The Taxation System in the United States

In the U.S., taxation is done at three levels: the federal level, state level, and local level. The tax rates at the federal level are between 10% - 37%, and at the state and local levels, they are between 0% - 13.3%.

Different individuals pay different taxes depending on their income. Corporate taxes in America are one of the highest in the world. Tax distribution in terms of revenue has been a cause for contention among the American populace. Some have felt that the IRS places the tax burden more on lower-income individuals than high-income ones.

However, the U.S. tax system is progressive in that higher-income individuals pay higher percentages of their income as taxes, just that they also benefit from tax breaks, causing the disproportionate assumption.

Further, movie depictions of taxes have only shown Americans being avid calculators and that tax is a burden for most people. America’s tax system is far from perfect. The necessary tax reform has to ensure that the tax system is less complex and confusing and more effective and simpler.

How the US compares with the rest of the world

Despite the murk surrounding the U.S. tax system, it is not as bad as it seems. Other countries have it worse, with some imposing up to 59% of income on taxes. That means only 41% of revenue is left to cover all costs and salaries. In 2020, for instance, the U.S. tax was 25.5% of the GDP, about 10% less than what OECD countries collected in the same year.

Value-Added Tax (VAT)

Unlike most countries of the world, which impose a tax on consumption, the U.S. charges tax on the following sources:

• Income
• Property
• Capital gains
• Dividends
• Gifts
• Payroll
• Sales
• Estates
• Imports

The IRS specifically draws its taxes from individual and corporate income. These taxes are collected at the three national levels; federal, state, and local.

The U.S. does not supplement its tax system with a Value-Added Tax (VAT) or a national sales tax. Any taxes imposed on consumption in the U.S. are done at state and local levels, not at the federal level. The U.S. is the only OECD country that does not have a national consumption tax system, in this case, VAT.

In Europe, VAT is not the sole tax; it complements income tax. Therefore, while you still have to file tax returns yearly, you will also have to pay taxes when you purchase items at the store. Implementing a broad-based consumption tax in America could be tricky, as the state sales taxes allow for some exemptions that may not augur well with a sturdy tax system.

Consumption tax is often considered regressive, as it places a higher tax burden on lower-income individuals. They have to spend a larger share of their income on paying taxes for items than higher-income individuals.

Consider this example: There are two individuals, Gale and Josh. Gale’s monthly salary is $1,200, while Josh’s is $45,000. Assuming they are at the store and purchasing a bag of chips for $1.56. The VAT on this bag of chips is $0.34. Both are required to pay the same VAT since they are buying the same item. However, Gale will have his income reduced by 0.028%, while Josh’s income will only decline by 0.00076%.

The disparity is obvious and might be why America has never implemented a national VAT system. The personal income tax system used in America works so well because most individuals have an employer. While the VAT system is self-enforcing, it remains a cloud of mystery in the U.S. but thrives in most countries of the world.

Tax percentages

Another way to consider how America’s tax system differs from other nations is by considering the actual statistics. We will consider this in terms of personal income tax and corporate tax.

Personal Income Tax

Corporate Tax Rates

Regarding continents, Asia imposes the lowest corporate tax rate at 19%, and Africa has the highest at 27%. Europe has low corporate tax rates, weighted against GDP at 24.92% (39 countries). For OECD countries, comprising 38 countries, the rate is at 23% and 25.81 when weighted against GDP.

A progressive income tax system

The phantom rises again: progressive and regressive tax. America’s tax system is considered progressive but disproportionate. The essence of a progressive tax system is that highfliers will be charged more tax than those with fewer finances. The highest tax bracket is 37% for earners of more than $518,400 (single individuals) and $622,050 (married individuals).

What makes it unfair is when high-income individuals get tax breaks. For instance, wealthy individuals could pay a measly $750 in federal income taxes.

In other countries, such as those in Europe, the lack of a progressive tax system breeds tax havens and tax evasion. Another form of progressive taxation is taxing the corporations that bring in huge revenues, in addition to individuals.

The European Union has a list of non-cooperative jurisdictions for tax purposes that lists non-compliant countries. Countries like Switzerland, Mauritius, and Singapore are some of the notorious tax havens, yet they are not on this list. America evades this problem in its entirety by implementing a progressive taxation system.

Despite the negatives against America’s taxation system, the truth is that America is nowhere close to being one of the world’s highest-taxed countries. There’s Japan for that.