Something I have never quite understood about the American way of life is the way we handle our taxes. I remember before I emigrated here, I saw a episode of the Simpons when Homer was late in filing his tax return. The hilarious antics portrayed by that american icon while he proceeded to attempt to file his taxes on time had me rolling in laughter (as is usually the case with Homer). What I didn’t realize was this was actually what happens to many americans every year!
Just after I moved here I noticed so many people using the phrase “thats a write off”. I was at first puzzled as to what they meant, and could not fathom the complexity of a tax code that had introduced such accountant vocabulary into everyday life. It was not until my first Tax Return did I truly appreciate the magnitude of the mess that constitutes the United States Tax Code. I was, and continue to be, amazed by the many avenues and methods people use to avoid paying money to Uncle Sam.
Every year we choose how much money we wish to pay through the year on our W2, and then at the end of the year we attempt to backtrack and show the IRS that we actually want some of that money back. Not only are we giving Uncle Sam our hard earned cash, but we also tell him how it was spent – in order to get some of it back!
Back in jolly ole England, if you are a salaried employee your taxes are alot easier. The Pay As You Earn (P.A.Y.E) scheme pretty much does all the tax filing for you. As you earn throughout the year, the Inland Revenue collects your taxes from your paycheck making adjustments throughout the year if necessary. If you pay too much, they send you a refund in the mail without even asking. If you didn’t pay enough, then you get a bill, but as there are not many deductions you can take (unless you are small business owner), then it pretty much always works out that you pay enough.
“What? No deductions?” – I hear you cry.
Well, lets think about it. Say you are earning $100k a year, and you donate $10k to charity. At the end of the year you can take a 10k deduction. So you might get $2500 in a refund in april! Woo. Now in england, when you donate to charity you fill in a card for the charity that enables the charity to reclaim the income taxes on the donation amount. So in order for the charity to get $10k you only actually have to donate $7500. You keep the extra $2500 in a bank account earning yourself interest, rather than providing that priveledge to government.
What about interest payment deductions?
Yes, I love these too. But the fact of the matter is that the basic rate of tax is proportionally higher here *because* people can take deductions. Yes, it can encourage home ownership, but if people had more disposable income throughout the year due to lower base rates, then that in itself would encourage home ownership.
We have all heard of many weird and wonderfull attempts to claim a deduction, but it has always seemed to me that most deductions are extremely obtuse – and seem to cater for special interests only. I refer to the world of professional lobbying of course. Without those lobbyists the tax code would be a lot smaller. In fact since 1990 the tax code has more than doubed in size.
So what is the alternative?
Well a simpler tax code would be a good start. There are many ideas around – the flat tax (one rate for all – no deductions), the fair tax (essentially a federal sales tax) are just two. But unfortunatly for the moment I think we are stuck with the current system. Why? Well for one the tax industry is huge billion dollar market in the United States – a simpler tax could mean shrinking that industry. An industry that pays a lot of taxes to the federal government. Hmm ever decreasing circles. Another reason is that changing the current tax code would mean alot of congressman admitting that they were wrong – and lets be honest folks that never happens.
Well, my lovely wife is now making the appointment with H & R Block so we can tango with our W2’s, 1040’s W4’s and a whole host of other obscure forms. This is going to be fun I can tell… Fingers crossed for a refund.