just to review: taxes
Dec. 3rd, 2009 06:16 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
winterbadgerI recall looking into this back when I first started planning to move to the UK and being surprised by what I found.
There's a popular perception in the US that the UK (and Europe in general) loads its inhabitants with burdensome taxes. "Maybe we don't have all those socialist benefits they have over there, but at least we don't pay most of our income in tax!" is the sweeping generalisation.
Of course tax is an incredibly complex subject, and almost any simple statement is going to generalise and oversimplify. And income and standards of living differ in many ways between the two countries. But, from reading a little about it, I think I understand the following, which runs counter to this US narrative:
UK citizens are not liable for income tax if their income is £2,440 (roughly $4,100) or less. If it is greater than this sum but under £37,400 (roughly $63,000), they pay 20% tax on income over the personal allowance of £6,475 ~$11,000). Higher incomes pay 40%.
In the US, the personal allowance (or personal exemption as it's called here) is much lower ($3,650). To this can be added a standard deduction ($5,700--more for those who are married, widowed, have children, are elderly, or are blind) or a deduction based on itemising a laundry list of tax loopholes: medical expenses, expenses for work, property taxes paid by homeowners, etc.
The final net income figure is then compared to a range of six brackets. And here's where it gets complicated (:-). For each bracket that a portion of your income falls into, you are taxed at that rate. So if you earn $8,025 (the lowest bracket, you pay $802.50 tax (10%). If you earn $20,000, taking you into the 20% bracket, you pay $802.50 tax for the first $8025 of your income, and then an additional $1796.25 (15% of the difference between your total net income and the first $8,025). Until I read up on this, I was not aware of this strange feature; I thought you paid the rate on the total. But our hypothetical $20K earner pays about $400 less tax than someone paying at the flat top-bracket rate.
Finally, tax credits are given to low-income workers (and for other reasons); credits reduce the computed tax, rather than reducing the income before computing the tax.
It would probably be worthy of an international finance thesis to actually compute comparable tax figures for hypothetical people in the US and the UK, but for someone earning the US median personal income of $32,140 and taking only the standard deduction and earning no tax credits, I *think* their tax would be $2,214.75, or about 9% of their gross income (despite being in the notionally 15% bracket). For someone with a higher income, say, a male of 25 or higher with a bachelor's degree, earning $60,493, he would pay $8,187, or about 16% (despite being in the 25% bracket).
I don't have the same median income figures to hand for the UK, but take someone with the median 30-35 year old income of £19,500. They would pay (I think) UK tax of £2,605, or about 13% of gross income. Someone with the median income of a 45-49 year old man (£35,400) would pay about £5,785 or about 16% of gross income.
But...
Most US states piles an additional income tax on top of the federal tax; Maryland, where I live, adds between 2% and 6.25%, depending on your level of income--in the case of our average earner, another $1,526 in taxes. In some cases, counties also add one; my county has a 3.2% tax, another $1028 for our low earner. Now our median income earner has paid nearly $4,800 in income tax, or about 15% of gross income, *more* than the comparable UK earner. So income tax rates are, from a small sample, pretty comparable between the US and the UK. And nowhere near the "most of your income" myth of UK taxes that exists in the US.
Of course, there are other factors to consider. Both countries levy tax on investment income. The UK has council rates, car tax, and TV license fees; the US has personal property tax on rel estate and motor vehicles in most, though not all, counties and cities. But I find it pretty striking that this popular myth about comparative tax rates really doesn't, on the surface of it, seem hold up to much scrutiny.
There's a popular perception in the US that the UK (and Europe in general) loads its inhabitants with burdensome taxes. "Maybe we don't have all those socialist benefits they have over there, but at least we don't pay most of our income in tax!" is the sweeping generalisation.
Of course tax is an incredibly complex subject, and almost any simple statement is going to generalise and oversimplify. And income and standards of living differ in many ways between the two countries. But, from reading a little about it, I think I understand the following, which runs counter to this US narrative:
UK citizens are not liable for income tax if their income is £2,440 (roughly $4,100) or less. If it is greater than this sum but under £37,400 (roughly $63,000), they pay 20% tax on income over the personal allowance of £6,475 ~$11,000). Higher incomes pay 40%.
In the US, the personal allowance (or personal exemption as it's called here) is much lower ($3,650). To this can be added a standard deduction ($5,700--more for those who are married, widowed, have children, are elderly, or are blind) or a deduction based on itemising a laundry list of tax loopholes: medical expenses, expenses for work, property taxes paid by homeowners, etc.
The final net income figure is then compared to a range of six brackets. And here's where it gets complicated (:-). For each bracket that a portion of your income falls into, you are taxed at that rate. So if you earn $8,025 (the lowest bracket, you pay $802.50 tax (10%). If you earn $20,000, taking you into the 20% bracket, you pay $802.50 tax for the first $8025 of your income, and then an additional $1796.25 (15% of the difference between your total net income and the first $8,025). Until I read up on this, I was not aware of this strange feature; I thought you paid the rate on the total. But our hypothetical $20K earner pays about $400 less tax than someone paying at the flat top-bracket rate.
Finally, tax credits are given to low-income workers (and for other reasons); credits reduce the computed tax, rather than reducing the income before computing the tax.
It would probably be worthy of an international finance thesis to actually compute comparable tax figures for hypothetical people in the US and the UK, but for someone earning the US median personal income of $32,140 and taking only the standard deduction and earning no tax credits, I *think* their tax would be $2,214.75, or about 9% of their gross income (despite being in the notionally 15% bracket). For someone with a higher income, say, a male of 25 or higher with a bachelor's degree, earning $60,493, he would pay $8,187, or about 16% (despite being in the 25% bracket).
I don't have the same median income figures to hand for the UK, but take someone with the median 30-35 year old income of £19,500. They would pay (I think) UK tax of £2,605, or about 13% of gross income. Someone with the median income of a 45-49 year old man (£35,400) would pay about £5,785 or about 16% of gross income.
But...
Most US states piles an additional income tax on top of the federal tax; Maryland, where I live, adds between 2% and 6.25%, depending on your level of income--in the case of our average earner, another $1,526 in taxes. In some cases, counties also add one; my county has a 3.2% tax, another $1028 for our low earner. Now our median income earner has paid nearly $4,800 in income tax, or about 15% of gross income, *more* than the comparable UK earner. So income tax rates are, from a small sample, pretty comparable between the US and the UK. And nowhere near the "most of your income" myth of UK taxes that exists in the US.
Of course, there are other factors to consider. Both countries levy tax on investment income. The UK has council rates, car tax, and TV license fees; the US has personal property tax on rel estate and motor vehicles in most, though not all, counties and cities. But I find it pretty striking that this popular myth about comparative tax rates really doesn't, on the surface of it, seem hold up to much scrutiny.
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no subject
Date: 2009-12-03 11:43 pm (UTC)no subject
Date: 2009-12-04 12:06 am (UTC)no subject
Date: 2009-12-04 12:29 am (UTC)no subject
Date: 2009-12-04 01:25 am (UTC)But food (at least, food from markets, not restaurant meals and not alcohol) is often exempt from sales tax. And many jurisdictions (at least in my experience on the East Coast) will have a day or more in the autumn that are "back to school" tax holidays when sales tax on clothes, stationery supplies, etc. are cancelled to allow parents to buy necessary (and, well, maybe not so necessary) things for kids about to start the school year.
no subject
Date: 2009-12-03 11:44 pm (UTC)no subject
Date: 2009-12-04 12:04 am (UTC)Yes, and we have payroll deductions for FUTA (unemployment insurance) and FICA (which funds Social Security retirement insurance and Medicare health insurance for the elderly and disabled). I'm not sure what the comparative levels of deduction are--that would be research for another day. But I know we get nothing like the same benefit for them. Jobseeker's Allowance and Local Housing Allowance are not time-limited, are they? UI in the US is usually paid only for half a year, though that gets extended in some recessions. I think Section 8 vouchers (our housing assistance for low-income persons) is not term-limited. And Medicare isn't free; some users still have to pay insurance premiums for it, and even those who don't have to pay co-pays, deductibles, and monthly premiums for drug coverage.
no subject
Date: 2009-12-04 12:15 am (UTC)Certain health conditions mean you get free medical prescriptions and eye care anyway.
I'm not on benefits, but I pay £13 every four months to cover ALL my prescription drugs - not just my regular ones, but ANY prescription my GP writes during that time. Otherwise it's £4 per item on each prescription. Hubby has T2 diabetes and takes drugs to control his blood sugar, so qualifies for free prescriptions for any drug his GP writes.
no subject
Date: 2009-12-04 08:58 am (UTC)I also get the impression that those countries that do pay high taxes get GREAT benefit from it and are generally pretty civilised places.
But yes, your popular myth is at least thirty years out of date, I'd say.
no subject
Date: 2009-12-04 01:23 pm (UTC)Sadly, I think the pattern holds true here. I feel as if the US is a country that can be very generous and kind at times out of sentimentality, but is not on the whole a terribly civilised place. We're still too selfish, as a nation, for that yet.
But yes, your popular myth is at least thirty years out of date, I'd say.
The one about British people drinking their beer warm is still out there, and it's more than 30 years old.
(I remember when I was about to leave to spend a semester in London, and I asked my father, who had spent time in England after the war with Toc H, "Da, do the British really drink warm beer?"
He paused and thought for a moment and replied, "They drink it at room temperature. Which, you'll find, is not the same thing." :-)
no subject
Date: 2009-12-04 01:25 pm (UTC)no subject
Date: 2009-12-04 02:24 pm (UTC)Been lurking!