Taxing

I tweeted last year about some of the differences in day-to-day life in the USA compared to the USA. The prevalence of checks, the centrality of plastic cards as opposed to tapping your phone and the adding of tax (and tips) at the cash register (sorry, the till) are just some of the finance-related quirks which have amused and bemused since I got here last August. These pale in comparison to one of the biggest differences of them all: paying your taxes.

Paying taxes plays has held a symbolic significance since the founding of the American Republic. ‘No taxation without representation’ is one of the more commonly known slogans of the American revolutionaries. That slogan is still used by proponents for statehood of the District of Columbia and other US territories. As a former member of the British plebeian class, who would occasionally delight in the odd rebate here and there, I was otherwise largely oblivious to the process of tax. Tax was something which, by and large, my employer handled for me and I didn’t have to worry about it much more than a cursory check of the payslip to make sure I hadn’t been put into the emergency tax code. Here in the USA though, perhaps unsurprisingly, tax is an industry.

I am very conscious that the comparison, as I suggested above, is perhaps starker for me as someone whose tax was largely handled by the pay as you earn (PAYE) system in the UK. Like many things about British life, you don’t realise quite how good it is until you’re living without it. The most cursory research has taught me that the PAYE system was pioneered by the UK during World War 2 in an effort to increase government revenues at a time when the country needed every penny it could collect to fund the war effort. PAYE has spread to a relatively limited number of other countries, most of which are former British dominions.

Thanks to PAYE I, like I’m sure most Brits, never have to deal with a tax accountant. I know there are plenty of people who do have to file their own taxes and I’m sure that comes with its complexities. Here in the USA though, your employer is heavily restricted to give tax advice to you and other than getting you to fill in the correct tax forms (without guidance of course) you are responsible for your own tax return. I’d done a little bit of research on tax levels though, to help populate my little finance spreadsheet (of course I have a spreadsheet) and when I got my first few pay checks it seems to tally pretty neatly with what I was expecting to pay. It was therefore with some trepidation that I had colleagues telling me that I could expect some money back when I finalised my 2022 taxes.

I guess that it is another difference about US tax compared to the UK: the tax year runs on a calendar year basis, rather than the UK financial year kicking off on 1st April. This means that you get a ‘W2’ form off your employer at the end of January and use it to file your taxes. Luckily, in this the heartland of capitalism, some entrepreneurial programmer has created a tech solution to your tax filing woes. I had Turbotax recommended to me (others are available, I’m sure). So off I went populated Turbotax. Much information-entry and data crunching later, I was given a refund figure and my forms were ready to submit.

I couldn’t believe that, after only five months of earning, that I could get such a significant refund (we’re talking four figures, accrued over just eleven fortnightly pay cycles). To explain the ‘refund’. While the US doesn’t do pay as you earn, it does operate a withholding system. The US withholding system also originated during WW2, for similar reasons as the UK. Described as ‘pay as you go’, I think it is fair to say that the withholdings are calculated more crudely than PAYE in the UK and as such don’t take as many nuances of the tax system, such as deductions and credits, into account. At the end of the tax year this means you have often had too much tax withheld and this gives you your refund.

To muddy the waters further, you have to file federal and state taxes. More complexity, more nuances. Quite frankly, you have to get some kind of outside help, so a tech-based service like Turbotax is probably the most cost effective option for many. Typing and clicking through, you are impressed by the platform and grateful that it is making the process so easy. I guess this is part of the broader desensitisation you experience as you adapt to your new country. Deep down though, my inner Brit is thinking ‘this would be much simpler back in the UK and [the inner northerner here] it wouldn’t be costing me nearly $80 for the privilege of filing my taxes!’.

Like the Lord, the US tax system giveth (the refund) and taketh away (the cost of sorting your paperwork). I’m sure people have tried to get things changed, maybe even introduce PAYE (perhaps a little too socialist), but the amount of people who’d lose out if the tax system changed (not least Turbotax owners Intuit) that I’m sure there is quite a little lobby fighting to keep the status quo. Another one of those differences which reminds us that the UK and the USA are separated by a common language and much more besides.