Tax systems - on topic

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Just bringing this from the other thread where it was off-topic.

Drew - I don't have to file a tax return every year. Only if I had a complicated situation, like I was a small business owner, or I ran several rental properties. I certainly don't need an accountant to look after my taxes, because our system sounds way more streamlined than the one you were describing. For most people, the tax they pay as they earn covers their entire income tax obligation. We don't have any of the deductions or credits that you described. Some people do get a refund, if they worked for part of the year, or if they were making a loss on their rental property. But nobody has an accountant to do their taxes unless they are a business.

 

Tax System? Most Americans don't pay much in taxes. We just borrow the money from China and give it away:

Last year, after deductions, Mrs. Chandos and I got a refund of about 12K, which was up from the year before (10K). I never used to get back that much until we started having kids. But I heard they want to cut our Social Security benefits though...I guess Iraq needs a bigger surplus....

http://www.huffingtonpost.com/2010/09/13/us-tax-dollars-funding-ma_n_714893.html

 

I got $29 refund last tax year! But no accountant needed to do that. It's all done online, quite simply. Full out a form with a bit of information. A month later you receive a cheque (or a letter telling you you owe them money).

 

Just doing my part to keep Iraq out of the red.

 

My annual tax return did get larger - by about 15-20% after I had a child, but not to the extent that Drew described. I do get a few thousand bucks back at tax time, but I got that before I had my son as well. It's bigger now, by maybe a thousand bucks, but it's not that much bigger. Then again, I make considerably more than the $42K Drew stated.

I will be interested to see what happens this year. My wife returned to work last month as a teacher, so our income will increase a bit for 2010, and it will increase a lot in 2011. I'm not sure if I get any deduction for child care costs. I imagine it has something to do with the amount of money you make, and if both my wife and I are working, we probably will exceed that number.

 

Why on earth do you get a tax deduction for having kids?

 

Basically to somewhat ease the financial burden of raising children (and the recognition that society generally benefits when people have children).

 

Truth be told, I think children are exemptions, not deductions, which are a little different. IIRC, the exemption last year was $3,500 per person in the household. So for me, my wife, and my son, the first $10,500 of income I earned was not taxable. So yes, the government incentivizes you to have children.

 

In terms of economics, I think that if you analyze all of the costs of having and raising kids and compare it to the paltry incentives offered by the government, you still lose money. The sad thing is that the tax system is really about taking money away from decent, hardworking people and giving it to lazy, good for nothing dirtbags. My friend had a shirt -- I liked it. It said

Work Harder! Milliions of people on Welfare are Depending on You!
Tax systems SHOULD focus on providing services that benefit us all, rich, poor, old, young, etc. But IMHO in the North American context it has become a way to subsidize minorities at the expense of the majority, who see very little of value for the tax dollars we have ripped away from us.

My take on taxes, anyhow.

 

On top of that, I don't think the Feds should be collecting so much money that they either can or should have to pay money out to every state in the union. At worst, assuming some level of weath distribution at the federal level, the state that gets the least money should be $0 or something. The federal money should primarily go to federal spending, and the extra money that we now give to the Fed should, instead, go to the States.

All in all, though, US taxes are simple until you itemize. As I hear it, most people don't need to itemize until they have a mortgage (which is deductable). For those who don't know, the US allows you to assume a 'standard deduction', or you can 'itemize' your deductions one at a time. Itemizing is apparently a lot of paperwork, and many people hire tax experts (or use software these days) to do it.

 

You had to go there didn't you? Well of course, they sit around at places like KBR, Halli, and Blackwater, sending emails about riding the government "gravey train" to their friends who work for corporations not lucky enough to have a vice-president who can throw government money back in the direction of his old cronies - or company he still has a vested interest in.

Yes, and here they are:

http://www.progress.org/2005/tcs179.htm



http://en.wikipedia.org/wiki/Halliburton

 

If they are undeserving buggers then I despise them whether they are winos on the street or lying slime in the boardrooms. Either way, the common working man is getting screwed by the tax system.

 

Yeah, there's basically one of two forms that most people use. If you take the standard deduction, you use the "short" form, whereas if you itemize, you use the "long" form. As someone who typically does his own taxes, and has filed using each of the forms over the years, the long form is certainly more time consuming than the short form (as you would expect), but it's not horrible, especially with the advent of tax software, like Turbotax. Even when I do the long form, I can usually complete my taxes in a couple of hours.

You're also right that the answer to whether you should use the short or the long form largely depends on whether or not you have a mortgage on your house. Since a married couple can take the standard deduciton of $7,000, the only reason to do the long form is if you have more than that in itemized deductions. The only way you're likely to exceed that much money is if you own a home, as the interest you pay on it is tax deductible. This is especially true in the first few years of a 30-year mortgage, where over 90% of what you're paying is interest.

 

That seems weird to me. There's no incentive like that in New Zealand and somehow people still keep having kids. The administration of such a complicated system must add a lot overhead to the tax collection process that would probably best spent on healthcare or something.

 

Not really. Even when our tax code was "simple," we still had to file every year. Those exemptions, deductions and whatnot are all just lines on a form that takes the typical American at most 15-20 minutes to complete. Simplifying our tax code would simplify our debate about the tax code, but it wouldn't make the IRS any smaller, reduce the size of its budget, or save the average American anything more than a few minutes every April.

 

We don't have to file tax returns every year. Probably only about 10% of people bother to file a tax return because 90% of people's taxes are correctly deducted through PAYE.

 

It could well be worthwhile for our IRS to come up with a system in which individuals with no self-employment income could just skip filing all together, but doing so wouldn't save them as much time or money as it would have before the dawn of the information age. The percentage of individuals who do all their filing electronically is fast increasing, making implementing such a change less and less attractive. There's also some benefit to requiring Americans who meet the income threshold to file a return because it reminds everyone that they need to declare their self employment income or at least certify that there isn't any to declare.

 

HB,

Do you not have a progressive tax code in New Zealand? It would seem like it would be difficult to get 90% of the people right every year, unless you were in a job where you didn't get a raise, and your income was exactly the same for every paycheck that year.

Perhaps this is better explained by example. This link shows the tax brackets in the US. Starting in 2010, the first $3,650 x persons in the household earned by members of the household isn't taxed at all. Additionally, you get a standard deduction of $5,700 for singles, $11,400 for married couples. (If you can itemize your deductions, you could conceivably come up with more tax free income, but unless you are paying a really big mortgage, it usually isn't that much more.)

For income earned beyond that, here are the tax rates (all in the list are for married couples):

Less than $16,750 - 10%
$16,750 – $68,000 - 15%
$68,000 – $137,300 - 25%
$137,300 – $209,250 - 28%
$209,250 – $373,650 - 33%
$373,650 or more - 35%

However, as I said it's progressive, meaning you pay the listed tax as you progress through the different levels of income. Say a married couple is making $200,000. After their exemptions and deductions, the first $16,750 of taxable income is taxed at a 10% rate. Income earned between $16,750 - $68,000 is taxed at 15%, and so on. So while they are in the 28% tax bracket, the only income taxed at 28% is the income earned between $137,300 and $200,000.

Here's what I would like to understand about the NZ tax system. It would appear in order for the government to tax you correctly, then they would have to know about how much money all people in your household would be earning in a year. (This is assuming that people of varying incomes levels pay different amounts of tax as a percentage of their income - i.e., a progressive tax system - if not, then disregard the comment.)

Most years, that won't be a problem, because assuming everyone in the household has a stable job, there won't be many years where your tax bracket will change. However, what happens in situations where one member of the household loses their job? Or conversely, as is my situation this year, a member of the household who was not working the previous year (my wife) returns to work? In situations like that, there's a decent chance that your tax bracket would change, and it would seem like this would happen often enough (especially with the recession) that it would be problematic.

One final point I'd like to bring up. When Bush became president in 2001, he lowered the income tax in all brackets by 2%. Those tax cuts expire at the end of this year. Thus, if no law is passed between now and the end of 2011, all the tax brackets would increase by 2%. Obama's proposal is to maintain the tax brackets as they are now, except for the top two brackets, which would go back to the 2% higher rate that they were prior to 2001. So the top two would increase to 35% and 37%, respectively. People making in excess of $209,250 annually are up in arms about this stating that they are "losing" their tax cut, which really isn't true. Because the tax system in the US is progressive, they will still be taxed at the lower rate for the first $209,249 of income that they earn in a year. So it's only income in excess of that amount that will be subjected to the higher tax. So even for people earning in excess of $209,250, they are still receiving the same tax break on the majority of their income (unless you're making millions per year).

 

In the UK, it's 20% up until you earn £40k a year, then it's 40% thereafter.... hence why companies don't tend to set up headquarters in this country, and lot of our high paid sports stars don't live here!