United States - Taxation



Measured as a proportion of the GDP, the total US tax burden is less than that in most industrialized countries. Federal, state, and local taxes are levied in a variety of forms. The greatest source of revenue for the federal government is the personal income tax, which is paid by citizens and resident aliens on their worldwide income. The main state-level taxes are sales taxes and state income taxes. The main local taxes are property taxes and local income taxes.

Generally, corporations are expected to prepay, through four installments, 100% of estimated tax liability. US corporate taxes are famous for their complexity, and it is estimated that amount spent trying to comply with, minimize and/or avoid business taxes is equal to half the tax yield. The Tax Reform Act of 1986 reduced the top corporate rate from 46% to 39%. The schedule has eight brackets with rates that begin with 15% (for taxable income up to $50,000), increase to 39% (for the increment of income between $100,000 and $335,000) and then applies rates of 34% to 38% on income increments above $335,000. Since 1969, an Alternative Minimum Tax (AMT) has been attached to each of the tax brackets except the lowest, 15%, bracket. The purpose of the AMT is to prevent what is considered an overuse of tax deductions. The corporation, therefore, pays the AMT if its calculated tax liability falls below the AMT. Including the AMT, therefore, the effective federal tax rates for each bracket in 2003 were as follows: 0 $7,500 + 25% of excess between $50,000 and $75,000; $13,750 + 34% of excess between $75,000 and $100,000; $22,250 + 39% of excess between $100,000 and $335,000; $113,900 + 34% of excess between $335,000 and $10,000,000); $3,400,000 + 35% of excess between $10,000,000 and $15,000,000); $5,150,000 + 38% of excess between $15,000,000 and $18,333,333); and $6,416,667 + 35% of excess over $18,333.333). Personal service companies were taxed at a flat rate of 35%. Personal holding companies were subject to an additional tax on undistributed income of 15% in 2003, down from 38.6% in 2002. Accumulated taxable income in excess of $250,000 (for a corporation), or $150,000 (for a personal holding company) was subject to an additional 15% tax in 2003, down from $38.6% in 2002. The capital gains exclusion was eliminated in the 1986 reforms, and capital gains are taxed at the same rate as other corporate income. The reforms also reduced other deductions, and curtailed the number of tax shelters that could be used. Withholding tax on dividends is 15%, unless the investor being paid owns at least 10% of the company, in which case the withholding tax is 5%.

The Tax Reform Act of 1986 reduced the 14 graduated personal income tax brackets, ranging from 11% to 50%, to two brackets, 15% and 28%, but these were later expanded to five. In 2003 the five tax brackets ranged from 15% (up to $40,000 taxable income) to 39.6% (above $263,750). Inheritance and gift taxes ranged from 18% to 55%. Most states have individual income taxes, although, as of 2003, eight did not (including Florida and Texas). The lowest tax rates ranged from 0.743% in Ohio to 5.35% in Minnesota, and the highest rates ranged from Pennsylvania's flat rate of 2.8% to 11% on taxable income above $75,000 in Montana.

The United States has not adopted a national value-added tax (VAT) system. The main indirect taxes are state sales taxes. There is an importation duty of 0.7% on imported goods. Excise taxes are levied on certain motor vehicles, personal air transportation, some motor fuels (excluding gasohol), alcoholic beverages, tobacco products, tires and tubes, telephone charges, and gifts and estates.

In May 2003, President Bush signed into law the third tax cut in three years: a $1.35 trillion tax cut in 2001; a $96 billion stimulus package in 2002, and a $350 billion package in 2003. For 2003, Bush had asked for a $726 billion tax cut to stimulate an economy in which unemployment had risen from 4% in 2000 to 6.3% in 2003, with the loss of about 2.7 million jobs. Tax revenues had fallen below expectations in 2002 and the national budget deficit for fiscal 2003 was projected to be headed toward a record $459 billion.

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