I live in Europe (Czech Republic) and as long as I'm simply employed at a company, I don't need to file any taxes on my own (I assume the financial department does that for me automatically).

Why is the American system different?

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    Note that France is similar to the US in this respect. – Relaxed Feb 9 '15 at 8:59
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    What do you do about your deductions? – curiousdannii Feb 9 '15 at 9:32
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    @curiousdannii for the basic fixed deductions (a minimum that's not taxed, deductions for children/dependents) the employer handles them, as it affects the amount paid. For various special deductions or income you file a tax report, but that doesn't affect 90% of people - either you don't have any special deductions, or the amount you'd receive as a tax return is small enough that it's not worth the effort of filing the paperwork. – Peteris Feb 9 '15 at 11:20
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    @curiousdannii it's worth noting that the available deductions vary a lot from place to place. In the UK everyone gets more or less the same deductions - there's not much variation depending on individual circumstances. I believe the US is very different in this regard. – Nigel Harper Feb 9 '15 at 14:47
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    @user2338816 you're assuming the current US system, just with the employer doing the filing. That's not the only way to do it. My employer is able to tax my salary correctly with a simple code from the tax authorities which reveals minimal personal information. My investments and savings are correctly taxed at source (or in tax free vehicles). I do a tax return, but only because I have some self-employed income as well as my salary. – Nigel Harper Feb 10 '15 at 11:49

12 Answers 12

up vote 33 down vote accepted

One of the reasons, apart from historical, is that different people have different tax liabilities which the employer may not be aware of.

For example, in the US we don't pay taxes in source on investment income, and there are many credits and deductions that we can't take. So if I have a child and some interest income from my savings account - employer's withholding will not match my actual tax liability. There are credits for children, additional taxes for the interest, and the actual tax brackets vary based on my marital status and filing options I chose.

So even the same family of two people married will pay different amounts in taxes if they chose to file separate tax returns for each, than if they chose to file jointly on one tax return.

For anyone who've lived anywhere else, like you and me, this system is ridiculously complex and inefficient, but for Americans - that works. Mainly for the reason of not knowing anything better, and more importantly - not wanting to know.

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    +1, but, for the record, as a lifelong American, I find the system maddenly complex. I'd be happy to have a larger final tax burden if the process were made simpler. – JoeTaxpayer Feb 9 '15 at 0:28
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    Or you may, for instance, have income from side jobs that you don't want your employer to know about. Given the progressive nature of US tax rates, you'd have to tell your employer about all your income: the side jobs, investments, lottery winnings... And deductions: mortgage, taxes, medical expenses, and so on. Which would turn your employer into a tax preparation service. – jamesqf Feb 9 '15 at 7:24
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    @jamesqf taxes are progressive almost everywhere, yet in most of the EU and other countries people with only salary and investment income don't usually need to file tax returns. That requires however withholding taxes in source for investments and notifying employer about the children etc (as these provide credits) and in most countries taxes are an individual responsibility (as opposed to household as in the US). As to the problem of multiple employers - one option is to file tax return for refunds, but you can avoid that using various systems. – littleadv Feb 9 '15 at 7:34
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    @jamesqf but one of the benefits of using such a system is that instead of making the employer "tax preparation service" - you make the taxes much simpler. Medical expenses? Universal coverage. Mortgage? Non-deductible. And so on. I mean, you don't need to justify complexity by complexity. Just make it simpler. – littleadv Feb 9 '15 at 7:36
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    @JoeTaxpayer While I agree with you, I suspect there are some Americans who would say, "I'd be happy to have a smaller final tax burden if the process were made more complex." (Or maybe that has already happened!) – Michael Feb 9 '15 at 17:11

Companies in the US will take care of paying a portion of your required income tax on your behalf based on some paperwork you fill out when starting work. However, it is up to you as an individual to submit an income tax return. This is used to ensure that you did not end up under or overpaying based on what your company did on your behalf and any other circumstances that may impact your actual tax owed.

In my experience, the process is similar in Europe. I think anyone who has a family, a house or investments in Europe would need to file an income tax return as that is when things start to get complex.

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    In (at least some parts of) Europe, people with families, who own houses and have investments may not need to file tax returns. This is because the tax authorities collect data directly from their employers, mortgage providers and investment bankers or dividend-payers. All of whom collect basic-rate income-tax at source. – RedGrittyBrick Feb 9 '15 at 11:16
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    I have a house and investments, and no need to file taxes usually - I would need to file if I got rental income from that house or got income from trading stocks abroad, but basic non-business things as mortgage or interest income don't require any action regarding taxes. – Peteris Feb 9 '15 at 11:24
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    Your impression of the UK is incorrect. It's certainly not necessary to file here just because you have a family or a house. Investments will necessitate it in some cases depending on the type and how active you are (e.g. active trading may give rise to capital gains liabilities which have to be declared). I get the impression the multi-layered nature of the US tax system (i.e. taxation at federal, state and in some cases sub-state levels) creates a level of complexity which doesn't exist in the UK (yet!) and makes individual filing almost unavoidable. – Nigel Harper Feb 9 '15 at 14:45
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    The complexity arises from the layered system, but also from how different income or loss sources are taxed and how different life events / choices result in additional tax burden, tax deductions, tax credits or subsidies. Another complicating factor is the ability to request tax refunds in advance, which need to then later be reconciled with reality. Note that all of this holds true for both the US and the Netherlands. – Eric Feb 9 '15 at 14:52
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    @NigelHarper The federal/state/local layers don't really have anything to do with why federal income taxes must be filed. Those systems are all completely separate. In several states (mine included,) there is nothing to file for the state or local levels, only the federal level. Other states do have to file state income taxes, but that's an entirely separate filing. – reirab Feb 9 '15 at 19:27

Politics is certainly part of the equation, in two ways that I can think of. These don't necessarily reflect my views; just trying to explain as I see it.

First, there are a lot of interests in having the current, convoluted tax system entrenched. ProPublica did a piece talking about the question you're asking, and Intuit, makers of the popular tax software TurboTax, is mentioned as a company that lobbied heavily to keep the kind of system you describe out. It's spun as increasing the size and cost of government (which, I guess, is true - someone has to do the work if you aren't filing) while opening up possibilities for error, but the piece portrays the companies as being more interested in preserving the status quo.

Second, plenty of people don't like the idea that taxation is done automatically, out of sight and out of mind. An issue that illustrates this is airline pricing. Consumers don't like seeing a $19 fare advertisement and then finding out that they'll actually have to pay $50 after the taxes are added. However, those in the airline industry and those who are generally against taxes don't like the idea that a tax can be added without the consumer really knowing that the government was responsible for the price increase. You sometimes see this with gasoline prices, where taxes are built into the price per gallon. My home state of Pennsylvania recently raised the gas tax without anyone really noticing since the overall price was dropping dramatically at the time. Contrast that to Pittsburgh-area bars who were able to very specifically pin an alcohol tax on its creator.

Point being, direct deposits with automatic deductions already take most of the thinking out of taxation. Those in that situation really only think about their income in terms of the amount that shows in their bank account. For some, that time of filing taxes is the one time a year where you actually get to reflect on the amount of money you're paying the government for its services. The more automatic taxation is and the less that the public thinks about it, the easier it is for the government to raise it without people noticing.

  • A big +1 for noting the lobbying component of all this. – ceejayoz Sep 20 at 22:09

One significant reason it makes sense for filing to be the default is home ownership rates. I think far more so than investment income, Americans own homes: as there is a significant mortgage interest deduction, between that and investments a large number of Americans would have to file (about a third of Americans get the mortgage interest tax deduction, and a large chunk of the richest don't qualify but would have to file for investments anyway).

We also have a very complicated tax code, with nearly everyone getting some kind of deduction. Earned Income Tax Credit for the working poor (folks making, say, $30k for a family of 4 with a full-time job get several thousand dollars in refundable credits, for example), the Student Loan interest deduction, the above mortgage deduction, almost everyone gets something.

Finally, your employer may not know about your family situation. As we have tax credits and deductions for families based on number of children, for example, it's possible your employer doesn't know about those (if you don't get health insurance on their behalf, they may well not know). Start reporting things like that separately... and you end up with about as much work as filing is now.

  • Actually the U.S. is on the low end of ownership rates, among larger and wealthier countries: en.m.wikipedia.org/wiki/List_of_countries_by_home_ownership_raten.m.wikipedia.org/wiki/List_of_countries_by_home_ownership_rate – Jon of All Trades Feb 9 '15 at 19:00
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    @JonofAllTrades Not really. The U.S. is pretty much in the middle of the pack of the wealthier countries on that list. It's mostly the poorer ones that are at the top, interestingly enough. – reirab Feb 9 '15 at 19:33
  • Well, poor countries are more agricultural and have a lower population density typically, so that's not that surprising. And as far as other nations vs US - we explicitly encourage ownership via a tax deduction. I suspect many others don't. – Joe Feb 9 '15 at 19:35
  • That does not explain anything. A country like Germany is quite different but some European countries with automatic/optional tax returns like the Netherlands have similar tax incentives and home ownership rates than the US. – Relaxed Feb 10 '15 at 9:21

I think the key point that's making the other commenters misunderstand each other here is the concept of "deductions". I can only speak for the UK, but that's only a concept that business owners would understand in this country.

For things like child credits or low income tax credits, we don't get paid them at the end of the tax year, but into our bank accounts every couple of weeks all year round. Therefore, we have nothing to "deduct". If we work for a company and have business expenses, then the company pays for them. If we make interest on our savings, the bank pays it for us. We make money at our jobs, and the employer works out what taxes and national insurance we owe, based on a tax code that the government works out for us annually (which we can challenge).

To be fair, it's not like we're free from bureaucracy if we want to claim these benefits. There are often lots of forms if you want child benefit or disability allowances, for instance. We just apply as soon as we're eligible, rather than waiting to get a lump sum rebate.

So it appears to be a very different system, and neither is inherently better than the other (though I'm personally glad I don't usually have to fill in a big tax return myself, which I only did one year when I was self employed). I'd be interested to know, since Google has let me down, which countries use the American system, and which the British or Czech.

you either tell your financial department about them (e.g. I used to get a student's tax discount), or you file them separately. But you don't have to file anything by default.

That is a comment connected to the question.

In the united states you can almost achieve this. 90% of the numbers on my tax form are automated. The W-2s are sent to the IRS, the 1099-s for my non retirement accounts are also sent. The two biggest items that take time are charities, and the educational benefits.

Nobody has to claim every deduction they are entitled to. They must claim all the income, and decide to take the standard deduction. It would probably take less than an hour to finish the families taxes: both federal and state.

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    Many US citizens can and do complete their tax forms in less than an hour. The main thing that forces folks to do more is having income other than wages. Many will want to spend more time since the US has the odd practice of implementing many social programs as tax rebates. The "why " behind that is pure irrational political history so don't bother trying to make it make sense. – keshlam Feb 9 '15 at 13:37
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    @keshlam: There's nothing irrational about that. Tax rebates via deductions benefit those with high marginal tax rates (i.e. the wealthy) and do nothing for the poor (as they didn't have any income over which to pay tax). Thus, social programs via tax rebates benefit the rich, as the lobbyists intended. It only stops making sense if you assume that the poor vote for their own benefit, instead of being swayed by electoral propaganda. – MSalters Feb 9 '15 at 17:06
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    My favorite part about filing US federal taxes is getting all the way through and then having to adjust every calculation I just did on the Alternative Minimum Tax form just to prove that I don't need to pay the Alternative Minimum Tax. – dg99 Feb 9 '15 at 18:56
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    @MSalters That's complete nonsense. The social programs are mostly implemented as tax rebates and nearly all of them are fully refundable (i.e. you still get money back even if you never paid anything in.) They also almost all have income limits above which they don't apply. For some, these limits are rather low, limiting those programs to only lower-income families. For others, the limits allow the programs to apply to middle incomes. However, nearly all of them exclude the wealthy. Please do not post on matters with which you aren't actually familiar. – reirab Feb 9 '15 at 19:22
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    @reirab: Even when the wealthy aren't excluded, the amounts are such that the benefit is a trivial fraction of income. As for instance tax credits for solar power & energy efficiency. Bill Gates wouldn't even notice the few hundred I was able to deduct for my insulation &c. – jamesqf Feb 9 '15 at 20:33

For two reasons:

1- People are entitled to deductions and credits that your employer cannot possibly know. Only you as an individual know about your personal situation and can therefore claim these deductions and credits by filing income tax returns.

2- Me telling you that you made $100,000 last year is not the same as telling you that you made $125,000 last year, but someone took $25,000 out of your pocket. Tax season is the one time of the year when citizens know exactly what chunk of their hard earned money was taken by the government, creating more collective awareness about taxation and giving politicians a harder time when they propose raising taxes.

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    Regarding point 2: That's why in the UK, for instance, your payslip shows gross and net pay, with itemised deductions. The UK also issues taxpayers with an annual breakdown of tax paid and spent. – frodoskywalker Feb 10 '15 at 11:27
  • @frodoskywalker How does your employer know about your itemized deductions? Business expenses or charity donations for example? – AxiomaticNexus Feb 10 '15 at 18:22
  • @YasmaniLlanes in my country, all taxes are paid for employers. You can choose to file up a declaration if you are entitled to deductions, which can be done online (really online, not that "fill up a pdf" nonsense.) – Leonardo Herrera Feb 10 '15 at 19:46
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    @LeonardoHerrera so you still have to file taxes. – AxiomaticNexus Feb 10 '15 at 19:51
  • @YasmaniLlanes Why would I have deductible business expenses when it is not my business? If I'm self employed as well as having a regular job, I'll need to file. Normally, you are issued a tax code which you give to your employer. It gives them no personal information, just lets them know how to tax you. As for charitable donations, the charity claims those deductions. – frodoskywalker Feb 11 '15 at 13:47

Because Freedom(tm). Seriously though.

In the US you are free to use your hard-earned money to

  • blow it on blackjack and hookers
  • donate to charity
  • pay State and municipal taxes
  • take a mortgage on a home
  • prepay into a "term-restricted endowment" for your healthcare
  • prepay into a "term-restricted endowment" for your retirement
  • prepay into a "term-restricted endowment" for your child's college

Every one of these actions has a tax consequence in the US. So it's impossible to reconcile your taxes until you've said what you did with the money. That's why you have to file tax forms.

The work of government

"But wait. Many of those activities seem like the mission of governments - charity, taxes, healthcare, education..." And I'll readily concede that point. Other governments find other ways to fund this without giving tax deductions.

For instance in the US if I want to donate $53 post-tax to a charity, I donate $92 and deduct the $92, netting $38 back, and the charity doesn't pay State VAT, netting $100 worth of goods. In the UK I donate $53 and the government matches with another $47 via the National Lottery something-or-other, and again the charity gets $100.

In the US I spend on a Health Service Plan to pay my insurance gap, and it's tax deductible. The UK, NHS just pays all my medical bills and done.

The US is starting to swing that way too. Our first swing at Individual Retirement Endowments, (IRAs) we made contributions tax deductible (here we go again) and retirement-age payouts taxable (so two tranches of tax treatment, with growth taxed). Now, US retirement (Roth IRAs), the contributions are taxable (i.e. don't get any special tax treatment) and then, withdrawals are tax-free (so 0 tranches of tax treatment, with growth not taxed.)

Why the US won't match instead

Similarly, the US could engage similar tricks - like matching charity gifts instead of allowing deduction, ditto health spending plans, college funds, you name it. However a couple things. First, this matching would become an Entitlement - an amount the government simply must pay, and Americans dislike tax entitlements.

Second, and bigger, the current "tax deduction" system favors the rich at the "expense" of the poor. This varies by deduction. For instance IRAs (traditional) are deductible from dollar one. For most other deductions, you must tally them all up on Schedule A, and choose to take these instead of about a $12,000 default deduction everyone gets. Unless you have have over $12,000 of deductions, fuggedaboutit. This crushes the soul of the incentive for any lower and middle class, as they'll never stack up that many deductions. The incentives are for rich people.

This also means regular folks do not enjoy the effective government match (via tax deduction) since the government doesn't lose any tax revenue when they contribute. It's very weird and creepy.

The $12,000 default deduction is a product of the Trump tax changes. It used to be half that, they folded in another unrelated exemption to cut 2 lines from the tax form. The result is deductability is even more out of reach for most Americans, who will now never file a Schedule A, and will never collect a tax benefit for many good activities. Charities are particularly feeling the pinch.

  • I thought the first bullet point should have been "hookers and blow", but I may be showing my age. – JoeTaxpayer Sep 19 at 19:59
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    No, it's me showing my age. It's a Futurama ref. – Harper Sep 19 at 20:02

There are a few reasons:

1) Deductions and credits. We have a lot of them. While I suppose we could pass this information on to our employers for them to file, why would we want to? That just unnecessarily adds a middle-man as well as sharing potentially private information more than it needs to be shared. This is the one that effects the most people.

2) Income sources. While normal employment, contract work, and normal investment income already gets reported to the IRS, this is not true for all sources of income. For one, the U.S. is almost completely by itself on actually taxing income that its citizens earn outside of the U.S. While this policy is completely absurd, the only way for the government to know about such income is for the person to report it, since the IRS can't require foreign employers to send information to them. Also, barter income as well as other income that doesn't meet the qualifications for the payer to be required to inform the government requires the employee to self-report. Similarly, capital gains on things outside of normal investments (real estate, for instance) require self-reporting.

Having said all of this, U.S. reporting requirements are absurd and illogical. For instance, the IRS already knows about all of my stock trading activity. My broker is required to report it to them. Yet, I still have to list out every single trade on my own return, which is really tedious and completely redundant. For charitable contributions, on the other hand, I only have to give the IRS the final total without listing out all of the individual donations, despite the fact that they don't have that information made available to them by another source. It makes no sense at all, but such is the federal government.

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    That hardly explains anything. Most of it is true in Europe too but there is no need to submit any information to your employer and no need to do a tax return by default. If you can benefit from some deduction or fall in one of those more complex situations, you do need to prepare a tax return, possibly using some software provided by the tax office that comes pre-loaded with all the data they do have. – Relaxed Feb 10 '15 at 9:28
  • Also, just about any country I know requires resident to report income earned abroad and that's always a bit more difficult. What's unique about the US is taxing citizens who don't live in the US. – Relaxed Feb 10 '15 at 9:29
  • @Relaxed In the U.S., a very, very large percentage of people end up having at least some credits and/or deductions, so the default case is that they do need to file a return. So, yes, that by itself is a large part of the answer to the question of why people in the U.S. need to file. As far as submitting information to your employer, other answers/comments have indicated that that is needed in some parts of Europe in order to claim deductions or credits without having to file a return (which seems logical enough.) – reirab Feb 10 '15 at 12:56
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    All these small differences are somewhat relevant and interesting but I still don't think this addresses the question at all. Many deductions and a majority of the population filing tax returns to benefit from them is also the way it is in the Netherlands. But filing a tax return is still optional for employees, if you want to forego a deduction, it's your problem. Regarding information submitted to your employer, maybe some countries do it that way. Personally I don't know any but the most important thing is that it's not a logical requirement at all so it's also not an explanation. – Relaxed Feb 10 '15 at 13:58

One of the reasons is also general distrust to the government. Another one is that there exist special interest group which profits from the complicated scheme, keep adding special cases, and has stronger financial situation that the opponents of such complex scheme.

People do not trust government, or companies, to act in their best interests. So they (we) waste huge amount of time and/or money to comply with byzantine income laws.

In 2004 Democratic presidential primary, presidential candidate Wes Clark (who beyond being 4-star general has also master degree in economics from Oxford, and taught economics in West point) proposed similar scheme: for people with income under 50K, employer would do all the (simple) paperwork, if desired, and get return.

In the noise of the campaign, idea how to simplify taxes for half of the population was lost.

Funny how the only candidate in recent history who was both professor of economics (not MBA, which is about business and profits) and distinguished military hero, could not get any traction in Democratic party.

A couple things. First of all, most people's MAIN source of income is from their job, but they have others, such as bank interest, stock dividends, etc. So that income has to be reported with their wage income.

The second thing is that most people have deductions NOT connected with their job. These deductions reduce income (and generate refunds). So it's in their interest to file.

Why is the US still working with paper checks when Europe went digital about a decade ago? Tax filing is just another area in which the US is lagging. Modernizing it costs money, and the US is quite close to bankruptcy (as seen by the repeated government shutdowns).

Also, the US tax code is quite complicated. For instance, I doubt there's anyone who has a full and complete list of all allowed deductions.

Some comments wonder about multiple incomes. This doesn't require tax filing either. My local tax authority just sends me a combined statement with data from 2 employers and 2 banks, and asks me to confirm the resulting payment. This is possible because tax number usage is strictly regulated. SSN abuse in the US presumably makes this problematic.

  • Comments are not for extended discussion; this conversation has been moved to chat. – JohnFx Feb 10 '15 at 1:57

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