Taxes in the United States [2023] – A Complete Guide [Clear Finances]

Last updated on 7 de April de 2023

We analyze the most important Taxes in the United States: income tax in the most important states, sales tax, capital income taxes, corporate tax, and property taxes. We also touch on the state of the country’s public finances.

Introduction

Taxes are one of the most complex issues when analyzing a country’s economy. This is especially true when it comes to a large and decentralized country like the United States.

Nevertheless, we will try to do our best, so you get a good understanding of how taxation works in the United States. You will realize that, like most Western countries, it can indeed be considered a high tax jurisdiction.

Because the United States is composed of 50 federated states, there 50 different tax regimes. Therefore, tax rates are set by three different levels of government: the federal government sets tax rates for the whole country, state governments set the taxes rates applicable to their state, and municipalities decide, to a much lesser degree, on specific taxes in cities and counties.

So that you learn what taxes look like in different places of the United States, we will focus on four of the most important states: New York, Florida, California and Texas. Nevertheless, some taxes will be analyzed in all 50 states.

We analyze our analysis of taxes in the United States by looking at how earned income is taxed.

Taxes on Earned Income

Earned income is subject to social security contributions, known as payroll taxes in the United States, and income taxes.

Payroll Tax and SUTA

Social security contributions in the United States are called Payroll taxes. Payroll taxes work similarly to social security payments in most European countries. Most payroll taxes are paid to the federal government. However, unemployment insurance is usually regulated at the state level.

When it comes to federal payroll taxes, both employees and employers pay the equivalent of 6.20% to the employee’s gross salary in retirement and disability pensions, with a maximum base of $147,000 per year. As for Medicare health insurance, the rate is 1.45% for both parties, also capped at a salary of $147,000 yearly.

However, if an individual earns more than $200,000 after combining labor and capital income, they will have to pay an additional 0.9% in Medicare.

While there is a small unemployment coverage at the federal level, this is mostly regulated at the state level, as we will see below.

The following table summarizes federal payroll taxes in the United States:

Unemployment insurance is regulated by the SUTA (State Unemployment Tax Act) and the responsibility of the states. Unemployment insurance is not uniform within one state, neither in the percentage nor in the maximum base it is paid on. Each employer pays a different percentage depending on its sector, size, average salary level, and history of laying off workers.

The following table indicates the SUTA unemployment rates in four important states within the United States:

Next, we analyze income taxes in the United States.

Income Taxes

We will break down this section into federal and state income taxes:

Federal Income Taxes

Most income taxes are paid to the central government in the form of federal income taxes. These taxes come obviously on top of the federal payroll taxes we have discussed above.

The federal income tax system is made up of 7 different brackets that follow a progressive structure. These are the brackets and rates for individual single taxpayers:

$0 to $11,000: 10%
$11,000 to $44,725: 12%
$44,275 to $95,375: 22%
$95,375 to $182,100: 24%
$182,100 to $231,250: 32%
$231,250 to $578,125: 35%
Over $578,125: 37%

However, the first $13,850 for a single person without children are tax-exempt. For couples filling tax together and/or with children, the tax-exempt amount is slightly higher.

State Income Taxes

One of the biggest differences between states are the income taxes they impose on their citizens. As we have said before, we will look at 4 of the most important states in the country: New York, California, Florida and Texas.

An important thing is that the first $10,000 in state taxes every year are deductible in the calculation of federal taxes.

However, state income taxes are always paid on top of federal income taxes:

New York

New York State has 8 different income tax brackets:

$0 to $8,500: 4%
$8,501 to $11,700: 4.50%
$11,701 to $13,900: 5.25%
$13,901 to 21,400: 5.90%
$21,401 to 80,650: 6.09%
$80,651 to $215,400: 6.41%
$215,401 to $1,077,550: 6.85%
$1,077,550 a $5,000,000: 9.65%
$5,000,000 a $25,000,000: 10.30%
Over $25,000,000: 10.90%

In addition, most municipalities in New York charge a small percentage in income tax. It is estimated that, on average, New York taxpayers pay 1.49% in income tax to their municipalities.

California

For its part, California has 10 brackets in its state income tax. California has the highest state taxes in the United States, including the highest marginal rate:

$0 to $8,932: 1%
$8,933 to $21,175: 2%
$21,176 to $33,421: 4%
$33,422 to $46,394: 6%
$46,395 to $58,634: 8%
$58,635 to $299,508: 9.3%
$299,509 to $359,407: 10.3%
$359,408 to $599,012: 11.3%
$599,013 to $999,999: 12.3%
More than $1,000,000: 13.3%

The only city in California that charges income taxes to its residents is San Francisco. The additional rate is 1.50%.

Florida

The state of Florida does not charge any state income tax to its residents. Neither do its municipalities. Tax residents in Florida only pay federal income taxes.

Texas

Like Florida, Texas does not charge any income tax to its residents, just like the municipalities in it. Therefore, tax residents in Florida only pay federal income taxes.

Comparison between the United States and main European countries

Because there are many jurisdictions and multiple brackets, the best way to compare taxation in the United States with taxation in other countries is to analyze how much net salary a worker receives in each of those places.

These calculations are based on total employment costs, including social security contributions and payroll taxes. They do not include, however, private medical insurance.

The following table compares 4 states in the United States with Spain, Germany and the United Kingdom. Because these countries use different currencies, we will standardize the data in US Dollars using approximate exchange rates of €1 = $1.20 and £1 = $1.35.

The data shown are valid for a single person without children.

Let us look at the same data in percentage. The following chart illustrates how much money receives the employee in net compensation for every dollar of employment costs:

As you can see, income taxes in the United States are very similar to those of various European countries.

While it is true that Spain and Germany tax low- and middle-income people more heavily, property taxes in the United States are significantly higher. And public services scarcer.

Another thing to note is that both Florida and Texas are much more attractive than New York and California, especially for high income earners. This is one reason many people have decided to relocate from New York or California and move to Florida or Texas.

Capital Income Taxes

Next, we will look at taxation on income from savings and capital. These can be in the form of dividends, interest income or realized capital gains. These three forms of capital income are taxed the same way. As with earned income, they are subject to federal, state and municipal rates.

The federal tax is applicable in all of the United States and composed of 3 tranches:

$0 to $44,625: 0%
$44,625 to $492,300: 15%
Over $492,300: 20%

An additional 3.8% Medicare surcharge is applied to any amount greater than $200,000 after combining both earned and capital income. Consequently, the federal tax ends up having 4 effective brackets:

$0 to $44,625: 0%
$44,625to $200,000: 15%
$200,001 to $492,300: 18.8%
Over $492,300: 23.8%

Some states will also charge state income taxes on capital income. In the case of Florida and Texas, capital income is not subject to any additional tax. However, both New York and California charge the same progressive tax rates that are applied to earned income.

As a matter of fact, state income taxes are calculated after combining both earned and capital income.

As a result, the marginal tax rate for capital income in New York is 32.62%. For its part, the marginal tax rate in California is 37.1%. These rates are higher than almost all European countries. This highlights the US billionaires tend to pay more taxes than their counterparts in other jurisdictions.

It should be mentioned that realized capital gains from real estate investments can be perpetually deferred by simply reinvesting them, something that is not available in most other countries.

Sales Tax

The purchase of goods and services in the United States is subject to sales taxes. Sales taxes in the United States are equivalent to VAT in Europe or Latin American.

There is no federal sales tax. Sales taxes are set by states and municipalities. This means there is a statewide sales tax rate and a municipal sales tax rate.

The following table contains all 50 US states, with the corresponding state sales tax rate, the median municipal rate in each of these states, and the combined median rate:

As you can see, there are four states that do not charge any sales taxes. Another thing to keep in mind is that sales taxes in the United States are substantially lower than VAT taxes in most European countries, where rates average north of 20%.

Property Taxes

Although the purchase of real estate in the United States is usually not subject to taxes, the ownership of real estate is subject to property taxes.

Property taxes in the United States, which are usually higher than their equivalent in Europe, are set by the municipality in which the property is located. Property taxes tend to be the main source of tax revenue for most municipal governments.

These taxes can fluctuate significantly over time because they are affected by the appraisal made by the authorities on an annual basis, and the percentage applicable to the area in which the property is located. This means that property taxes end up being higher in those places where the value of real estate is higher.

The following table shows the median rate of property tax in each of the 50 US states. We also see the median amount payable which is influenced by property values:

As you can see, property taxes in some states are very high. Interestingly, California, the state with the highest income taxes in the country, has reasonable property taxes. This is because, by law, their politicians have no power to raise them. Otherwise, they would have probably done that a long time ago.

Corporate Tax

Corporate taxes are levied on corporate profits. They include both a federal and a state tax rate. A few municipalities in the countries also charge some additional percentage points.

The federal corporate tax rate in the United States is 21%. Up until 2017, it was 35%, which made the United States the country with the highest corporate tax in the world.

State corporate tax rates range from 0% for small and medium-sized businesses in some states to 12% in Iowa. It should be noted that state corporate taxes are deductible for the calculation of federal corporate taxes.

The following table lists the maximum state corporate tax rate in each state, as well as the combined corporate tax rate applicable:

As you can see, the combined corporate tax rate is between 21%, in those states that charge no corporate taxes, and 30.48%. These percentages are similar to those of most Western European countries.

United States Public Finances

Finally, an analysis of a country’s taxes is not complete without looking at the state of public finances. Tax revenues should be compared with public spending to assess the sustainability of fiscal policy in the long term. Otherwise, it might be necessary to implement tax increases, spending cuts or inflationary policies.

To analyze the sustainability of public finances in the United States, we will look at the level of public debt relative to the size of the economy (GDP):

Data from the Federal Reserve of St. Louis

As we can see in the graph, the level of public debt prior to 2008 had not exceeded 65% of GDP in several decades. However, public debt has increases dramatically ever since.

For almost a decade, public debt has been above 100% of GDP. And the crisis that began in 2020 led to the largest public deficits in history, bringing debt level even higher.

The truth is that the state of public finances in the United States is precarious. As a result, the Federal Reserve was forced to be an active participant in the debt market for a long time. This was done with the objective to keep borrowing costs at a manageable level.

If the United States does not get around to addressing its fiscal situation, the threat of sustained, elevated inflation rates is very real. Ultimately, this could lead to the US Dollar losing its reserve currency status in the future.

Conclusion

I hope you found this analysis of taxes in the United States useful. Whether it is because you are still considering moving there, because you already live there and need to know how taxes work, or simply because you are interested in the topic, knowing how a tax system works is fundamental to understanding the incentives it creates.

Contrary to what many people in Europe believe, taxes in the United States are generally high. Though there are substantial differences between their states. Consequently, while California resembles the most punitive countries in Europe, like France, Florida and Texas have moderate tax burdens.

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Clear Finances

And if you want to read a similar analysis about the United Kingdom, check out the following link:
Taxes in the United Kingdom – A Complete Guide

Finally, here is a useful link for those who want to learn even more about taxes in the United States:
Tax Foundation