Paper Example - State vs. Federal Taxes on Businesses

Tax is one of the main sources of revenue for many countries. How revenue is earned through a tax system may be a critical process to understand. Both state and federal taxes contribute to the overall revenue of a country. Typically, the state income tax refers to the direct tax that is levied on the individual's income by the state while the federal income tax refers to the tax that is levied by US internal revenue service on an individual's annual earnings, companies, or other entities. This paper will be looking at the differences that exist between state and federal taxes and the impact which both have on businesses.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Order now

Differences between State and Federal Tax

There are various differences that exist between state and federal taxes. They normally differ in terms of income tax, deductions, and the level of tax rates applied to taxpayers. One of the differences is seen in terms of the tax rate. While the State tax system applies a uniform tax rate to their taxpayers, the federal system applies a tax rate that is based on the individual's level of earnings (Rohlin, Rosenthal, & Ross, 2014). The State system of tax rarely discuss matters concerning deductions of tax from their respective taxpayers, unlike the federal system, which values matters relating to taxpayers. Moreover, the state system of tax has a flat tax rate because they have other sources of income, unlike the federal government, which it usually relies on individual income tax, which makes them impose a higher rate upon the taxpayers. Federal taxes collected from the taxpayers by the federal governments are usually used to pay the bills of taxpayers, whereas state taxes collected by specific states are normally used to pay state bills.

Impact of State and Federal Tax on Businesses

Positive Impacts

Both state and federal tax has played a major role in the enhancement of business activities. State taxes have promoted businesses through the provision of equal tax (Suarez Serrato, & Zidar, 2016). More profit that comes as a result of an equal tax rate has encouraged business people to expand their businesses. Through the imposition of the uniform tax rate by the state, it has encouraged more investors to venture into business activities. Also, it has encouraged hard work among business people. Hard work in business comes in as a result of the urge of maximum output, which, after being taxed, will leave the taxpayer with enough money for personal use.

Negative Impacts

The federal system of tax has negatively affected businesses. Firstly, the consumption rates have significantly changed. When making purchases, consumers limit themselves because of higher tax rates imposed on them. Federal taxes have also led to a decrease in the number of workers in the workplace. The decline in the number of employees is due to the fact that the federal tax system applies the same tax rate, which makes the businessmen hire a few number workers which they are able to pay. The productivity level of workers has also been affected. Inadequate labor production as a result of the employment of fewer workers has led to a decline in the level of production.

References

Rohlin, S., Rosenthal, S. S., & Ross, A. (2014). Tax avoidance and business location in a state border model. Journal of Urban Economics, 83, 34-49.

Suarez Serrato, J. C., & Zidar, O. (2016). Who benefits from state corporate tax cuts? A local labor markets approach with heterogeneous firms. American Economic Review, 106(9), 2582-2624.