They say only two things are certain in life: death and taxes. While moving countries may not prevent death, it can definitely change on what and how much tax one pays. The types and amounts of taxes paid by individuals vary drastically from country to country and can greatly affect a nation’s economy. This paper will explain and analyze the individual taxation of three nations with greatly differing tax and economic structures.
The United States of America is an economic superpower and has continuously had the world’s highest GDP since 1871.
In 2017, the United States GDP was a massive $19.39 trillion dollars and $53,128 per capita. The United States operates on a mixed economy heavily supported by healthcare, technology, construction, and nondurable goods manufacturing. All US citizens are subject to paying income and estate taxes to the United States, even while living abroad. Taxes are levied on the federal, state, and local level, and therefore can vary drastically depending on location in the country.
Therefore, in analysis, averages will be used (unless otherwise noted) to best compare with other nations.
Income taxes refer to a category of taxation on earned revenue. Income tax most commonly refers to the United States’ federal taxation system on revenue earned from salaries and wages. This system is progressive in the United States, meaning the higher one’s income, the larger percentage is paid in taxes. In the 2018-2019 tax year, percentage brackets ranged from 10%-37% with the highest tax bracket beginning at an income exceeding $510,300 for unmarried, single-filing taxpayers, with adjusted brackets for married joint-filers and head-of-household single-filers (see Appendix A for complete tax bracket breakdown) .
However, federal income tax in the United States is also marginal, this means that if an unmarried individual earned an income of $511,000, they would not pay 37% tax on that entire income. They would instead pay 10% in taxes on the first $9,699, and so on and so forth, only paying 37% in taxes on earnings exceeding $510,299. States and municipalities can also charge their own income taxes which must be paid in addition to federal taxes. These systems vary widely and 43 of 50 states impose their own income taxes.
US Income taxes also include payroll or FICA (Federal Insurance Contribution Act) taxes. FICA taxes fund the social support systems known as Social Security and Medicare and differ from many other types of taxation due to operating on a matching basis, which affects both individuals and businesses. FICA tax is at a flat rate of 15.3% of income, however, the individual only pays 7.65% and their employer is obligated to match the other 7.65%. This leaves the self-employed population liable for the entire 15.3%.
The United States also taxes incomes earned not from wages and salaries. Capital gains taxes are levied on profits earned from the sale of assets, typically investments and real estate, but “the Internal Revenue Service points out, just about everything you own qualifies as a capital asset.” Everything from the sale of stocks and bonds, to houses, to collectibles such as fine art and rare coins can be taxed as capital gains. US capital gains tax is also separated into short- and long-term tax on assets. Short-term capital gains tax (on assets sold after less than a year of ownership) is taxed as normal income (using the same tax brackets as in Appendix A). Assets sold after over a year of possession are considered long-term capital gains and are taxed at 0%, 15%, or 20% based on a variety of factors including filing status and total income. Another type of tax, the estate tax, is designed to mitigate the passing of extreme wealth. Levied on the transfer of property and other assets, the highest bracket of the estate tax is 40%. Two types of the estate tax are implemented in the United States: gift tax and inheritance tax. While both are essentially the same, the gift tax affects transfers of property by a living person. The inheritance tax, or death tax, taxes assets passed down after the death of an individual. However, not every gift or inheritance payment is taxed, as the federal annual per-person deduction is $11.4 million, but state and local estate taxes may vary.
The next major type of individual tax in the United States is a tax on property. Property taxes are most commonly levied on real estate, but can also apply to other durable goods such as cars, machinery, and boats. The US Federal Government does not impose a property tax; however, states and cities can decide to impose property taxes. Property taxes are a large source of revenue to jurisdictions such as towns and school districts and can provide supplemental government income in areas which may have lower income taxes.
Finally, taxes on goods and services round out the United States’ taxes imposed on individuals. Most well known is sales tax. Sales tax is a percentage of the goods bought that is then added on as tax revenue. For example, the state of Michigan has a 6% sales tax rate , if one purchases an item that costs $100 ticket price, at the register, he or she will actually pay $106, the extra $6 going as tax revenue to the state government. Sales tax varies greatly from state-to-state and even from locality-to-locality. Goods and services tax also include excise tax, taxes based on number of units purchased. One of the most notable excise taxes in the United States is on gasoline at 18.4? per gallon, regardless of gas prices. A subset of excise taxes includes so-called “sin taxes”. These taxes specifically tax items viewed as detrimental to the public to attempt to discourage use. The most famous “sin taxes” in the United States apply to cigarettes and alcohol.
The United States’ individual taxation system varies so widely across states and towns, that each location must make decisions balancing federal, state, and local taxes to generate sufficient revenue. While residents in some locations pay far more than others – for example the average taxpayer in New Jersey paid $26,657.29 total in taxes in 2018 whereas the typical Wyoming taxpayer paid less than half that at $12,261.92 – different places work to balance income, property, and goods and services taxes to build an effective, revenue-generating taxation system. When all is accounted for and deductions and other specifications are applied, the average American paid $10,489 in 2017, which comes out to only about 14% of the average American’s income.
The Cayman Islands is a small nation made of three islands in the western Caribbean. Despite its small size, the nation has a very high standard of living bolstered by thriving tourism and offshore finance industries . In 2017 the Cayman Islands had a GDP of 3.1 billion KYD ($3.7 billion USD) with a GDP per capita of 49,227.9 KYD ($59,056.25 USD).
The Cayman Islands has a unique and famous tax system: there is no direct tax system. No federal income, capital gains, estate, or direct taxes of any kind are imposed upon those in The Cayman Islands. The government instead earns income through fees, payments, and other forms of indirect taxation.
The Cayman Islands’ government still needs money to function even without direct tax revenue. Over half of the Cayman Islands’ revenue stream is known as coercive revenue. These are fees imposed by the government with no exchange of goods and services. These coercive revenues are complex, but consist of elements such as fees for registering a company, import duties, and immigration and tourism costs paid to the government. The government also charges stamp duties, specifically on transfers of real estate. Non-coercive revenue streams include fees, sales, and rentals. Fees include non-essential government charges such as marriage licenses and passport fees. Sales refer to products and services issued and sold by the government. Including items such as water (from the Cayman Islands Water Authority), postage stamps, and the government’s airline, Cayman Airways. Finally, the renting out of government property generate yet another stream of revenue. Through these channels, the Cayman Islands’ government brought in 1.2 billion KYD in 2016, (see Appendix B for a further break down of this income).
While there is not direct taxation, Caymanians are still subject to government expenses which manifest in fees, as well as higher prices due to import duties. All in all, the average Caymanian paid about 6,607 KYD (about $7,931 USD) to the government in 2018, approximately 10.5% of the average income.
Denmark is located in northern Europe with strong industries in pharmaceuticals, renewable energy, shipping, and agriculture. With a 2017 GDP of $324.87 billion (USD) and a GDP per capita of $61,582, Denmark boasts the 16th largest GDP in Europe and the 36th largest in the world. Denmark is famous for its extensive social welfare programs and the great care it provides its residents and is the second happiest country in the world. The Danish government makes money through subjecting individuals in Denmark to both direct income and indirect taxation.
Taxes in Denmark are some of the highest in the world. Taxes on income are on a progressive marginal bracket system, but, unlike the United States, there are only two brackets at the national level: bottom and top. In 2019, the bottom tax rate is 12.16% while the top bracket is 15%. While this may not seem like much, the top tax bracket begins at 513,400 DKK, which is only $75,694 USD. Additionally, municipal flat income taxes in Denmark are quite high, averaging 24.9%. Beyond just income tax, Denmark also imposes a labor market contribution tax of 8% for all who are actively employed. Another municipal income tax, known as the church tax, is levied on all members of the state Evangelical Lutheran Church of Denmark.
Denmark also taxes property. However, the way in which they determine the tax rate is unique compared to the United States. Every other year, Danish officials assess the private property and assign it an appropriate tax. This also applies to Danish-owned properties abroad. The land upon which the property is built is also subject to municipal taxation.
The Danish are also subject to a variety of indirect taxes. VAT (or value-added tax) applied to the total value of goods and services sold. Unlike sales tax, VAT is added at different points in the production process, and in Denmark comes to 25% of the total value of a good. Green taxes are applied to use of “society’s resources”, especially on fuel and other energy production, charging between 2 and 14 euros per gigajoule depending on the resource being used and for what purpose. Denmark has the highest revenue from environmentally related taxes in Europe, comprising nearly 4% of the GDP. Similarly to the US, Denmark also sets excise taxes on certain products such as alcohol, chocolate, and batteries. Another component of the excise tax is Denmark’s incredibly high motor vehicle tax. Ranging from 150-180% of the price of gas-powered vehicles, the tax is designed to discourage private transportation and promote environmentally-friendly solutions. Finally, the Danish government sets customs duties for goods purchased outside the European Union.
Danes pay some of the highest taxes in the world. When all is added together, the average Danish resident pays about 55.8% of their annual income in taxes. This goes to benefit the robust and extensive welfare programming offered by the state.
The United States, the Cayman Islands, and Denmark all have vastly different tax systems. From no taxes at all to over half of annual income, this taxation support nation in very different ways. It is impossible to say one tax system is better than another. It all depends on the expectations and roles of the government in society. If you do not mind paying for necessities such as healthcare on your own but would rather not pay taxes, a nation with incredibly low or no taxes – such as the Cayman Islands – may be for you. If you would like to embrace a heavy role of government in your life and have needs such as healthcare, welfare, unemployment, and more cared for and then some by the government, a heavily-taxing nation such as Denmark may best suit your needs. Finding yourself somewhere in between may lead you to a country like the United States. Taxes are not always inevitable in life, but a correlation between them and the role of government in society very likely is.