3 Reasons to Be Thankful for the U.S. Tax System

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I'm pretty sure that most people, if asked for their opinion of the U.S. tax system, would exclaim that it's far from perfect. Honestly, there seems to be something inherently wrong with the idea that Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) CEO Warren Buffett can take home a salary of $100,000 a year and be ranked among the richest people in the world, yet pay less in taxes than his own secretary by his own admission. Moreover, Berkshire's longtime investors also pay less in taxes on all the gains they've enjoyed from their share price appreciation over the years, thanks to low rates on capital gains.

It's true that the rich in this country bear a considerable amount of the tax burden. According to The Economist, the top 1% of earners in the U.S. contributed to 74% of all taxes paid in 2007, up dramatically from the 24% they contributed in 1976. But by all accounts, things could be considerably worse.

There are three countries out there that have an even more profound "tax first, ask questions later" policy, and they just might have you thanking your lucky stars that you live in the good old U.S. of A.

Britain is downright stingy when it comes to tax time if you're a top-earning chap. In 2010, Britain passed a new tax law that would tax those Brits at a rate of 50% for every pound earned beyond 150,000 pounds, or about $237,500. Blimey!

Indications so far are that Britons are finding ways around the new tax. In January, the British government received 10.35 billion pounds in self-assessments, which was actually a drop-off of 509 million pounds from the previous year. The new tax was meant to generate an additional 1 billion pounds this year but appears to be having the opposite effect.

According to data from the Organization of Economic Co-operation and Development, the top-earning French pay about 28% of all taxes. While the top-tier marginal tax rate of 40% might not seem that bad considering that it used to be north of 50% prior to 2000, it's the potential for a huge tax hike that should have French citizens concerned.

Francois Hollande, the Socialist Party's nomination for president, currently has a slight advantage over Nicolas Sarkozy, the current French president. While he's no lock to win, his tax plan for the rich is perhaps one of the harshest on record. His plan includes a 75% tax rate on French citizens earning more than 1 million euros a year. Can I raise the white flag now?

This last spot was a toss-up between Belgium and Denmark. The Danes have the highest income tax on those earning over $100,000, but their social security contribution is a minuscule 0.2%. Therefore, Belgium, which will take about 48% of your $100,000 in income, takes the cake in my book.

If that's not enough of a kick in the pants for top earnings, Belgium's residents are also subject to a 21% value-added tax. Unlike traditional sales taxes, which are just paid to the government on final sale, value-added taxes are required to be paid at every point along the product development line, from manufacturer to consumer, giving governments faster revenue but adding complexity to the system.

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If that doesn't make you love the tax system in the U.S. just a tiny bit more, then I'm not sure what will.

The U.S. tax system also affords you numerous ways to reduce your taxable income, including contributing to your 401(k). Many companies even make it worth your while to participate. For instance, Nucor (NYSE: NUE  ) not only offers a profit-sharing plan that divides 10% of its operating profit among its employees, but matches the first 7% of your contributions. Depending on the company's health, this could be a 5% to 25% match. McDonald's (NYSE: MCD  ) will match three times an employees' first 1% and, for those with the company for more than a year, double the next 4%. In addition, the company can, at its discretion, divvy out a profit-sharing match.

In short, the opportunities to minimize your tax liability are there. You just have to act on them -- and be thankful you live in the U.S.A.

Are you due money this year or will you be writing a check to Uncle Sam? Share your story in the comments section below.

If you're eager to learn about other tax-saving tips that could help you rule your retirement, then I invite you to check out our latest special report on the subject. And, you bet -- it's free!

Fool contributor Sean Williams has no material interest in any of the companies mentioned in this article. He's definitely glad he lives in the U.S.A. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway, Nucor, and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that always goes above and beyond your expectations.


Comments from our Foolish Readers


  • Report this Comment On March 19, 2012, at 11:49 AM, user1234567891 wrote:

    "...less in taxes..."

    NO - that would be a LOWER TAX RATE.

  • Report this Comment On March 19, 2012, at 11:51 AM, KaiUli wrote:

    Buffet does not pay less taxes than his secretary, he pays at a lower rate since the bulk of his income is long term capital gains vs regular income. Big difference.

  • Report this Comment On March 19, 2012, at 6:28 PM, xetn wrote:

    Where this article goes wrong is that the US taxes world-wide income, while the others tax only domestic income.

    In fact, the US tax rates (if you include federal, state, local, sales taxes, luxury taxes, increased costs due to high tariffs on imports, etc) are near the highest in the developed world.

  • Report this Comment On March 19, 2012, at 7:51 PM, CaptainWidget wrote:

    I like where this article was going (I'm an eternal optimist) but you missed the mark on so many points....

    A) Buffet does not pay less in taxes than his secretary, he pays a lower rate. He pays millions in taxes, his secretary probably pays $12,000 a year. Huge difference.

    B) You're comparing the total tax revenues of other nations to Federal only tax in the US. If you just go by the averages; 28.5% federal income, 15ish percent FICA...because let's be intellectually honest, your employer isn't paying half, it's all coming out of your salary...10% state income, 8% state sales, and another 5%ish on excise on useage taxes like gasoline tax, utility tax, alcohol tax, medical supply tax, death tax, capital gains tax, ect we're floating somewhere around 50%.

    C) You've forgotten the GREATEST US tax of all, the inability to escape your tax liability. Every other country on earth taxes it's based upon residency. If you leave the UK, the assumption is that you're not absorbing services anymore, therefore you owe nothing in taxes. You could leave the US for the UK, live there the rest of your life, and still owe US taxes.

    The US doesn't have the highest taxes....but it's way way way too high. The only thing our high tax rates encourage is tax avoidance.

  • Report this Comment On March 19, 2012, at 10:29 PM, 8bravo wrote:

    Coming from Germany I truly endorse that the taxes we pay in the US are a joke! They are so low, pretty much everybody in Central Europe would laugh to pay this little income and sales taxes. Of course for the higher expenses on the other side of the pond you get some things in return which are virtually priceless: social medicine and in most countries a decent education. There's always a trade off and I keep on saying that you can't have everything. Low taxation AND full coverage is just wishful thinking.

    However, when it comes to the top earner, in Europe they tend to pay their taxes in shelter states like Monaco or Luxemburg. The basic folk there is complaining about the same tax escape tactics top end affluent Americans are using to get their way around the taxation.

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Sean Williams

A Fool since 2010, Sean specializes in the health care sector, but also has a penchant for mining, retail, technology, and small-cap stocks. You can follow him on twitter at @TMFUltraLong.

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