Naive question about taxes around the world

[PyramidHead]

I'm not asking about rates or progressiveness. I'm wondering, is it the norm in most developed countries for taxes collected throughout the year to be either too much or too little, so that everybody has to manually file their taxes at around the same time to correct the imbalance?

To put it another way: has any country figured out how to tax by the right amount the first time taxes are levied, thus eliminating the need for tax returns? Is this even possible logistically speaking, or are there too many variables?

 

[bilby]

I'm not asking about rates or progressiveness. I'm wondering, is it the norm in most developed countries for taxes collected throughout the year to be either too much or too little, so that everybody has to manually file their taxes at around the same time to correct the imbalance?

To put it another way: has any country figured out how to tax by the right amount the first time taxes are levied, thus eliminating the need for tax returns? Is this even possible logistically speaking, or are there too many variables?

The British system when I was there (30-odd years ago) allowed the majority of wage-earners with no other sources of taxable income to have their tax managed by their employer; when changing employer, you were given a form P45 that told your new employer how much tax they should withhold from your pay. Failure to present a P45 to a new employer meant paying top-rate tax until the end of the year, and then applying for a refund. That simplified things for the vast majority of taxpayers who had only one source of income; no tax return was needed, although you could file one if you believed you had been over-taxed.

I don't know if that system still exists; it seems that it essentially moves the reporting burden from the earner to the employer, rather than eliminating it altogether, but as I only saw it from an employee perspective, I don't know the details. As a worker, the only effort required was to ensure that you gave a P45 to each new employer as soon as you started work, or as soon as possible afterwards.

The Australian system seems to be far less complex than the US system for most taxpayers, but an annual return is still required for almost everyone.

 

[Derec]

Well US has a reporting burden on the employer as well. All W2s and 1099Miscs over $600 (I think) have to be reported to the IRS.

 

[dismal]

One could argue the Social Security tax meets the definition of a tax on income that is sufficiently uncomplicated as to be levied at the time without a true-up filing for most people. I think there are some things that need to be trued up, like if you switch employers during the year they can take out more than the maximum and you can get it back on your 1040.

US income taxes are way too complicated to contemplate doing this as I would guess are most other countries, but it could be done.

 

[PyramidHead]

The obvious solution to the complicated mess of once-a-year filing in the US would be some kind of computerized monitoring system that keeps track of transactions as they occur (including employment changes, going back to school, getting married, etc. all the things that could in principle affect one's taxable income), but that would mean putting a whole lot of personal information out there on IRS servers. I don't know if it would be worth it for the majority of people who probably just do whatever they did last year when they file.

A while ago, a forum member said that the reason checks and some other deposits don't 'clear' until the next business day is because the banks are lending out your money in the interim. I wonder if there is a similar logistical reason why the IRS would want to tax people in a certain way for 90% of the year, and then make a one-time correction all at once. I'm not saying lending has anything to do with it, just that there may be some advantage to the IRS this way, otherwise they would have upgraded the system by now.

 

[Togo]

I don't know if that (British) system still exists;

It does. PAYE or Pay As You Earn is calculated by your employer on yourt behalf. You can also fill out a tax return if you feel there's an adjustment that needs doing, or opt out of the system entirely and fill in taxes by hand.

There's also a system whereby you can ask the Revenue service to fill in your return for you - that's only for straightforward cases.

In general I've found the revenue service to be very helpful.

 

[Loren Pechtel]

The basic problem is multiple sources of taxable money. Creating a system that worked correctly for a single source of money wouldn't be hard--and the US system comes pretty close in this regard, you'll be within a few hundred dollars if you fill out your W-4s correctly.

However, the reality is that most people have multiple sources of taxable income--for example, any couple where both people work. The IRS tables for this are much more complex.

You might as well throw the IRS tables out the window if you have two people who earn variable incomes. No sane prediction system is going to be good enough.


Things could be made much simpler, though. The IRS should mail everyone a proposed tax return. If you like the numbers, sign it and return it. If you disagree you can either file your own return or you can simply replace the parts of what they sent you that you disagree with. I would even favor allowing you to simply write in the missing data and send the return in incomplete, let the IRS figure out the tax and send you a bill/refund as the case may be. The data should also be available for download into tax programs.

Such a system could basically eliminate the hassle of tax returns for most people. So long as your life situation hasn't changed from last year and you're not itemizing the IRS generally has the data it needs to do it and even in the cases it doesn't there's usually only a schedule or two that you would need to fill out (for example, if you have multiple lots of stock the IRS won't know which ones you elected to sell.)

So far the tax prep industry has managed to keep the IRS from doing anything like this, though--it would be devastating for them.

 

[dx713]

Here in France, we avoid tax returns themselves by paying for the previous year income, so after it is known and your tax perfectly calculated.
But it means we still need to fill an income declaration yearly (although now, it is pre-filled with what the revenue service knows, like salary and social security payments, making the workload quite light for salaried people like me).
Also, it means you're paying taxes on the previous year income. It's nice when you're young and starting a new and better job, as you have one year of better earnings with low taxes. But it hurts when you're downsizing or retiring, with one year of lower income and high taxes to look at - better plan ahead!