Relative State Income Tax Burdens and Federal Tax Reform
Ten reasons why the U.S. should adopt a territorial system of taxing foreign earnings.
May 26, 2011
With the relative national debt at its highest level since World War II, state deficits looking just as grim and the economy still struggling to pull out of a two year tail-spin that taxpayers have faced, business owners and their employees have been working longer hours to stay afloat in the current economic environment. Now they can also anticipate working more in the near future to pay off the likely increases in federal, state and local taxes that are still looming in future federal and state/local budgets.
The Tax Foundation has produced two recent studies, which provide some interesting perspective for analysis and potential federal, state and local tax reform.
How Is Your Tax Clock Working for You?
Based on a study done by Kail Padgitt and Alicia Hansen, the average American devotes over a quarter of their standard eight-hour work day to paying various taxes — federal, state and local income tax, social security tax and Medicare, sales and excise tax and even property tax. If we add in payments required to pay down the federal deficit, the average American would need to use up their entire morning income to cover their share of the various government tax burdens.
According to the study, Connecticut, New Jersey and New York are the states with the highest tax burden, which requires the average worker to work until 11:13 (assuming a 9:00 a.m. start time) to pay-off their daily tax burden — only then do these taxpayers begin banking money for "extras" such as food, housing, cars and other creature comforts. Maryland, Washington and California represent the next batch of the bottom rung of tax unfriendly states. The states with the lowest relative tax burdens (which can burn-off the tax bite before 11:00 a.m.) include: Mississippi, Tennessee, South Carolina and Louisiana. or a full listing of all states and their relative tax burdens, please refer to the full study.
The morning tax burden is broken out by tax type in the report as follows:
While tracking your minute-by-minute tax burden may be a depressing thought, the report does give us all a unique perspective on how we fund our taxes. This may also be useful information to pass along to your federal, state and local representatives since the report personalizes the tax bites better than other analyses.
Potential Federal Tax Reform
With the country just beginning to see some positive indicators since the beginning of the year, both businesses and individuals are still semi-reluctant to hire and/or to spend. Business owners are still focused on the future tax structure as they develop their hiring, capital investment and overall business plans.
Therefore, there is no better time than the present for our federal and state legislators to fully assess our current federal, state and local tax policies and structure and begin working towards true, long-term tax reform. The House Ways and Means Committee understands that the immediate focus should be on how comprehensive tax reform can help spur job creation in the U.S. and make American businesses more competitive in the global economy.
President Obama even addressed this issue in his January 25, 2011 State of the Union Address, saying that Washington's goal is to make the U.S. a competitive place to do business in and do business from. Unfortunately, due to the extreme complexities of the U.S. Tax Code and lack of a coordinated and comprehensive restructuring of the often unintelligible patchwork of statutes developed since the 1900s, a simple fix is just not in the cards.
One school of thought being discussed by some Beltway legislators, scholars and lobbyists is to:
The Tax Foundation released two new studies earlier this month:
The current U.S. tax rate is 35 percent. Along with an average 6.56 percent state tax rate, this puts the average combined tax rate at 39 percent, net of state taxes. The weighted average of the Organization for Economic Cooperation and Development (OECD) nations is 30 percent and the simple average of OECD nations is 25 percent (which would match China's rate). Therefore, those pushing for a reduced federal rate believe that legislators should seriously consider lowering the federal tax rate so companies can stay competitive and foster economic growth in all areas.
In addition, the current worldwide tax system generally allows all business income — earned at home or abroad — to be taxed at the U.S. rate. Companies may defer paying U.S. tax on active foreign income until it is brought "home" (in other words, received by the U.S. taxpayer). Even though companies and individuals may claim a credit for foreign taxes paid, they must pay the difference between the amount of tax paid to the foreign government and what would be owed under the generally higher U.S. tax rate. This means that at the end of the day, the taxpayer still pays the higher U.S. taxes unless they keep their earnings offshore. This tax system calls for reform as outlined below.
U.S. Should Move to a Territorial System of Taxing Foreign Earnings
According to the study (PDF), below are the 10 reasons why U.S. should adopt a territorial system of taxing foreign earnings:
Therefore, with respect to reform of cross-border taxation, U.S. legislators have three distinct choices:
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