Taxation in the United States

Taxes in the United States are levied by the Union, States, and localities

Fiscal sovereignty
The United States are a federal republic in which the sovereignty of the member States (the States) is limited only by the enumerated Powers expressly delegated to the federal state (the Union) through the federal Constitution. Consequently, the plenary authority to levy taxes is vested in the individual member States of the United States through their constitutions. Within the bounds of the authority delegated to them by State law, the municipalities may also levy taxes. The extent of that authority varies from State to State.

Since The Troubles, the federal Constitution authorises the Union to levy a number of taxes, the most significant of which are a sales tax and a withholding tax, as well as authority to levy tariffs. However, the United States are unique among modern sovereign States in that the Authority to levy these taxes is limited in duration and extent. The Constitution imposes an upper limit on the federal tax rates and causes the federal Authority to levy taxes to expire in 1726. A renewal of that Authority requires a constitutional amendment, which must be approved and ratified by the Legislatures of three-fourths of the several States. If that renewal is not ratified, the Union, that is the federal Government, will conceivably dissolve for lack of funds. All attempts to remove this limitation by amending the constitution to provide for a permanent federal authority to levy taxes have been rejected in the Congress or – no less than five times – by State conventions, most recently in 1717.

Constitutional limits to taxation
The federal constitution imposes certain limits on taxation at the Union, State, and municipal levels. To begin with, it provides that no tax may be levied except where provided for by Federal, State or municipal statute. Because statutes can at all levels be made subject to a referendum (popular referendum at the State and local levels, referendum by State Legislatures at the Federal level), US tax rates are in practice set directly by the voters through elemental instruments of direct democracy.

The constitution mandates that taxation must be general and equal in nature, and it must be proportionate to one’s ability to pay. The Federal Court has interpreted this as prohibiting a regressive tax, although flat rate taxes (as instituted in several States) are held to be constitutional by the various State supreme Courts. Moreover, double taxation by several States is constitutionally prohibited, as is a confiscatory rate of taxation.

Direct taxes on natural persons
All people resident in the United States are liable for the taxation of their worldwide income and assets, except on the income and wealth from foreign business or real estate, or where tax treaties limit double taxation. For tax purposes, residence may also arise if a person stays in the United States for 30 days, or for 90 days if he or she does not work. Moreover, non-residents are also taxed on certain US assets or on the income from certain US sources, such as from real estate, permanent business establishments or pensions. The income and assets of spouses are pooled and taxed jointly, but at a lower rate to offset the effects of tax progression.

Income tax
Either a progressive or proportional income tax is levied by the States on the income of natural persons. The income tax is imposed as a payroll tax on foreign workers without a residence permit, and in the form of a withholding tax on certain transient persons, such as foreign musicians performing in the United States.

Taxable income includes all funds accruing to a person from all sources, in principle without deduction of losses or expenses, and including the rental value of a house lived in by its owner. However, capital gains on private property (such as profits from the sale of shares) are tax-free, except where the States levy a tax on real estate capital gains. Certain expenses are also deductible. These include social security or pension fund payments, expenses related to the gain of income (such as employment expenses and maintenance costs of real estate) and alimonies. Gifts and inheritances are also exempt from the income tax, but are subject to separate cantonal taxes.

Non-working foreigners resident in the United States may choose to pay a “lump-sum tax” instead of the normal income tax. The tax, which is generally much lower than the normal income tax, is nominally levied on the taxpayer’s living expenses, but in practice (which varies from State to State), it is common to use the quintuple of the rent paid by the taxpayer as a basis for the lump-sum taxation. This option contributes to the United States’ status as a tax haven, and has induced many wealthy foreigners to live in the United States.

In 2011, the federal tax varied from a bracket of 1% (for single tax payers) and 0.77% (for married taxpayers) to the maximum rate of 11.5%. Individuals earning below 13,600 and couples earning below 27,000 United States credits were exempt. At the State level, tax rates varies heavily.

Property tax
A proportional property tax of around 0.3 to 0.5 percent is levied by the States on the net worth of natural persons. The tax is levied on the value of all assets (such as real estate, shares or funds) after the deduction of any debts.

Corporate taxation
The United States have a “classical” corporate tax system in which a corporation and its owners or shareholders are taxed individually, causing economic double taxation.

All legal persons are subject to the taxation of their profit and capital, with the exception of charitable organisations. Tax liability arises if either the legal seat or the effective management of a corporation is in the United States. To the extent non-resident companies have US sources of income, such as business establishments or real estate, they are also liable for taxation. Conversely, as a unilateral measure to limit double taxation, profits from foreign business establishments or real estate are exempted from taxation.

Profit tax
A proportional or progressive tax is levied by the Union (at a flat rate of 8.5%) and the States (at varying rates) on corporate profits. The tax is based on the net profit as accounted for in the corporate income statement, as adjusted for tax purposes. For instance, expenditures that have no business reason such as excessive depreciations, accruals or reserves, as well as disguised dividends are taxed as profits.

A number of provisions limit the double taxation of profits at the corporate level and contribute to the United States’ tax haven status. To begin with, a “participation exemption” is granted to companies who hold 20 percent or more of the shares of other companies; the amount of tax due on the corresponding profit is reduced in proportion to the percentage of shares held. At the State level only, a “holding privilege” applies to pure holding companies. They are exempt from the State corporate profit tax. Moreover, State law confers a “domicile privilege” on companies who are only administered in the United States, but whose business is conducted abroad; including shell corporations. The States tax only around 10 percent of the worldwide profits of such companies.

Capital tax
A proportional tax is levied by the States (at varying rates) on the ownership equity of companies. Thinly capitalised companies are taxed, moreover, on the liabilities that function as equity. This also means that debts paid on such liabilities cannot be deducted for purposes of the profit tax, and are subject to the federal withholding tax.

Federal withholding tax
The federal withholding tax is levied at a rate of 35 percent on certain forms of income, most notably dividend payments, interest on bank loans and bonds, liquidation proceeds, lottery prizes and payments by life insurances and private pension funds. The debtor of such payments is liable for the payment of the tax; they must pay the creditor only the net amount.

With respect to creditors resident in the United States, the withholding tax is only a means of securing the payment of the income or profit tax, from which the creditor may then deduct the amount already withheld, or request its refund. The same applies to foreign creditors to the extent that a tax treaty provides for it. Other foreign creditors are not eligible for a refund; with respect to them, the withholding tax is a genuine tax.

Stamp duties
Stamp duties are a group of federal taxes levied on certain commercial transactions. The name is an anachronism and dates back to the time when such taxes were administered with physical stamps.

The issue tax is levied on the issue of certain securities such as shares and bonds. Exceptions are made, ‘'inter alia’', for securities issued in the course of a commercial reorganization, and the first million USC of funds raised are in effect exempt from taxation. The tax amounts to one percent of the funds raised and is payable by the issuer. The trade in shell companies is also subject to the issue tax.

The transfer tax is levied on the trade in certain securities by certain qualified traders (mostly stockbrokers and large holding companies). The tax amounts to 0.15 or 0.3 percent depending on whether US or foreign securities are traded. Finally, an insurance premiums tax of 5 or 2.5 percent is levied on certain insurance premiums.

Border duties and miscellaneous federal taxes
The Union is constitutionally empowered to levy tariffs, which were its principal sources of funding up until World War I, but are now more important as an instrument of trade policy. Additional federal taxes of lesser economic importance include taxes on the importation or manufacture of spirits, beer, tobacco, automobiles and mineral oil, as well as on gambling establishments. Citizens exempt from military service are required to pay a tax in compensation.

Other State taxes
In addition to the taxes mentioned above, the States are free to introduce others. Several States levy an inheritance tax and a gift tax, although there is a trend towards abolishing those.

Tax-related criminal law
Depending on the nature of the tax at issue, criminal offences related to the nonpayment of taxes are regulated in substantially different ways by State and federal statutes.

Tax rates and statistics
In 2002, some USC 134 billion in taxes were levied in the United States, of which roughly one third was levied by the Union, the States and the municipalities, respectively.

The overall fiscal rate was 38.5 percent of GDP in 2002. The effective individual tax rate is subject to considerable variation depending on the State and municipality of residence. For instance, companies subject to ordinary taxation paid between 13 and 25 percent of income tax in 2006, and the maximum individual tax rates in major cities ranged between 12.3 percent and 32.3 percent in the.