Theme: Taxation of the United States

Theme: Taxation of the United States
The United States of America has separate federal, state, and local governments with taxes imposed at each of these levels. Taxes are levied on income, payroll, property, sales, capital gains, dividends, imports, estates and gifts, as well as various fees. In 2010, taxes collected by federal, state, and municipal governments amounted to 24.8% of GDP. In the OECD, only Chile and Mexico are taxed less as a share of their GDP.

However, taxes fall much more heavily on labor income than on capital income. Divergent taxes and subsidies for different forms of income and spending can also constitute a form of indirect taxation of some activities over others. For example, individual spending on higher education can be said to be "taxed" at a high rate, compared to other forms of personal expenditure which are formally recognized as investments.

Taxes are imposed on net income of individuals and corporations by the federal, most state, and some local governments. Citizens and residents are taxed on worldwide income and allowed a credit for foreign taxes. Income subject to tax is determined under tax accounting rules, not financial accounting principles, and includes almost all income from whatever source. Most business expenses reduce taxable income, though limits apply to a few expenses. Individuals are permitted to reduce taxable income by personal allowances and certain non-business expenses, including home mortgage interest, state and local taxes, charitable contributions, and medical and certain other expenses incurred above certain percentages of income. State rules for determining taxable income often differ from federal rules. Federal marginal tax rates vary from 10% to 37% of taxable income. State and local tax rates vary widely by jurisdiction, from 0% to 13.30% of income, and many are graduated. State taxes are generally treated as a deductible expense for federal tax computation, although the 2017 tax law imposed a $10,000 limit on the state and local tax ("SALT") deduction, which raised the effective tax rate on medium and high earners in high tax states. Prior to the SALT deduction limit, the average deduction exceeded $10,000 in most of the Midwest, and exceeded $11,000 in most of the Northeastern United States, as well as California and Oregon. The states impacted the most by the limit were the tri-state area (NY, NJ, and CT) and California; the average SALT deduction in those states was greater than $17,000 in 2014.

The United States is one of two countries in the world that taxes its non-resident citizens on worldwide income, in the same manner and rates as residents; the other is Eritrea. The U.S. Supreme Court upheld the constitutionality of imposition of such a tax in the case of Cook v. Tait.

Payroll taxes are imposed by the federal and all state governments. These include Social Security and Medicare taxes imposed on both employers and employees, at a combined rate of 15.3% (13.3% for 2011 and 2012). Social Security tax applies only to the first $132,900 of wages in 2019. There is an additional Medicare tax of 0.9% on wages above $200,000. Employers must withhold income taxes on wages. An unemployment tax and certain other levies apply to employers. Payroll taxes have dramatically increased as a share of federal revenue since the 1950s, while corporate income taxes have fallen as a share of revenue. (Corporate profits have not fallen as a share of GDP).

Property taxes are imposed by most local governments and many special purpose authorities based on the fair market value of property. School and other authorities are often separately governed, and impose separate taxes. Property tax is generally imposed only on realty, though some jurisdictions tax some forms of business property. Property tax rules and rates vary widely with annual median rates ranging from 0.2% to 1.9% of a property's value depending on the state.

Sales taxes are imposed by most states and some localities on the price at retail sale of many goods and some services. Sales tax rates vary widely among jurisdictions, from 0% to 16%, and may vary within a jurisdiction based on the particular goods or services taxed. Sales tax is collected by the seller at the time of sale, or remitted as use tax by buyers of taxable items who did not pay sales tax.

The United States imposes tariffs or customs duties on the import of many types of goods from many jurisdictions. These tariffs or duties must be paid before the goods can be legally imported. Rates of duty vary from 0% to more than 20%, based on the particular goods and country of origin.

Estate and gift taxes are imposed by the federal and some state governments on the transfer of property inheritance, by will, or by lifetime donation. Similar to federal income taxes, federal estate and gift taxes are imposed on worldwide property of citizens and residents and allow a credit for foreign taxes.
Levels and types of taxation



Picture 1. U.S. federal tax receipts for 2014

The U.S. has an assortment of federal, state, local, and special-purpose governmental jurisdictions. Each imposes taxes to fully or partly fund its operations. These taxes may be imposed on the same income, property or activity, often without offset of one tax against another. The types of tax imposed at each level of government vary, in part due to constitutional restrictions. Income taxes are imposed at the federal and most state levels. Taxes on property are typically imposed only at the local level, although there may be multiple local jurisdictions that tax the same property. Other excise taxes are imposed by the federal and some state governments. Sales taxes are imposed by most states and many local governments. Customs duties or tariffs are only imposed by the federal government. A wide variety of user fees or license fees are also imposed.

A federal wealth tax would be required by the U.S. Constitution to be distributed to the States according to their populations, as this type of tax is considered a direct tax. State and local government property taxes are wealth taxes on real estate.

Types of taxpayers

Taxes may be imposed on individuals (natural persons), business entities, estates, trusts, or other forms of organization. Taxes may be based on property, income, transactions, transfers, importations of goods, business activities, or a variety of factors, and are generally imposed on the type of taxpayer for whom such tax base is relevant. Thus, property taxes tend to be imposed on property owners. In addition, certain taxes, particularly income taxes, may be imposed on the members of organizations for the organization's activities. Therefore, partners are taxed on the income of their partnership.

With a few exceptions, one level of government does not impose tax on another level of government or its instrumentalities.

Income tax

U.S. federal effective tax rates by income percentile and component as projected for 2014 by the Tax Policy Center

Taxes based on income are imposed at the federal, most state, and some local levels within the United States. The tax systems within each jurisdiction may define taxable income separately. Many states refer to some extent to federal concepts for determining taxable income.

Filing status



Picture 2. Marginal Tax Rates in the United States
Historical federal marginal tax rates for income for the lowest and highest income earners in the U.S.

Federal and state income tax is calculated, and returns filed, for each taxpayer. Two married individuals may calculate tax and file returns jointly or separately. In addition, unmarried individuals supporting children or certain other relatives may file a return as a head of household. Parent-subsidiary groups of companies may elect to file a consolidated return.

Graduated tax rates

Income tax rates differ at the federal and state levels for corporations and individuals. Federal and many state income tax rates are higher (graduated) at higher levels of income. The income level at which various tax rates apply for individuals varies by filing status. The income level at which each rate starts generally is higher (i.e., tax is lower) for married couples filing a joint return or single individuals filing as head of household.

Individuals are subject to federal graduated tax rates from 10% to 39.6%. Corporations are subject to federal graduated rates of tax from 15% to 35%; a rate of 34% applies to income from $335,000 to $15,000,000. State income tax rates, in states which have a tax on personal incomes, vary from 1% to 16%, including local income tax where applicable. Nine (9) states do not have a tax on ordinary personal incomes. These include Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Two states with a tax only on interest and dividend income of individuals, are New Hampshire and Tennessee.

State and local taxes are generally deductible in computing federal taxable income. Federal and many state individual income tax rate schedules differ based on the individual's filing status.

Income

Share of income tax paid by level of income. The top 2.7% of taxpayers (those with income over $250,000) paid 51.6% of the federal income taxes in 2014.

Taxable income is gross income less adjustments and allowable tax deductions. Gross income for federal and most states is receipts and gains from all sources less cost of goods sold. Gross income includes "all income from whatever source", and is not limited to cash received. Income from illegal activities is taxable and must be reported to the IRS.

The amount of income recognized is generally the value received or which the taxpayer has a right to receive. Certain types of income are specifically excluded from gross income. The time at which gross income becomes taxable is determined under federal tax rules. This may differ in some cases from accounting rules.

Certain types of income are excluded from gross income (and therefore subject to tax exemption). The exclusions differ at federal and state levels. For federal income tax, interest income on state and local bonds is exempt, while few states exempt any interest income except from municipalities within that state. In addition, certain types of receipts, such as gifts and inheritances, and certain types of benefits, such as employer-provided health insurance, are excluded from income.

Foreign non-resident persons are taxed only on income from U.S. sources or from a U.S. business. Tax on foreign non-resident persons on non-business income is at 30% of the gross income, but reduced under many tax treaties.