Tax systems - on topic

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Aldeth - we are taxed as individuals, not as households, so the IRD doesn't need to know anything about the earnings of other people in the house. If you've worked the same job for the whole year, your PAYE is going to be 100% correct. Even if you have a pay rise, it'd have to be a pretty big one (I wish) to make any difference to the accuracy of the tax.

Our system is deliberately designed to reduce admin. Most people don't do a tax return so we save on the costs of all the paper and all the people who process the returns.

 

Aldeth, the calculations are probably different to New Zealand's but the administration sounds broadly similar.

The first €36,400 of a person's income is taxed at 20% and anything above that at 41%. Spouses are assessed jointly (though you can elect to be assessed separately if you wish). Spouses can transfer up to €9,000 of their unused tax band to their partner i.e. both spouses working will get a double band but a housewife can only transfer a portion of hers.

People then get tax credits that they can subtract from the tax payable. The standard is €1,830 and can be fully transferred to the other spouse. There are a variety of other credits available as well, such as for widows and the blind.

You inform Revenue of your circumstances and they will tell your employer at the start of the year. Revenue will automatically calculate the amount each year based on your circumstances, you do not need to contact them unless your circumstances change. Your employer will then convert this into a weekly/monthly figure and deduct accordingly so that your tax paid at the end of the year is correct. If you leave your employer you are given a form with your tax details and the amounts already paid and your new employer will carry on where the other left off. If you lose your job midway through the year there is a facility to apply to have the "overpaid" tax refunded to you.

The other income most people would have would be bank interest. This is taxed at a flat rate of 25% and automatically deducted by the bank so you don't have to anything yourself. Some tax credits are dealt with in a similar way. Mortgage interest and health insurance entitles you to a credit at the standard rate of 20%. This is automatically credited by the financial companies so that the amount you pay is 80% of the "real" cost.

There are then a variety of non-standard credits available, such as for certain medical expenses. You will get a refund for these when you apply to Revenue. You don't need to send in a full form, just one for what you're applying for. It can be done at any time, not just annually, though I do think you need to wait for the year to end to do so.

If you run a business or have significant other income than you will need to provide details and in this case an annual return is necessary.

 

OK, but in the US if you are single, then chances are you are the only person in the household, so in those cases, my point about losing a job or taking on a new one would still apply.

This, I think, is the main reason why it's simpler - you only have two tax brackets.

I did think it was strange that HB mentioned everyone is done individually. It would make sense that a household would be taxed jointly, and that one individual wouldn't be given a lower rate if their partner made a lot more.

We are also taxed on bank interest and stock dividends, although I am unsure what the rate is. However, is you participate in a 401k (for retirement savings) this is not taxed (until you take the money out of the 401k).

This is very different in the US. You get a 100% deduction for the interest you pay on your mortgage, provided that it exceeds the standard deduction. If the standard deduction is larger, then you get a 0% deduction for your mortgage. With healthcare it's a little different. The money you pay for health insurance is not taxed at all - whatever you spend on health insurance is like money you never earned. Money you spend on health care beyond medical insurance is only deductible if it exceeds 7% of your income (there's little wonder why people hate filing their annual taxes in the US).

 

Actually, that is how it works in Canada. For example, I earn more than my wife, and therefore I pay a greater proportion of my income towards taxes than she does. We don't get to calculate our taxes based on our combined earnings. About the only time it matters is if the spouse's income is very low (a few thousand dollars), in which case you get a small tax credit (but this doesn't come even close to being the same as averaging out the two incomes). There are a few other calculations which require a spouse's income to be factored in (also relating to the availability of certain deductions), but generally, a spouse's income is irrelevant for calculating your taxes.

 

A married couple's tax rate isn't the average of their incomes - the two incomes are added together, and it's the cumulative total that determines your tax rate.

 

Poor wording on my part. But paying tax on the combined income is essentially the same as paying tax on the average (with the tax brackets cut in half). My point was that in Canada, neither one of those scenarios exists.

 

In NZ, people are definitely taxed individually. My wife's income and the number of children we have are irrelevant to my income tax position.

Also, in NZ, there are no deductions for mortgage payments.

Hence my comments that our system appears to be much much simpler than the American one:
- no adjustment for income of wife
- no adjustment for number of children
- no adjustment for mortgage
=> less need for people to file tax returns as most people's PAYE will be exactly right.

Aldeth's example of losing your job halfway through the year IS an example of where the tax would be over-collected so filing a return WOULD likely result in a refund.

 

It doesn't make a big difference, multiple brackets would just take a bit longer to work out yourself. For a business their payroll software will automatically work out all the taxes once you put in a person's band and credits at the start of the year. It'll also give the total amounts to send onto the government. It wouldn't be hard to tweak the US system so that US businesses could do the same.

That depends on whether you want women to work or not. If you don't allow housewives to transfer their allowances then they've a much bigger incentive to work.

Deductions and credits are not the same thing. Under both US and Irish systems deductions come off your income and you calculate tax on the remainder. Credits are taken off the tax that's calculated. Deductions favour the rich as they allow them to escape tax at the higher rates while the poor can only get relief at the lower rates. Almost all reliefs in Ireland are credits at the standard rate. The main ones at the higher rate would be pension payments and investments in certain sectors the government wishes to encourage, like nursing homes.

 

The American system sounds like a job creation scheme for tax accountants.

 

Not really, HB. Most Americans that use a tax service have no need of it, since the instructions are right on the form, plain as day, for all to see. If you're running a business, you'd do well to hire an accountant, but I'd wager that's true everywhere.

 

It is. I don't see why most Americans should need to return a form at all. The only main advantage I can see is that over here many people don't bother claiming their full reliefs as they couldn't be bothered saving their medical receipts all year for a tiny bit of money back. The American system forces you to do this.

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Not sure if it deserves its own thread or not but Her Majesty's Revenue and Customs is proposing that all employers send employee paychecks to the government, after which the government would deduct what it deems as the appropriate tax and pay the employees by bank transfer. I can't see it happening but it's a world away from the US's approach.

 

Deise - isn't that what already happens? PAYE? What's the point of sending to IRD first? Why not stick with what already happens, where the employer deducts the right tax and sends to IRD?

Drew - the American system still seems unnecessarily convoluted.

 

I am no tax expert, but IMHO the present systems in Canada and the US are designed to screw the middle class. The poor don't have to pay a blessed thing because they make very little. No one gets taxed on the first X amount of money they earn, and if you earn less than that or have more kids than you can afford, you pay nothing and raise your kids using the money of more responsible people who actually <snipping> think ahead before having 8 kids*.

The rich can put their vast wealth to work finding loopholes and deductions, and they pay very little as well.

This is why, IMHO, the income tax rate should be dropped to a really low number and EVERYONE pays it. No loopholes, no deductions, whatever. I've heard it all before about flat taxes favoring the wealthy, but is not the current system ALSO favoring the wealthy? Simplification would reduce costs and headaches (and put tax accountants out of business, sorry Snook!)

A very low universal sales tax would also be helpful, and reward people who economize rather than reward people who overspend and then access social programs (read that, the money of people who aren't stupid with their money). It burns my butt to bust my hump (3 jobs ATM) and be paying for (via my tax dollars) lazy Skinimax watching douchebags or some rich guy's third condo.

*yeah, some of these people are religious whackjobs. Some of them are MORMON religious whackjobs. But they are STUPID whackjobs and do not have my support for their lack of foresight and decency.

 

LKD, wealth is the true source of power in any nation. As such, any tax system will favor the wealthy. Your flat tax would simply favor them more. The reason that the very wealthy pay less than the middle class on their income is not because of loopholes, but investment income. Most of their income comes in the form of capital gains, which is only taxed at the rate of 15%. Once capital gains are out of the picture, you'll see that a much larger percentage of the income of our top 2% is taxed. Consumption taxes are fine, as long as they aren't the only tax out there. The all-inclusive consumption tax, better known in the US as the fair tax, favors the wealthy more than any other tax scheme I've seen. The wealthy spends by far the smallest percentage of their income on goods and services, and investments aren't taxed using the consumption model. Most models being floated around flip the progressive tax on its head rather than fixing it.

 

I would favor treating the interest gained on investments (which I believe is capital gains but I'm not sure) merely as income, and taxning it along with all other income at the same low rate as all other income. I know it's more complicated than that, but I just get really hostile at all of the loopholes, tricks, dodges, and shelters that mean the wealthy can weasel out of paying, and the middle class worker is stuck footing the bill for lazy, parasitic bastards of all socioeconomic levels.

 

Firstly, it ensures that the correct amount of tax is deducted. Secondly, it makes sure that the taxes are actually paid over. It's common for companies in trouble to delay paying over the taxes and in these times they often go under without ever paying the taxes.

Interest itself isn't a capital gain. Capital gains are the profit you make on long term investments. Take shares. The dividends they pay are income. The difference between the price you bought it at and the price you sold it at several years later is a capital gain.

Loopholes are, well, loopholes. You'll never close all of them, not that you shouldn't try. Shelters aren't all bad. Most of them are designed to encourage investment in good things, like employment in disadvantaged areas. The catch is to make sure that they're still doing what you want them to. A major problem here in recent years were shelters that were in place far longer than they needed to be and ended up pouring too much money into certain areas.

 

That's a good point, Deise.

 

Interest you get from a savings account or a checking account isn't a capital gain, but I think some types of interest are. You already mentioned dividends from stocks, but the other major investment type are bonds (I have both in my 401k account). Bonds don't pay out dividends, but they do pay out interest, and I'm pretty sure that counts as income as well. Bond prices are far less volatile than stock prices, so you are unlikely to gain or loss much in the actual pricing of the bond. The interest payment guaranteed at the end of the term of the bond is the carrot for investors.

 

Very interesting. I don't know if you intended it but it's fascinating seeing the article about how tax cuts for the rich are bad for democracy and contrasting it with LKD calling for much greater tax cuts for the rich. Democracy may not be giving us what we want but it might be giving us what we asked for. Like Wish!