In every nation, there is a set system of tax collection. The U.S. is not an exemption to the rule. Their system is self-assessing and presupposes that citizens, as well as foreigners, are liable to taxation. The taxation of foreign citizens is different from that of resident citizens.
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Every foreign citizen is subjected to a test, after which his/her legal presence in the country is determined. The objective tests include substantial presence tests and lawful permanent residence test. Taxation depends on the test undertaken by the individual (Gustafon, Peron, & Pugh, 2010).
The lawful permanent residence test is also referred to as a green card test. After undertaking the test, someone is considered a nonresident citizen when he/she acquires the green card. This also makes him/her a U.S. tax resident even when outside the country.
The substantial presence test has several criteria which require that the individual is to be physically present for 31 days period in the current year, and 183 days which include the current year and the two consecutive or preceding years (Gustafon, Peron, & Pugh, 2010).
Taxation system on foreign residents
After attaining legal citizenship in the country, a foreign citizen is subjected to a different taxation system from the one applied to native residents. They are taxed separately on income accrued from a business that is either connected or not to the U.S. business and trade.
The income fewer allowance deductions gotten from activity involving the U.S. trade is taxed at regular rates. This is applicable to both, the native and foreign citizens. However, the gross income from the activity which is not associated with U.S. trade is taxed at a flat rate of 30% or at a treaty rate that is lower.
The income taxed from business linked to the U.S. trade includes business profits, real property business income, dividends, interest, capital assets sales income, personal service compensation, and partner income involved in partnership trade in the U.S. ( Deloitte Development LLC, 2008).
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Interest rates from bank accounts and bonds that are registered are not taxed, and it is effectively associated with the United States business. A nonresident alien in a partnership that is associated with the United States business is subjected to pay tax on his or her share of income. This taxation applies to this person without any consideration whether he/ she is a limited or general partner.
Income from business linked to the U.S. trade include: interest and dividends paid by the U.S., royalties, and rents accrued from a property in the country, and income from personal property exchange or sale through a U.S. office or by an individual whose tax home includes the U.S. Meanwhile, the net gain from real property investment by a foreign person is not taxed except when a person is in the U.S. for a minimum of 183 days of the current year.
Apart from business deductions, foreign citizens are subjected to deductions from U.S. charity contributions and property-casualty losses ( Deloitte Development LLC, 2008).
In the United States, aliens are not able to file a joint tax return since they are only permitted to deduct one personal exemption. This, however, only applies to individuals from some countries, while others like Canada and Mexico are allowed.
They have to file separate tax returns if they are married. If the foreign individual is both a “nonresident and resident alien in one taxable year, he/she is a dual-status alien” (Deloitte Development LLC, 2008). The income of this person is categorized into two and is taxed separately.
The current taxation system in the United States is fair enough. However, there are some areas that need to be addressed. Partnership business, which is involved in the country trade, should be taxed as a single entity or business instead of subjecting tax to the respective partners. Income that comes from a business that is not linked to the United States trade should be taxed at lower rates to enhance investment.
Tax laws impact on the U.S. economy
The U.S. economic development is greatly influenced by the marginal tax rates, which are incorporated in the tax policy. High marginal rates have a negative influence on the performance of the economy. High marginal rates reduce the overall labor supply since it discourages work effort.
This is achieved due to the fact that people providing labor acquire less additional earnings, which discourages them from working more. Productive people in the country are forced to find alternatives in other countries with low tax rates. This deprives the country of skilled labor hence affecting economic growth.
High marginal rates discourage investment in human and physical capital. It discourages foreign investors as well, and they decide to invest in other countries. Investment in skills expansion and education also reduces. It also interferes with the price of commodities, which encourages consumers to substitute other cheap goods.
In summary, high tax rates reduce the labor and capital supply and weaken the gross domestic product (Gwartney & Lawson, 2007). This has a great effect on resource management since it negatively affects resource usage efficiency. This leads to the slow growth of the economy.
However, the tax policies in the United States greatly enhance the growth of the economy. The U.S. has the lowest tax rates, which encourages investors and workers to work harder. This, in return, promotes growth as more revenue is collected, and the gross domestic product is strengthened. The marginal rate of income tax in the United States is progressive, where people with large incomes face high marginal rates. This, however, results in inequality issues.
Taxation systems vary from country to country. However, the taxation system in the United States has proven to be the best as the tax rates are low. This has led to a high supply of labor force and investments. The GDP has strengthened as a result of this. The U.S. taxation system impacts on the economy positively as it enhances its growth.
Deloitte Development LLC. (2008). Taxation of Foreign Nationals by the United State.
Gustafson, C., Peroni, R., & Pugh, R. (2010). American Casebook Series: Taxation of International Transactions Materials, Text and Problems. New York: West.
Gwartney, J., & Lawson, R. (2007). The Impact of Tax Policy on Economic Growth.
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