Subtitle I: Trust Fund Code
- Subtitle J: Coal Industry Health Benefits
- Subtitle K: Group Health Plan Requirements
Individual states may or may not have their own tax codes. Instead of codifying a group of tax-specific laws, a state may spread its tax rules across various components of its laws. In fact, federal tax laws began as these types of individual revenue acts—until they were codified into a unified tax code in 1939.
Jurisdictions generally have some kind of revenue agency or department that is responsible for fairly enforcing the laws found in the tax code. In the United States, this agency is the Internal Revenue Service (IRS). Other countries have different names for their tax code enforcement agencies:
- United Kingdom: Her Majesty’s Revenue and Customs
- China: State Taxation Administration
- Canada: Canada Revenue Agency
Regulations and Official Guidance
In the United States, the Internal Revenue Code—as the nation’s tax code—is the ultimate source of authority on all matters pertaining to federal taxation.
However, while they’re not as authoritative as the tax code itself, other sources of tax authority can be helpful for taxpayers. One such source is the Treasury regulations, which provide the Department of the Treasury’s official interpretation of various parts of the Internal Revenue Code. The IRS also publishes official guidance intended to help taxpayers understand tax laws and obligations.
Criticism of Tax Codes
Many people and organizations dislike paying taxes, and criticisms of tax codes are commonplace.
It’s fairly common for tax codes to be criticized for their complexity and difficulty to understand.
Even tax department employees sometimes have trouble understanding their own tax code correctly. For example, in 2017 the Office of the Auditor General of Canada tested agents working for the Canada Revenue Agency and found that they provided incorrect information almost 30% of the time. In the 1980s, the U.S. General Accounting Office ran a similar assessment of IRS telephone operators and found they gave incorrect responses 36% of the time.
If a tax code is too complicated or difficult for a country’s own tax agents to explain correctly, critics may claim it’s unreasonable to expect the average taxpayer to understand it.
Others criticize tax codes for their perceived unfairness in terms of who pays the most in taxes. For example, the Internal Revenue Code is routinely criticized by politicians for benefiting wealthy Americans at the expense of the average citizen.
This criticism is not unique to the United States tax code. In the United Kingdom, over 117,000 people have signed a petition urging the prime minister to “stand up and fix the system” that consists of “tax breaks for corporates and wealthy individuals.”
- A tax code is a unified set of laws that govern the taxation systems in a particular jurisdiction.
- The U.S. tax code is known as the Internal Revenue Code.
- Not all jurisdictions have a unified tax code. For example, many states’ tax laws are scattered throughout various codes.
- Tax codes are often criticized for their complexity and unfairness.