The federal government first imposed an individual income tax in 1862 as an emergency means of financing the Civil War. It also established the Bureau of Internal Revenue, predecessor of the Internal Revenue Service. Tax rates were 3% on income from $600 to $10,000 and 5% on income above $10,000. Later in the war the maximum rate increased to 10% of income." (Encarta)
My how times have changed. This paper will compare the tax systems of four different countries to the American tax system. The four countries that have been chosen are South Africa, Mexico, Hong Kong, and New Zealand..
First lets attempt to briefly (if that were possible) explain the American tax system.
The American Tax System
America has a progressive tax system meaning the greatest tax burden is on people who have the most income. The American tax system can be described as long and complicated. The following summary will seek to explain the tax system in simple terms.
Individual Income tax: this includes employment earnings, interest income, and dividend and capital gains income. In addition there is taxation of income earned from rental properties, royalties, alimony, game winnings (just to name a few). Deductions include Medical expenses, interest on student loans and mortgage loans, charitable contributions, the cost of state and local taxes. (Encarta) The following is a tax schedule for single individuals for the 2001 tax season.
Provided by If taxable income is over but not over the tax is plus % on the excess over Corporate Income Tax: Taxable income for corporations is found by subtracting the number of expenses from gross profits. Much like the individual income taxes corporations are taxed on interest income, dividend income, capital gains, rents, and royalties. The fact that shareholders have to pay a dividend tax on income that has already been at the corporate level is called double taxation. This policy is said to discourage the formation of corporations in the U.S. As Follows Corporate rates:
If taxable income is over But not over The tax is:
15% of taxable income
7,500 + 25% of excess over $50,000
13,750 + 34% of excess over $75,000
22,250 + 39% of excess over $100,000
113,900 + 34% of excess over $335,000
3,400,000 + 35% of excess over $10,000,000
5,150,000 + 38% of excess over $15,000,000
35% of taxable income
State and local Taxes: In America there are also state and local taxes such as property tax.
Many argue that the American tax system is in need of reform. Not only to provide tax breaks to the middle class but to also encourage the formation of more businesses. There has been speculation that a flat tax rate would be good for America. In the meantime President Bush has introduced a tax cut "The Economic Growth and Tax Relief Reconciliation Act of 2001, enacted under the administration of President George W. Bush, sought to lower taxes. It called for the gradual lowering of tax brackets, with the top tax bracket dropping to 35% by 2006." (Encarta)
As a result of the apartheid there is a severe income inequality in South Africa, personal income tax and revenue is only collected from a small percentage of the population." (Henry) The South African system is somewhat broken at the present time. The system of taxation is different than America's in that there are 1.no deductions for mortgage interest or charitable contributions. 2. Dividends and capital gains are not taxed. South Africa's system is the same in that they both are progressive tax systems. The following is a summary of South Africa's tax system.
Personal Income Tax: The personal tax is levied at progressive rates when the source of the income is domestic. For the 1999-2000 tax year, taxable incomes face graduated rates; 19% on the first ZAR 33,000 of taxable income 30% on income up to ZAR 50,000, and topping out at 45% beginning at ZAR 120,000 ($20,000). There are various deductions, which benefit middle and high-income brackets. "The tax base includes all earnings, minus contributions to retirement funds, plus interest in excess of ZAR 2,000. Dividends and capital gains are not taxed at the household level. No deductions are allowed for mortgage interest, property taxes, or charitable contributions, other than limited gifts to educational institutions." (Henry)
Retirement Fund: Deposits are deductible and there is a 25% percent tax on interest and net rental income accruing to retirement funds. Annuities are taxed as if they were ordinary income.
Corporate Income Tax: The Corporation Income tax rate is 30%. In addition dividends are taxed at 12.5%
Value Added Tax: This tax constitutes a levy of 14% on goods and services. (Henry) http://www.crwflags.com/fotw/images/m/mx.gif
In 1986 and 1988 the Mexican tax system was reformed through legislation. These reforms were an attempt to make Mexico's tax system more compatible with its investors and traders. 1. Mexico has a flat tax rate for non-residents. 2 They have allowances for domestic interest.
Personal Income Tax: Residents of Mexico are subject to worldwide taxation of their income. There are allowances made for domestic interest, dividend income and capital gains on a scale that reaches 35%. Non-residents are only taxed on income that is derived from Mexico. There is a flat rate that does not provide for deductions.
Corporate Income: The rate for corporations if 35% this rate includes inflation. After corporation's taxes are paid, earnings may be given to shareholders.
Value Added tax: The rate is 10% on the VAT. The items that are taxed are goods, services rents and imports of goods and services.(Taxes In Mexico)
Hong Kong has a Schedular system of taxation. "The tax burden is light and the system is simple." (Taxation in Hong Kong) In this system the only types of income that are taxable are: salaries, profits, and property tax. This system of taxation differs from that of the United States in that 1. The system is simple and easy to understand. 2.Personal income tax rates are among the lowest in the world with a cap of 15%. 3. Corporations are only taxed at a flat rate of 16.5% and capitals gains and dividends received by another Hong Kong corporation are not taxed. 4. It does not have a worldwide tax on income. The following is a summary of Hong Kong's simple tax system.
Salaries: the salary tax is on all income produced by any office or employment in Hong Kong. The tax rate is on a sliding scale of 2% to 20% and there is a cap of 15% on total taxable income. If an individual has an annual income of HK $444,000 (U.S.$56,923) than they can only be taxed up to 15%. Hong Kong tax law also provides for generous tax allowances because of this 47% of the workforce does not pay any salaries tax.
Profits: Corporations are taxed at 16.5% while unincorporated businesses are taxed at a rate of 15%. Profits derived from sources outside of Hong Kong, dividends received from a corporation which is subject to Hong Kong profits tax, capital gains and interest derived from outside of Hong Kong are all excluded from taxation. In addition deductions and losses can be carried forward indefinitely.
Property tax: There is a standard rate of 15% on the net accessible value of property for owners of land and buildings. (Taxation in Hong Kong)
New Zealand has a simple, low cost tax system, and has no sales tax, regional or state taxes." (Film New Zealand) New Zealand's tax system is different in that. 1. There are no state taxes. 2. There is a GST tax as opposed to a sales tax. 3. There is a flat rate on corporate taxes. New Zealand's tax system is also progressive resembling America's.
Personal income tax: Personal or Payroll tax is 19.5% to 39%, with the top rate of 39% applying to that portion of income above NZ$60,000. New Zealand taxes residents on their world-wide income. However non-residents are generally taxed only on their New Zealand sourced income there are no tax-free income thresholds.
Corporate Tax: The corporate tax rate is a flat 33%. A company is considered a tax resident in New Zealand if it is incorporated in New Zealand, or its head office or center of management in New Zealand, or control of the company by its directors is exercised in New Zealand. However, overseas production companies that are resident in countries which have a double tax treaty with New Zealand (for example Australia, Canada, the UK and the U.S.A.) will generally not be tax resident in New Zealand.
Goods and Services Tax: This is the most complex of the taxes an Internet source reports "New Zealand has no sales taxes. The only tax payable on goods and services consumed in New Zealand is GST at a rate of 12.5%. GST is a tax levied on goods and services purchased from a company or individual registered for GST. Registration for GST is…