7. Taxation in the united states

The United States is a federal republic with autonomous state and local governments. Taxes are imposed in the United States at each of these levels. These include taxes on income, property, sales, imports, payroll, estates and gifts, as well as various fees.

Taxes are imposed on net income of individuals and corporations by the Federal, most state, and some local governments. Residents are taxed on worldwide income and allowed a credit for foreign taxes. Income subject to tax is determined under tax rules, not 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 nonbusiness 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 tax rates vary from 15% to 35% of taxable income. State and local tax rates vary by jurisdiction, and many are graduated. State taxes are generally treated as a deductible expense for Federal tax computation. Certain alternative taxes may apply.

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). Social Security tax applies only to the first $106,800 of wages in 2009 through 2011. Employers also must withhold income taxes on wages. An unemployment tax and certain other levies apply.

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.

Sales taxes are imposed on the price at retail sale of many goods and some services by most states and some localities. Sales tax rates vary widely among jurisdictions, from zero 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. This tax must be paid before the goods can be legally imported. Rates of duty vary from zero to more than 20%, based on the particular goods and country of origin.

Tax law covers the rules, policies and laws that oversee the tax process, which involves charges on estates, transactions, property, income, licenses and more by the government. Taxation also includes duties on imports from foreign countries and all compulsory levies imposed by the government upon individuals for benefit of the state.

The intricate body of tax law covers payment of taxes to a minimum of four levels of government, either directly or indirectly. Indirect taxes are assessed against products and services that are meant to be consumed, but are paid to an intermediary. For example, when you buy coffee at a local corner store, the retailer charges you tax on your coffee, which he/she subsequently pays to the government. Direct taxes are those you pay directly to the government and are imposed against things like land or real property, personal property, and income.

There is a seemingly endless list of entities that create and enforce tax laws and collect tax revenues. They range from the local government level, such as cities and other municipalities, townships, districts and counties to regional, state and federal levels. They include agencies, transit districts, utility companies, and schools, just to name a few.

The area of tax law is exceedingly complex and in constant flux largely due to two reasons. The first is that the tax code has been used increasingly more often for objectives other than raising revenue, such as meeting political, economic and social agendas. The second reason is the manner in which the tax code is amended.

The Federal tax law is administered primarily by the Internal Revenue Service (IRS), a bureau of the U.S. Treasury.

There is a special trial court which hears disputes between the IRS and taxpayers regarding federal income, estate and gift tax underpayments - the U.S. Tax Court. This federal court is based out of Washington, but its 19 presidentially appointed judges travel to preside over trials in courts located in several designated major cities. The Tax Courts’ decisions may be appealed to the Federal District Court of Appeals and final review is retained by the highest court in the land, the U.S. Supreme Court.

Tax attorneys serve many important functions in the complicated arena of tax law. They may represent you throughout the various stages of tax disputes, from an initial audit to IRS administrative appeals, Tax Court and final review by the Court of Appeals, or even the U.S. Supreme Court. They are also invaluable in helping you navigate the intricate and bewildering laws in this area of practice.

If you are a non-resident of the United States and have had US withholding tax deducted on income received then you are likely owed a tax refund. Recovering the US withholding tax that you have paid can be quite difficult. In fact 60% of Americans pay someone else to file their tax returns. Dealing with the IRS can be frustrating and time consuming for an American so you can imagine what it is like for a foreign national.

If you are an investor in real estate or operate a US foreign owned company or LLC then you have certain tax filing requirements that must be met as well as a refund or reduction in the withholding tax rate depending on the tax treaty in place with your country and the United States.

We are one of a select group of IRS approved Certifying Acceptance Agents that specialize in International US tax recoveries and tax compliance reporting. We can get you an Individual Taxpayer Identification number and recover your US withholding tax or file the required US tax returns to meet your tax compliance requirements.

Simple, easy and risk free. If our service involves a tax refund our fee is paid out of that tax refund and if you don't get your US tax refund we don't charge a fee.

7.1. Single out the peculiarities of the tax system in the USA.

7.2. Draw a table comparing the peculiarities of the tax system in the USA and Japan.

7.3. Write an e-mail to your friend explaining the role of tax attorneys in the tax system of the USA.

8. TAKE SOME TIME OFF, MR MANKIW.

Greg Mankiw is rich. This is not a controversial statement. In addition to his Harvard salary, Mr Mankiw is the author of one of the bestselling economics textbooks ever, which has earned him millions of dollars. He also picks up cheques from various publications and organisations for writing, speaking, and consulting, or so I suspect. Mr Mankiw's earnings place him firmly in the ranks of Americans who would see an increase in their tax rates due to the expiration of the Bush tax cuts (note: Mr Mankiw served as chairman of Mr Bush's Council of Economic Advisers). And in an attention-getting Sunday column, he explained why he was concerned that such an expiration might negatively impact the work incentives of the rich, using himself as an example:

Suppose that some editor offered me $1,000 to write an article. If there were no taxes of any kind, this $1,000 of income would translate into $1,000 in extra saving. If I invested it in the stock of a company that earned, say, 8 percent a year on its capital, then 30 years from now, when I pass on, my children would inherit about $10,000. That is simply the miracle of compounding.

Now let’s put taxes into the calculus. First, assuming that the Bush tax cuts expire, I would pay 39.6 percent in federal income taxes on that extra income. Beyond that, the phaseout of deductions adds 1.2 percentage points to my effective marginal tax rate. I also pay Medicare tax, which the recent health care bill is raising to 3.8 percent, starting in 2013. And in Massachusetts, I pay 5.3 percent in state income taxes, part of which I get back as a federal deduction. Putting all those taxes together, that $1,000 of pretax income becomes only $523 of saving.

And that saving no longer earns 8 percent. First, the corporation in which I have invested pays a 35 percent corporate tax on its earnings. So I get only 5.2 percent in dividends and capital gains. Then, on that income, I pay taxes at the federal and state level. As a result, I earn about 4 percent after taxes, and the $523 in saving grows to $1,700 after 30 years.

Then, when my children inherit the money, the estate tax will kick in. The marginal estate tax rate is scheduled to go as high as 55 percent next year, but Congress may reduce it a bit. Most likely, when that $1,700 enters my estate, my kids will get, at most, $1,000 of it.

Here’s the bottom line: Without any taxes, accepting that editor’s assignment would have yielded my children an extra $10,000. With taxes, it yields only $1,000. In effect, once the entire tax system is taken into account, my family’s marginal tax rate is about 90 percent. Is it any wonder that I turn down most of the money-making opportunities I am offered?

The column has prompted quite a few responses. Richard Green points out that there's an income effect to tax increases, as well—if taxes leave you with less disposable income, you may opt to work more to maintain a desired income level. Kevin Drum notes that in order to arrive at numbers large enough to look at all significant, Mr Mankiw has to compound the change in disposable income over 30 years, and even then it's hard to ignore that fact that Mr Mankiw might simply opt not to take additional work since the marginal dollar isn't worth very much to him—because he's rich. Meanwhile, Brad DeLong writes that Mr Mankiw already chooses to do a lot of work, like writing New York Times columns, despite the fact that they lead to a minuscule increase in his income. The decision to work, he rightly indicates, is about more than the marginal dollar, especially among those who, like Greg Mankiw, are near the point of consumption satiation. At that point, prestige, power and influence become important motivators.

For my part, I'll make two observations. The first is that to spend is to tax, and so given the spending commitment embodied in the current American debt, there is a limit to which taxes can be cut. The conversation must then turn to questions of which taxes should be cut or increased. Economists can tell us something about the efficiency of various kinds of cuts, and my second observation is another adage, that one should tax things one doesn't want and cut taxes on things one does want. As a general rule, then, it's wise to tax negative externalities and reduce taxes on income and investment. And yet when it comes down to actually shaping policy, choices are heavily influenced by value-judgments.

What's interesting to me is that Mr Mankiw encourages an efficiency view of tax changes but winds up inviting us to take a value-oriented look at what those changes would mean. He says: 'Now you might not care if I supply less of my services to the marketplace — although, because you are reading this article, you are one of my customers. But I bet there are some high-income taxpayers whose services you enjoy.'

Maybe you are looking forward to a particular actor’s next movie or a particular novelist’s next book. Perhaps you wish that your favorite singer would have a concert near where you live. Or, someday, you may need treatment from a highly trained surgeon, or your child may need braces from the local orthodontist. Like me, these individuals respond to incentives.

I suspect that the average non-economist will read this column and muse that trading foregone Mankiw columns for better education or reduced debt isn't a bad deal. Or that a novelist who curtails his writing because of the tax rate isn't much of an artist. Or that a surgeon who skips life-saving operations because of a tax increase is a cruel and immoral man. Put another way, if workers are doing something truly important, they should carry on doing it whether or not taxes go up. And if they're not doing something important, then who cares whether they do less of it?

This isn't an economic way of looking at things; in reality, people do respond to incentives, and even if current surgeons carry on operating amid higher tax rates, current graduates might opt for a medical career in reduced numbers based on the reduction in expected earnings. I favour moving tax rules in a more efficient direction—simplifying rules, reducing income and investment taxes, and increasing consumption-oriented taxes, especially those on "bads" like pollution or congestion. But I think economists tend to underestimate the extent to which beliefs about taxation are shaped by values: ideas of fairness and justice. It's interesting to me that many rich individuals don't make an efficiency argument when railing against tax rates, but rather declare that they're being robbed of the deserved fruits of their labours—they earned it, they should get to keep it.

I just find the effect of this column particularly interesting. In terms of the economics, I can't find much in it with which to disagree. And yet it seems like a woefully incomplete model of the actual decisions made by those setting tax rates and those responding to them. For better or worse, people care about fairness and they work for reasons other than money. And one of the biggest shortcomings of economics, I think, is the extent to which the field struggles to incorporate such realities into its models. It's amusing to me that in a piece laying out the maths behind his choice to write an additional piece on economics Mr Mankiw demonstrates how incomplete the picture painted by economists frequently is.