Introduction

Taxation in the United States functions through a multi-tiered system comprising federal, state, and local governments, each empowered to impose taxes. U.S. taxes cover income, payroll, property, sales, capital gains, dividends, imports, estates, and gifts, among other fees. In 2020, the aggregate tax revenue from these government levels represented 25.5% of the Gross Domestic Product (GDP), below the OECD average of 33.5%.

Progressive Tax System

The U.S. employs progressive tax and transfer policies, whereby tax rates generally rise with increasing taxable income, aiming to mitigate income inequality. Lower-income individuals, especially those with dependents, typically pay no income taxes and might receive subsidies like the Child Tax Credit and Earned Income Tax Credit. Conversely, labor income is taxed more heavily than capital income, with diverse rates and subsidies across income types leading to indirect taxes on certain activities.

Taxation Structure

Federal, most state, and some local governments levy taxes on net income for individuals and corporations. U.S. citizens and residents pay taxes on global income but can claim credits for foreign taxes paid. Taxable income is determined by specific tax accounting rules, with the Inflation Reduction Act of 2022 introducing a 15% minimum tax on large corporations based on financial statement income.

Deductions and Exemptions

Businesses generally reduce taxable income through expenses, though some are capped. Individuals may lower taxable income via personal allowances and specific non-business expenses like home mortgage interest and medical expenses surpassing certain thresholds. State tax rules often differ from federal ones, with federal marginal tax rates from 10% to 37%. State and local tax rates vary from 0% to 13.30%, with various states using graduated rates. The 2017 Tax Cuts and Jobs Act capped state and local tax (SALT) deductions at $10,000, raising effective tax rates for medium and high earners in high-tax states.

Global Taxation and Foreign Income

Uniquely, the U.S. taxes its non-resident citizens on worldwide income at resident rates. This approach, upheld in Cook v. Tait, allows citizens abroad to exclude up to $120,000 of foreign-earned income from U.S. taxation, as adjusted for inflation in 2023. Payroll taxes, such as Social Security and Medicare, are levied federally and by states at 15.3%, with Social Security taxes only on wages up to a certain threshold, and additional Medicare taxes on higher wages.

Property and Sales Taxes

Local governments primarily impose property taxes based on fair market property values, with rates from 0.2% to 1.9%, varying by state. Sales taxes are applied by most states and some localities to retail sales of goods and services, with rates from 0% to 16%. Sales tax is collected by sellers at the time of sale, or as a use tax by buyers who did not pay it at purchase.

Customs Duties and Estate Taxes

The federal government imposes tariffs or customs duties on many imported goods, with rates ranging from 0% to over 20% depending on the goods' type and origin. Estate and gift taxes are levied federally and sometimes by states on property transfer through inheritance or donations, affecting worldwide property with a credit for foreign taxes paid.

Types of Taxpayers

The U.S. taxes entities like individuals, businesses, estates, trusts, and organizations, with tax bases varying by property, income, transactions, transfers, imports, or other taxpayer-relevant factors. Property taxes typically affect property owners, while income taxes impact business entity members based on their income share.

Income Tax System

Income tax in the U.S. is levied at federal, state, and some local levels, defining taxable income and applying specified rates, reduced by credits and deductions, some refundable. The history began with the Revenue Act of 1861. While the Supreme Court deemed federal income tax unconstitutional in 1895, the 1913 Sixteenth Amendment reestablished authority, resulting in Supreme Court rulings that upheld the structure.

Taxation of Income

Income tax is based on income levels, with varying rates for individuals, corporations, estates, and trusts. Taxable income equals gross income minus exemptions, deductions, and personal allowances. Gross income includes all receipts and gains and isn't limited to cash. Certain income types, like state bonds interest, may be tax-exempt. Foreign non-residents are taxed on U.S.-source income, often reduced by treaties.

Filing Status and Tax Rates

Federal individual income taxes have multiple filing statuses, like single, married filing jointly, married filing separately, head of household, and qualifying widow(er), influencing available deductions and credits. Federal income tax rates for individuals are graduated, ranging from 10% to 37%, while corporate income faces a flat 21% rate. State income tax rates vary, with some states having no income tax.

Conclusion

The U.S. tax system entails multi-layered taxation at federal, state, and local levels, each with distinct rules and rates. The progressive federal tax system and diverse state and local regimes create a complex landscape for taxpayers. Understanding these components is vital for effective navigation of the U.S. tax environment.