A Look at America’s Tax, Retirement and Old-Age Pension Systems: Part I

I am a retired senior engineer from Shanghai Power Equipment Research Institute. I studied in the Czech Republic in the 50s. I retired in 1996, and since 2006 I have visited the U.S. seven times — with each stay lasting between half a year and year — to look after my grandchildren. From a variety of sources — including the Americans around me, my son, local Chinese friends, and American newspapers — I gained some understanding of the tax, retirement, and old-age pension systems in the United States, and I have written this article to share my knowledge with you.

Taxes in America

The Americans regard paying taxes as everyone’s duty. Everybody knows about it and conscientiously follows it. The tax authority in the U.S. is huge and its system is quite perfect.

There are three types of tax revenue in the U.S. current tax system:

The first one is the federal tax. It is the tax collected nationwide. All companies, organizations and individuals must pay federal tax on their earnings. The amount of tax they pay varies from fifteen to forty-five percent of their income. A lower income means a lower tax percentage, and this tax system plays a role in adjusting the gap between the rich and the poor.

The second type of tax is state tax. It is an income tax levied by each individual state, and, consequently, it varies from state to state. But generally it falls somewhere between 5 to 10 percent of the income.

The third type is local tax, which is collected by local authorities. For example, there is property tax, which depends on the size of the house, and the education tax, which has to be paid regardless of whether you have children. These local taxes usually add up to 10 percent of the income, depending on the local authorities. My son has to pay $5000 in property tax and $3500 in education tax each year.

In addition, anyone who purchases goods in any shop must pay consumption tax (except food), which is 7 to 8 percent of the commodity price. It is collected by the shop and then turned in to the tax office.

As we can see from these three types of taxes, higher-income persons have to pay income tax of 50 to 60 percent of their earnings. For ordinary earners, it is normally about 30 percent of their income. An American non-governmental organization, The Tax Foundation, releases statistics each year. In 2000, all taxpayers in America paid an average of 33.8 percent of their income on tax. That is equivalent to 124 days’ earnings in a year. It means that all the income earned from New Year’s Day to May 3 have to be used to pay tax. During this period, you work for the country and the society. From May 4 until the end of the year, you work for yourself, and all your earnings go to your own pocket to feed your family.

Of course, the amount of tax you pay fluctuates each year. So the number of days you work for the country and society are different; in some years it’s 130 days and in other years it’s 120 days. In short, when a person works in the U.S., four months’ salary has to be used for tax, and the remaining eight months’ income is yours alone.

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At present, every country in the world establishes its own tax system according to its specific national conditions. For example, when I was studying in the Czech Republic, it encouraged child bearing because of a shrinking population. Therefore, the Czechs developed a tax system that encouraged child bearing: young men and women who are still single when they reach the age of 28 have to pay late marriage tax, and married couples who do not have children when they are 31 years old have to pay late childbirth tax. There are similar taxes in some other European countries. In a word, every country in the world should have a tax system where the types and amounts are determined by that country’s situation. Generally speaking, the tax rate in European countries is higher than that of the United States.

To be continued…