Nature if the US Taxation System
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Introduction
The US is a federal republic with autonomous state and local governments. Taxes in the US are charged at the federal, state and local levels. The US tax system has evolved over the last three centuries, marked by significant changes in response to changes in the structure and role of the government, changes in the economy and society as well as changes in other circumstances. The types of taxes charged, the magnitude of revenues and the relative proportions of the taxes collected are far different from the way they were 100 or 50 years ago (Carbaugh & Ghosh, 2009). This paper presents a brief description of the US taxation system today. As well it examines how the taxation system impacts on the choices made by individuals. Lastly, the paper examines the impact of the taxation system on US business internationally.
Description of the taxation system
Taxes at the three different government levels in the US are charged on income, property, payroll, gifts, estates, sales, imports and various types of fees. Net income for individuals and business organizations is subjected to taxation at federal, state and local levels. As well, taxes are charged on worldwide income of residents and citizens, but they are allowed credit for foreign taxes. Non-resident citizens also pay taxes on worldwide income in the same rate and manner like the residents. The amount of income of an individual or business organization to be subjected to taxation is determined using tax accounting rules (Carbaugh & Ghosh, 2009). Citizens and residents and allowed to reduce taxable income by deducting personal allowances. As well, they are allowed to deduct the amount that is used for certain non-business expenses such as medical, charitable contributions, state and local taxes and home mortgage interest. Rules for determining taxable income differ from one government level to another. For instance, the local and state tax rates vary from 0% to 13.30% from one jurisdiction to another and are graduated. On the other hand, the federal taxation rates vary from 10% to 39.6%. The US has one of the most progressive taxation systems in the world. Tax rates on individual incomes increase as income increases (Eric & Matt, 2009).
Apart from income taxes, payroll taxes are also charged at the federal and state levels. These include Medicare and Social Security taxes charged on both employees and employers. Employers also pay unemployment tax and other levies. Property taxes are charged by the local governments and other special purpose authorities. The taxes are charged based on the market value of a property. Schools and other authorities are governed separately and are charged separate taxes. Property tax rates and rules vary widely from one jurisdiction to another (Carbaugh & Ghosh, 2009). Sales taxes are charged at the local and state levels. The taxes are charged on the retail prices of goods and services. The sales taxes vary from 0% to 16% from one jurisdiction to another. Customs duties or tariffs are imposed by the federal government on imports of goods into the US. The customs duties or tariffs are paid before the goods are legally imported. The rates vary from 0% to more than 20% based on the country of origin and type of good. Gift and estate taxes are charged by the federal and some state governments. The taxes are charged on the transfer of an inherited property by lifetime donation or by will (Carbaugh & Ghosh, 2009).
Impact on choices of individuals
Just as in any other country, the taxes levied in the US have a significant impact on the choices that are made by individuals. A good example is the impact that the progressive personal income tax has on the decisions that are made by US citizens and residents. Personal income tax is legally assessed on household or individual income but its impact goes beyond there (Barigozzi & Villeneuve 2006). Individuals may respond to high personal income tax rates by migrating to low tax states, reducing their work efforts and other behaviours to reduce the personal income tax liabilities. In the case of personal income tax increase, firms or employers may decide or may have to compensate their workers for the higher personal income tax by offering them higher pre-tax wages. This implies that the higher personal income tax may be shifted, in part or in full, onto the employers. If the personal income tax levied on workers is shifted, in part or in full, onto the employers, it may have an impact on the decisions made by employers. For instance, the employer may decide to transfer the burden to consumers by increasing prices of products or by establishing other ways of saving costs within the firm (Laganà & Sgro, 2011).
As Eric and Matt (2009) explain, personal income tax rates in the US highly affect business location decisions. Apart from affecting the pre-tax wages, the personal income taxes can have a huge impact on after-tax returns on capital investment. As such, the personal income tax rates levied in different states may highly influence decisions on where to locate plants and facilities. The rates may also influence the decisions on whether or not to establish a new business or to add more capital investment in a business. If an increase in personal income tax is shifted, in part or in full, onto the employer, the latter may decide lay off some workers or to put off future recruitment plans. As Eric and Matt (2009) explain, taxes levied on different raw materials may affect costs of the materials. In turn, the cost of the materials may influence the decision by an individual or a firm on whether or not to purchase a particular material. Similarly, tax rate charged on the production of an item may influence the decision on whether or not an individual or a firm will produce it. Generally, the US taxation system has a huge impact on the decisions and choices that are made by individuals.
Impact on US business internationally
The US tax system facilitates US business in the international arena. Precisely, the current tax system encourages US multinational firms to conduct business in foreign countries by allowing them to defer US tax on their foreign sources of income until their profits are repatriated. The US government uses this and other incentives to encourage US multinational firms to locate physical assets, jobs and production in low-tax foreign countries. For instance, US oil multinational firms located in Saudi Arabia have remained firm due to support by the US government through such incentives. Their ability to defer US taxes enables them to have higher operating capital than most competitors. In addition, the multinational firms utilize the advantage by altering their prices to achieve competitive advantages (Angus et al., 2010). Some provisions of the US tax law encourage the US multinational companies to shift profits to low-tax countries. For instance, cross-crediting allows corporations to use the excess tax credits derived from operations in high-tax nations to offset the tax due on repatriated profits from the net returns earned in low-tax nations. The American Jobs Creation Act allows a tax break on income repatriated from low-tax countries.
As Clausing (2006) explains, the US tax system allows domestic multinational firms to shift income among themselves and their affiliates in foreign countries. For instance, a multinational corporation can borrow funds in a high-tax country to finance its operations and then claim larger interest deductions in that country. In doing so, the firm can be able to report more profits in another low-tax country. At the same time, the corporate income tax rates have remained higher in the US than in other advanced industrial countries. This has strengthened incentives for foreign corporations operating in the US to shift their investments and income to other countries. This has led to a reduction in the US tax revenue. In short, the tax system has both positive and negative consequences on US business in the international arena.
Conclusion
In conclusion, taxes in the US are levied by federal, state and local governments. There are different types of taxes which are levied at one, two or all of the three government levels. The federal, state and local governments usually charge different tax rates, which vary from one jurisdiction to another. As explained in the discussion, The US tax system has a high impact on the decisions and choices that are made by individuals. The tax system provides incentives for US multinational companies in the international arena. At the same time, it has led to reduction in US taxation revenue.
References
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Barigozzi, F. & Villeneuve, B. (2006). The Signaling Effect of Tax Policy. Journal of Public
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Carbaugh, B. & Ghosh, K. (2009). Reforming the U.S. Tax System. Challenge, 54(2), 61 – 79
Clausing, K. A. (2006). International Tax Avoidance and U.S. International Trade. National Tax
Journal, 59(2), 269
Eric, E. & Matt, B. (2009). On the effects of increasing income tax. Central Penn Business
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Laganà, G. & Sgro, P. M. (2011). A factor-augmented VAR approach: The effect of a rise in the
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