When my husband and I decided to take the plunge and move to the USA, we knew we would miss certain things about home. And yes, the cliches are true: we hanker for good tea, Victoria sponge, sausage rolls, etc. But never did I imagine how strongly I would long for PAYE taxes.
Pay As You Earn – until you’ve been an employee in America you have no idea how beautiful and progressive those four words are. You see, quite wonderfully, you pay… as you earn.
America does, technically, have a PAYE system – they call it mandated withholding. All employers must deduct money for tax from their employees’ wages but, and here’s how it differs from the UK, the amount they withhold seems little removed from a wild guess. Bosses here essentially throw a dart at a number line, multiply by ten, and send that amount to the government… or should I say ‘governments’ because every time you pay tax, you in fact pay taxes, plural, state AND federal.
For clarity, I’m not protesting about the rate of tax (which is actually very low in the USA for the average worker – http://www.politifact.com/virginia/statements/2015/oct/20/donald-trump/trump-says-us-has-highest-tax-rate-anywhere-world/). What bugs me is the ridiculous unnecessary complexity of the system. Back home, there are only two tax statements you frequently hear about: the P60 annual statement and the P45 end of employment statement. That’s it. You almost never have to fill in a form, contact the government, etc. On the other hand, having lived here for only six months, I have already undergone the following tortures:
W4 – when you start a job you fill in a form that tells your employer how much tax to withhold each month. It is extremely complicated and there are mountains of conflicting advice about what to tick and what not to tick. Nobody expects their employer to EVER withhold exactly the right amount.
W2 – at the end of every year you get a statement from your employer saying what was withheld. I got four copies, so I could keep one, send one to the state, send one to the federal government, and give one to my ‘tax preparer’.
1040NR and IT203- as a non-resident, these are the tax returns I file (one federal and one state). All taxpayers, even simple US citizens with just one regular job, have to file tax returns and it is completely expected that the amount that was withheld will be incorrect; you will either have a refund or a bill. A whole industry of ‘tax preparers’ exists to try and get you the full refund to which you’re entitled.
843 – this is the form you fill in to get any refunds to which you are entitled in addition to the refund calculated on the tax return. I know that is a ridiculous sentence, but there you go.
Americans accept this absurdity almost without question. Along with their ridiculous healthcare system, the tax rigmarole is just accepted as an inconvenient part of life. The paperwork involved in having a job and going to the doctor is almost overwhelming at times.
It is actually quite simple to work out how much tax I should be paying. The tax rules for non-resident aliens are fairly clear, as is the tax treaty between the USA and the UK. My salary for the year is set in advance and the pre-tax deductions for healthcare, transit, etc., will vary a little but not widely. Despite this, my employer withheld about $3,000 more than I needed to pay, over the course of five months. When I complain about this, nobody seems outraged. It will take at least a month to get that back, but some of my colleagues are still waiting for refunds from last year.
The IRS cleverly markets the annual tax refund as an advantage – a sort of enforced savings plan. They proudly boast that 8 out of 10 taxpayers get a refund. Another interpretation, missing from their website, is that every year the workers of America lend the government over $100 billion, interest free (https://www.irs.gov/uac/newsroom/tax-refunds-reach-almost-125-billion-mark-irs-gov-available-for-tax-help).
Given this country’s twitchiness about state interference, along with its foundational belief in fair taxation, you might expect some appetite for change. However, in a country where the IRS is using a 56-year-old computer program running on an IBM mainframe, and the Department of Defense is reliant on 8-inch floppy disks (http://www.gao.gov/products/GAO-16-696T), I won’t hold my breath.