Why the United States is not the Land of the Free
With so much interest in the United States and President-elect Obama, it’s time to adopt a US theme this week.
Senator Obama has promised tax cuts for 95% of Americans — quite a big promise. Possibly a hard one to deliver in the current economic climate.
Rather than getting into the practicalities of election promises, my article today will simply be a comparison of the tax systems in the US and the UK. Maybe at the end of it you can decide which you prefer.
Tax return completion is a task for virtually everyone in the US, whereas in the UK only perhaps a quarter of the adult population has to file a tax return. Last year some nine million self assessment returns were issued in the UK.
In the US, the tax year runs to December 31, and the tax return has to be filed by April 15. Any tax must be paid by them too. This gives individuals and their accountants just three and a half months to file tax returns.
By contrast the UK allows online filing over a 10 month period, and even paper filers get almost seven months (if you have not filed your paper 2007/08 return the door closed on October 31 so online is your only option now).
Income taxes are horrendously complicated in the US. People pay national taxes (known as federal taxes) but also state taxes. This list does not stop there — there can then be city taxes, county taxes and municipal taxes.
You can sometimes see how your taxes are being spent — for example a town with two schools could charge higher schools taxes within the town charge than its neighbouring town with one school.
Then there are property taxes called real estate taxes. These are the equivalent of rates in Northern Ireland.
The UK income tax system seems simple by comparison with only one income tax system across the whole of the country.
The day when Scotland or Northern Ireland get local income tax raising powers will be a confusing one for accountants and the public alike.
Sales taxes are another area where the rates differ depending on the state you are in. Holidaymakers still prepared to face the security hassle of travelling to the US will know all about sales taxes.
That item in the shop might say $10, but once you get to the till a state or local sales tax could well be added — anything up to 10% or more.
This can make quite a difference between states as some states have no sales tax on many items. On the other hand the UK has a flat 17.5% sales tax (called VAT) which applies to most things we buy in shops (apart from books and some food).
The UK has the same tax across the country, though it is higher than the sales tax in much of the US.
Both countries have tax on death — inheritance tax in the UK and transfer taxes in the US. The US system seems to be more complex than ours — and you thought UK inheritance tax was complicated!
Medical insurance, of course, is a big issue in the States. As well as paying for your private provision, self employed people pay 2.9% of their earnings into the Medicare programme.
This is to provide medical care and benefits for the elderly and disabled people. For all employees the cost is split — 1.45% by the worker and 1.45% by the employer.
In the UK medical care is covered under our income tax, though some incapacity benefits and pen
sions are paid for out of National Insurance.
When you think the UK tax system is complicated you need only look to the US to see how much worse things could be.
They have differences across every state border and a multiplicity of tax charges for citizens to pay. And far less time to file their tax returns. Little wonder the tax filing business is so big over there.
Now there’s an idea, methinks selfishly, maybe we should make UK tax more complex?
Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co — www.hustontax.com or (028) 9080 6080.