Introduction
The formation of an effective market competition mechanism and a stable financial system are the main directions of state regulation in such a developed country of the world as America. States in America often recognize, support, and set business norms and standards through competitive tax rates. Maintaining VAT and reducing income tax on citizens is an integral part of a competitive tax plan and the appropriate type of rates. Based on the economic approaches, one should remark that “competitive” in the U.S. States implies such elements as productivity, efficiency, and a high standard of living. Such “challenges” ensure the efficiency of the functioning of the mechanism of the market economy, as well as improve the business and investment climate. At its core, essence, idea, characteristics, and functionality, competitive tax rates are a lever of pressure that promotes the development and prosperity of businesses in America and the States.
The Essence, Specifics, Features and Advantages of Competitive Tax Rates for Business
Tax Rates
Before considering competitive tax rates from the point of view of stimulating the promotion and development of business in States in America, it is essential to appeal to the theoretical aspects. Thus, this procedure allows one to delve into the core of the stated topic. Primarily, Tax Rates are the amounts of deductions of individuals or business entities, calculated per unit of the tax base. In particular, they represent the basis of the States’ tax system, which allows authorized bodies to calculate the amounts of tax deductions for a specific time. As a rule, the size of the rate depends on the legislative acts adopted in accordance with the established procedure. However, taxes have another critical function called “regulatory;” this function comes to the fore in a market economy. It often manifests itself through the impact of the taxation system on the level and structure of aggregate demand and supply, the development of production (stimulating and discouraging), and leads to increased the States leaders’ intervention in economic processes.
Competitive Tax Rates
Competitive Tax Rates, in turn, enable American entrepreneurs and business people to operate in the interregional arena. As practice shows, this phenomenon makes it possible to increase capital, stimulate job creation in a specific region, and develop and improve the business industry in a particular State (Harris, 2021). Competition is a necessary condition for implementing entrepreneurial activity. It is a rivalry of economic entities; the independent actions of each of them exclude or limit the ability of each of the entities to unilaterally influence the general conditions of circulation of goods in the relevant commodity market. Competition in a market economy is a determining factor in the ordering of prices and a serious incentive for introducing new inventions, technologies, and ideas into production. In addition, it promotes the rational and efficient use of resources, ensures the displacement of inefficient companies from the market, and serves as a guarantor of preventing the dictate of monopolies in relation to consumers.
In fact, “competitive taxes” are fundamental for developing small, medium, and large businesses in the country. They significantly affect the volume and direction of investment, the pace of economic growth, and the dynamics of the labor market in the area. In most cases, tax competition arises when the state chooses a strategy to attract direct or indirect investment. Therefore, assets and the high cost of human resources make the state competitive due to the depreciation of taxation or the provision of other unique benefits.
Description of the Situation Picture
All Americans are subject to the same federal tax code, but each of the 50 states has the authority to levy or not their sales taxes, income taxes, and property taxes. For example, this year’s worst states within the framework of significant taxes are Hawaii, Louisiana, Vermont, Arkansas, and Minnesota. In this context, the best are Wyoming, South Dakota, Alaska, Florida, Montana, New Hampshire, and other States (Cammenga & Walczak, 2021). Corporate taxes for companies in the U.S. vary from State to State and usually range from 1% to 12% (United States: Corporate, 2022). The most common tax base is federal taxable income, which varies according to specific area regulations and is usually distributed between States based on a proportional distribution formula.
In practice, the authorities of States and local entities (counties, municipalities, and cities) can exercise their right and set their income taxes, corporate income taxes, sales taxes, and use taxes. Such tax rates are significantly lower than the corresponding taxes at the federal level. The tax powers of regional and local authorities also include taxes on assets located within their jurisdiction. These may consist of taxes on the property of organizations, taxes on the property of individuals, and taxes on land. A separate group of taxes relates to the use of natural resources. In oil and gas-producing states, there are taxes on the extraction of minerals (severance tax), and for example, in the States of the East Coast, there are taxes on income from deforestation.
In general, the current dynamics of America’s tax revenues demonstrate positive results of the work of enterprises in many States of the country. In particular, competitive Tax Rates bring tangible benefits for both “ordinary citizens” and business owners. Stimulating investment flows, creating and developing jobs, raising workers’ wages, and several other essential moments create attractive opportunities for the country, specific regions, people, and enterprises (Boccia & Howe, 2018). Competition is the basis for more and better jobs, freedom, and decent wages for citizens (Biden Jr., 2021). Accordingly, for entrepreneurs, this situation creates conditions for implementing new, interesting, and innovative ideas as the engine of the regional and state economy. Therefore, businessmen are most inclined to promote and enhance their “offspring”; they are willing to invest more in hiring new workers and improving business processes or technologies.
Furthermore, the cost of doing business is the most important element for attracting entrepreneurs to create and develop a specific company in the state. As a rule, this cost includes the strength of the tax climate in a particular region, as well as the tax burden for various types of businesses (Cohn, 2021). Accordingly, at the moment, only those states that take into account the previously mentioned points can participate in the competitive environment. Moreover, the arrival of COVID-19 has also managed to make adjustments to some economic indicators of enterprises. The pandemic required updating and adapting tax systems to changing business conditions to ensure favorable conditions for economic growth and attract investment. Thus, property taxes, income taxes, and sales taxes are becoming more and more of a priority when choosing a state for the deployment of business activities (Osterland, 2021). For quite a long time, there has been a tendency to move from the northern states to the southern ones, where a system of low taxes can be witnessed.
The most business-friendly States mainly focus on not too-inflated amounts. This aspect is also associated with lower costs, taking into account the transfer of the enterprise to a more competitive economic system, situations, and conditions. Most experts are sure that enterprises prefer and will prefer in the future places where it will be possible to pay low taxes (Osterland, 2021). At the moment, only those states that have high taxes are in “deep trouble;” they do not make much effort to improve the development of business industries.
Some States tend to offer entrepreneurs significant tax breaks, taking into account inflated corporate tax rates. However, research shows that this incentive is not as effective for attracting business; States offering low corporate taxes without any tax benefits, in most cases, remain the “win” (Slattery & Zidar, 2020). In fact, the reduced corporate tax rate benefits most firms located in a particular state, thereby reducing tax bills (Slattery & Zidar, 2020). Consequently, the low tax burden attracts businesses; it creates conditions for implementing projects aimed at progress and creating higher innovations, considering the prospects for the future and benefits for residents of the U.S. (Boccia & Howe, 2018). In contrast, a higher rate leads to a less productive economy in the States, a smaller tax base, and, consequently, a deterioration in the productivity and efficiency of enterprises.
Competitive Tax Rates: Application Example
Moving to the practical components of this research, it should be recalled that the advantages, benefits, and features of competitive Tax Rates are to attract entrepreneurs to create new enterprises and promote a specific business industry. As practice shows, competition between states occurs in economic terms; low taxes are often crucial in making certain decisions for companies (Giroud & Rauh, 2019). Taxation is inevitable, but the clever use of the system of taxes and fees levied following the procedure established by law ensures business promotions.
In order to prove this idea, it is necessary to turn to the analysis of one of the states, which is more loyal, friendly and predisposed to doing business on the territory. For example, in this case, New Hampshire is considered one of the several best places to promote a business. Thus, New Hampshire is recognized as the best state in America regarding the tax climate, assistance to companies, and return on taxpayer investment (Best Place for start-ups, n.d.). It is noteworthy that the state authorities are actively seeking to “revitalize” some areas by offering tax incentives to stimulate the growth of business enterprises and the creation of infrastructure (Pilaar, 2019). The tax burden is acceptable since there is no sales tax, but a business tax has been introduced in parallel. The leaders of New Hampshire argued that the state’s actions aimed at non-taxation of personal income tax are the most crucial feature of the region’s sovereignty (Denham, 2021). Moreover, the current tax regime creates unique and favorable conditions for residents and attracts new businesses.
Therefore, based on the information from the previous section, such an approach of the state to business, especially small, will support the promotion of the business sphere in business. The absence of income tax and sales tax makes New Hampshire one of the most competitive among other states. Accordingly, a similar picture of the situation is observed in those places where leaders adopt the experience of New Hampshire. Thus, the introduction of tax competition tools also aims to increase tax revenues. Although, of course, the low level of tax rates does not always determine high tax competitiveness.
Conclusion
In conclusion, the effectiveness of the functioning of the modern market economy and various kinds of market relations are inseparably linked with such an economic category as competition. The role of competition in the contemporary world is significant because it is a basis for the effective functioning of the market economy and impacts the development of relations between market entities. It is necessary to suppose that competitive Tax Rates are the keystone to the success and prosperity of a business in a particular State in America. Such rates allow one to achieve well-being for “ordinary citizens” and entrepreneurs at the level of the whole country and individual regions.
For example, low-income taxes and the absence of sales taxes should be considered as positive elements in the promotion and development of business industries, as happens in one of the States of the U.S. – New Hampshire. This study demonstrated that when State leaders create the more favorable conditions for small, medium, and large enterprises, the higher the chances that a specific company will conduct and develop its activities in a particular region. Nevertheless, one can also assess this topic not only in the context of individual states but also of several countries. Moreover, it is possible to investigate and compare other conditions administrators create for business promotion.
References
Boccia, R., & Howe, J. (2018). How international tax competition benefits American workers. The Heritage Foundation. Web.
Biden Jr., J.R. (2021). Executive order on promoting competition in the American economy. The White House. Web.
Best place for start-ups. (n.d.). New Hampshire Department of Business and Economic Affairs, New Hampshire Division of Economic Development. Web.
Cohn, S. (2021). How we chose America’s top States for business in 2021. CNBC LLC. Web.
Cammenga, J., & Walczak, J. (2021). 2022 state business tax climate index. Tax Foundation. Web.
Denham, K. (2021). New Hampshire v. Massachusetts: Sovereignty or status quo?. BerryDunn. Web.
Giroud, X., & Rauh, J. (2019). Measuring the impact of US state taxation on business activity. Microeconomic Insights. Web.
Harris, C.L. (2021). The case for preserving a competitive corporate tax rate. U.S. Chamber of Commerce. Web.
Osterland, A. (2021). Pandemic heats up state tax competition to attract businesses and residents. CNBC LLC. Web.
Pilaar, J. (2019). Making the most of a BVT: Lessons from New Hampshire and Michigan. State Tax Notes, 703-713. Web.
Slattery, C., & Zidar, O. (2020). Evaluating state and local business incentives. Journal of Economic Perspectives, 34(2), 90-118. Web.
United States: Corporate – Taxes on corporate income. (2022). PwC. Web.