Washington State: Lowest Marginal Tax Rates for Pass-Through Businesses

According to the Tax Foundation, Washington State has the lowest marginal tax rate for "pass-through businesses." A "pass-through" business includes sole proprietors, S Corporations, limited liability companies (LLCs) and partnerships.

The Tax Foundation calculates Washington State's "Top Marginal Tax Rate" for Sole Proprietorships and Partnerships (including LLC's which have no made an "S election") at 42.6%. It calculates the "Top Marginal Rate" for S-Corporations at 39.6%.

The rates calculated for Idaho are 48.2% for Sole Proprietorships and Partnerships and 45.3% for S-Corporations. The rates calculated for Oregon are 49.8% for Sole Proprietorships and Partnerships and 46.8% for S-Corporations. 

The reason that Washington rate is lower than other states is because Washington State does not have an income tax.

Additionally, the Tax Foundation reports that 95% of businesses nationwide are "pass-through" entities. This means that Washington State has a significant edge over other states. 

The Tax Foundation's report can be found here.

U.S. is in bottom 10% of OECD Countries for Tax Competitiveness

The Tax Foundation has recently issued its 2014 International Tax Competitiveness Index (ITCI) for the 34 OECD countries.

Overall, the United States ranked as 32^nd most competitive out of the 34 OECD countries (i.e. the bottom 10%). The ITCI notes that the largest factors behind United States's poor score are:

1. The US has the highest corporate income tax rate in the developed world (39.1%) (OECD average 25%),
2. The US is one of the only countries in the OECD that does not have a territorial tax system (the top 5 all have territorial tax systems),
3. The US has a relatively high progressive individual income tax (combined top rate 46.3%) which taxes both dividends and capital gains.

The top 5 and bottom 5 overall OECD Scores under the ITCI are:

	Country Name	ITCI Overall Score
1.	Estonia	100.0
2.	New Zealand	87.9
3.	Switzerland	82.4
4.	Sweden	79.7
5.	Australia	78.4
30.	Spain	50.8
31.	Italy	47.2
32.	United States	44.6
33.	Portugal	42.9
34	France	38.9

Within the OECD, the United States has the 3^rd worst tax environment as calculated by the ITCI. This puts it in the bottom 10% of the OECD. This has tremendous implications for long-term investment and job growth within the United States. Congress needs to address this reality and make our tax code more competitive with the rest of the OECD. As stated in the report:

In today's globalized world, capital is highly mobile. Businesses can choose to invest in any number of countries throughout the world in order to find the highest rate of return. This means that businesses will look for countries with lower tax rates on investments in order to maximize their after-tax rate of return. If a country's tax rate is too high, it will drive investment elsewhere, leading to slower economic growth.

Fiscal Cliff Deal: What it means for 2013 taxes!

As you probably already know, the House and Senate have passed a fiscal cliff deal which the President has said that he would sign.

Although in depth analysis is premature (the text of the Senate bill is 157 pages), some key figures are already known. This from the good folks at the Tax Foundation, much more in depth analysis can be found there. Check it out!

Particulars of the Deal from the Tax Foundation:

Income Tax Brackets:

"Retains the 10 percent, 15 percent, 25 percent, and 28 percent income tax brackets from the Bush tax cuts permanently

Retains the 33 percent and 35 percent income tax brackets from the Bush tax cuts for taxable income under $400,000 (single), $425,000 (head of household), and $450,000 (joint filers). Imposes 39.6 percent tax rate on income above this level."

Capital Gains & Dividend Tax:

"Capital gains tax and dividends tax will be 20 percent for taxpayers with income over $400,000 (single) and $450,000 (joint filers). This does not include the new 3.8 percent health care tax on investment income above $200,000 (single) and $250,000 (joint filers) in adjusted gross income, so the top rate for capital gains and dividends will be 23.8 percent. For lower income levels, the tax will be 0 percent, 15 percent, or 18.8 percent."

Estate & Gift Tax

"Raises estate and gift tax to 40 percent, but above the current exemption level (~$5.12 million) and adjusted for inflation in future years"

Alternative Minimum Tax

"Permanently sets Alternative Minimum Tax (AMT) exemption at $50,600 (single) and $78,750 (joint filers) for 2012 and adjusts for inflation thereafter"

America: Highest Corporate Tax Rates in the World!!!

As of April 1, the United States of America now has the highest combined corporate tax rate in the world. The US's combined state and federal rate is 39.2% and Japan (the next highest) is now 38.01%.

The Tax Foundation has great analysis and put together the following table.

President Obama’s Business Tax Reform Plan

President Obama has recently released his Framework for Business Tax Reform.

The President proposes to lower the statutory Corporate rate from 35% to 28%.

The President's Five Elements of his Business Tax Reform:

PRESIDENT OBAMA'S FIVE ELEMENTS OF BUSINESS TAX REFORM

I.     Eliminate dozens of tax loopholes and subsidies, broaden the base and cut the corporate tax rate to spur growth in America: The Framework would eliminate dozens of different tax expenditures and fundamentally reform the business tax base to reduce distortions that hurt productivity and growth. It would reinvest these savings to lower the corporate tax rate to 28 percent, putting the United States in line with major competitor countries and encouraging greater investment in America.

II.    Strengthen American manufacturing and innovation: The Framework would refocus the manufacturing deduction and use the savings to reduce the effective rate on manufacturing to no more than 25 percent, while encouraging greater research and development and the production of clean energy.

III.    Strengthen the international tax system, including establishing a new minimum tax on foreign earnings, to encourage domestic investment: Our tax system should not give companies an incentive to locate production overseas or engage in accounting games to shift profits abroad, eroding the U.S. tax base. Introducing a minimum tax on foreign earnings would help address these problems and discourage a global race to the bottom in tax rates.

IV.    Simplify and cut taxes for America's small businesses: Tax reform should make tax filing simpler for small businesses and entrepreneurs so that they can focus on growing their businesses rather than filling out tax returns.

V.    Restore fiscal responsibility and not add a dime to the deficit: Business tax reform should be fully paid for and lead to greater fiscal responsibility than our current business tax system by either eliminating or making permanent and fully paying for temporary tax provisions now in the tax code.

Update on Friday, February 24, 2012 at 11:31AM by Jess Monnette

Tax Foundation commentary can be found here and here and here.