Does the US have a employer withholding system (i.e. if you get paid $1000 in a week, your employer withholds and remits whatever the pro rata amount is for $52,000 annual income to the Tax Office)? We have that in Australia, and it definitely simplifies the process for workers at the end of the year.
Personally, I've always liked the idea of a 'standard deduction'. People with a steady paying job for the whole year, and simple tax affairs, don't have much of a reason to fill out a tax return given how much data our Tax Office pulls in from other sources (e.g. your bank interest gets pre-filled). The longest part of the whole exercise is claiming all those little work-related deductions here and there. For most people I don't think this ever exceeds $1000 total.
So if the government just gave everyone a default $1000 deduction, combined with pre-filling, filing a tax return for most people would be a simple matter of looking at the summary and hitting 'agree'. You could even take it one step further: if you don't fill out a tax return the government assumes you agree that your default return is correct.
We almost had this in Australia [0]. It was a measure in our 2010-11 Federal Budget [1], but we didn't go through with it for.... reasons...
[0] And there's good reason to believe it would have radically simplified things. I recall 'tax agents' really hating the idea for some strange reason.
Disclaimer: I am not a tax professional, this is not tax advice, and I'm not your lawyer either!
> We have that [a employer withholding system] in Australia, and it definitely simplifies the process for workers at the end of the year.
We have that in America too, only it complicates our tax forms.
When filling out your Form 1040s, under "Payments" you fill field 64 "Federal income tax withheld from Forms W-2 and 1099" from your employer-provided W-2's field 2 "Federal income tax withheld" (ignoring fields 4 and 6, "Social security tax" and "Medicare tax" withheld.) And of course, any 1099-Rs with federal income tax withheld must also be attached to your tax return...
You can ask your employer to adjust your withholding - if you owe too much money (more than $1000 and more than 10% of your total yearly taxes?) come tax time, you'll have to pay an additional penalty. If you paid too much already, the government can wire it back to you, or apply it to next year's taxes.
> Personally, I've always liked the idea of a 'standard deduction'
We have this in America, it's great - mine was "only" $6300 this year (single, no dependents). On the other hand, there are deductions for everything from mortgages to electric vehicles (expiring after this tax year), which can add up quick. Fortunately I'm not there... yet...
Yes, the US does have an employer withholding system but there are so many more layers of taxes and complexity because the taxation system is less federalised.
In Australia there is a single federal employment tax, and a single federal sales tax. States and counties typically collect property tax and fees from services.
In the US both the federal and state governments collect income tax. The tax rates and deduction complexity varies widely between the 52 states. Then the states AND counties (districts) have different sales tax rates. California alone has over 1790 districts each with sales taxes set at a local level.
Not to mention capital gains, Medicare tax etc...
Then the comparatively high lobbying, wealth inequality and inefficiencies in the US political systems makes tax change very slow or regressive.
Wow, that's a lot of complexity! I remember the various state sales taxes when I visited the US a few years ago (that weren't built into the menu prices). Between that and tipping, I swear Americans must be absolute guns when it comes to quick mental arithmetic.
On the tax complexity, at least on the bright side the only direction is 'up' from here :)
US companies do withhold money from each paycheck, but this varies not just by how much you make, but also by how many dependents you have and a few other things [0]. The US also has default deductions, or a person can choose to itemize. These vary if you are "head of household", single, married. However then there's all kinds of other deductions and things to complicate your tax return such as retirement accounts, mortgages, kids, side income, student loan interest, interest earned and on and on. Would be great if it was easier. :)
Edit: People who are contractors / not employees have to remember to set aside a portion of their income that the employer would take out automatically for them.
You've described the American tax system in a nutshell.
Employers withheld on wages, which is how most Americans "pay" their taxes. Most Americans also use a standard deduction, which is several thousand dollars. Taxpayers can alternatively itemize up all of their deductions and if the sum total is larger, use that sum instead of the standard deduction.
A US taxpayer with just W2 (employee) wages taking the standard deduction can fill out a tax return in 5 minutes or less. It only gets complicated when you try to take advantage of the many deductions and tax credits available in the tax code.
Personally, I've always liked the idea of a 'standard deduction'. People with a steady paying job for the whole year, and simple tax affairs, don't have much of a reason to fill out a tax return given how much data our Tax Office pulls in from other sources (e.g. your bank interest gets pre-filled). The longest part of the whole exercise is claiming all those little work-related deductions here and there. For most people I don't think this ever exceeds $1000 total.
So if the government just gave everyone a default $1000 deduction, combined with pre-filling, filing a tax return for most people would be a simple matter of looking at the summary and hitting 'agree'. You could even take it one step further: if you don't fill out a tax return the government assumes you agree that your default return is correct.
We almost had this in Australia [0]. It was a measure in our 2010-11 Federal Budget [1], but we didn't go through with it for.... reasons...
[0] And there's good reason to believe it would have radically simplified things. I recall 'tax agents' really hating the idea for some strange reason.
[1] http://www.budget.gov.au/2010-11/content/bp2/html/bp2_revenu...