Competition, especially healthy competition, is the foundation of a capitalist economy. Without it, a free market could not function and the, “invisible hand of the market,” would operate much differently than everyone might imagine. Competition, although sensitive and fragile, is so important that many governments have opted to protect it. In fact, specific agencies have been founded for solely this purpose: they are comprised of teams of specialists and cover detailed legal provisions (criminal regulations included). Some even believe that a degree of competition should be present in all arenas of life, both economic and social.
So why is this different in the realm of taxes?
Taxes are one of the staple elements of our modern economy: all entrepreneurs are quite familiar with this notion. Therefore we can ask the question, why should the “healthy competition” concept not be applicable here? Now, we start to wade into some murky water. Predominately in today’s world, the idea of tax constructs being “competitive” is becoming inextricably linked to an implicit notion that this is ‘harmful,” or detrimental to the business environment. In Poland and many other European countries, “harmful tax competition,” is a concept that has even been written into legal code. The take-home message seems to be clear, you have to compete, just not when it comes to tax rates.
While this may be common place in the EU, there is in fact a nation (actually composed of many smaller states) which not only sanctions but encourages competition as a part of the tax system, the USA.
Taxes in US
The American tax system
The United States is a federation of fifty separate states that together create a single unified country. This means that the centralized (Federal) government (headed by the President as there is no prime minister) manages the main aspects of the nation; primarily, the armed forces, foreign policy and the central budget. However, most aspects of operations are maintained at the state level, managed by individual authorities in the various states. Due to this organizational construct, the federal government has limited opportunity to interfere and/or intervene in the local protocols of these individual states. The United States Constitution stipulates that states delegate some powers to the centralized federal government while retaining other powers locally at the state level.
From a financial logistic perspective, both levels of governance require appropriate funding (sources of revenues) in order to cover expenses. Hence, the tax system in the US is somewhat more complex in comparison to unitary countries such as Poland. The most notable difference is a two tiered taxation system (taxes are collected at both a state and federal level) on income, business, property etc. Below we will focus on income taxes.
Income tax, both for natural persons and legal entities, is required both at the federal (national) and state levels. Depending on the residence (situs) of a natural person or legal entity (including companies) income tax levels vary. Federal taxes are the same while state tax amounts differ.
Each state establishes separate laws regarding practices in income taxation. The variation here can be quite vast from state to state and is not limited solely to differences in tax rates. In some states, taxes are collected based on a uniform flat rate, as well as, progressive scales with many tax thresholds (sometimes even up to six).
At times taxes may be collected based on margins, not on income. Hence, it is through the variation in these local tax constructs that states are able to compete with one another to attract residents as well as companies.
Therefore, when deciding to invest in the United States and start a business there, it is imperative to investigate the differing tax structures of varying states.
In terms of corporate income tax, the Federal tax rate is 21% of income. Naturally, there are many nuanced regulations that must be taken into account, that in one way or another affect the final amount of tax payable. This is particularly true in the context of international situations when a company carries out cross-border activities, holds shares in foreign companies, receives income from abroad, etc.
Hence, it is essential to investigate and understand the regulations of individual state jurisdictions in order to choose the most favorable environment for each circumstance. So, here we have tax competition, which is not considered harmful at all but in fact, works very well in the United States.
Below is a general summary of the five most interesting jurisdictions to be considered for tax and business purposes
It is worth stressing that the above statement contains only the most basic comparison of the characteristics in varying tax jurisdictions in different states. The tax systems in different states contain many detailed regulations that can make specific states more favorable than others for a given type of activity.
In short, separate states in the United States compete to draw investments, businesses and residents. Therefore, before investing in the US, one should closely examine regulations (state by state) in order to ensure the most beneficial situs is chosen for the desired scope of business operations.
Adam has over eight years of experience in tax advisory for Polish and international clients. He worked in tax advisory departments of several of the so called Big Four companies as well as leading Polish tax advisory firms. He also supported one of key construction groups operating in Poland as an in-house tax advisor. Licensed […]
This website uses so-called „Cookies”. Further use of the website without changing your cookie settings, means consent to their recording or use. Detailed information can be found in the Regulations tab.