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The UK Business Tax System for Small Business - Research Paper Example

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This research paper describes different types of no-return systems and summarizes features of the British system. We then provide estimates of how many U.S. individual income tax returns could be eliminated under various sets f changes in the tax code…
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The UK Business Tax System for Small Business
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Download file to see previous pages No-return systems are clearly feasible: thirty-six countries--including Germany, Japan, the United Kingdom, and several other industrialized nations--use some form f no-return system for at least some f their taxpayers (U.S. General Accounting Office [GAO], 1996). Moving to a no-return system, however, has implications for both the administrative and structural features f the tax system. Our goal in this paper is to identify and provide information on some f the major trade-offs involved.
In exact withholding systems, the tax agency makes every effort to withhold the exact amount f taxes so that no end-of-year filing, payment, or refund is needed. Thirty-four countries operate exact withholding systems. These systems require taxpayers to report some minimal, nonfinancial information to either employers or the tax authorities. (In the United States, this would likely consist f items such as name, address, social security number, filing status, name, and social security number f spouse and dependents.)
The proportion f taxpayers who have to file varies by country. About 90 percent f taxpayers eligible for final withholding in the United Kingdom did not have to file in 1991. In Germany in 1986 and in Japan in 1988-90, the corresponding figures were 46 and 63 percent, respectively. Moreover, even among wage earners, exact withholding can be difficult to apply accurately to everyone. Withholding errors can occur when earnings come from more than one source or when the taxpayer changes jobs, retires, marries, divorces, or has a child.
These issues indicate the important interaction between tax structure and tax administration. If these tax systems had been set up to tax only wages, and to tax at a flat rate with no allowances, deductions, exemptions, or credits, exact withholding would work accurately for virtually everyone.
Tax Agency Reconciliation
Taxpayers may be relieved f the burden f filing even in systems that do not generate exact withholding. In tax agency reconciliation (TAR) systems, taxpayers can elect to have the tax agency prepare their return. Under a TAR system, tax filing occurs in four steps. Interested taxpayers provide basic information to the tax authority.
Because withholding does not have to be exact, TAR systems may not place as great a burden on employers and other payers as exact withholding systems. Moreover, it may be easier in a TAR system to apply a progressive tax rate structure to a combination f income derived from different sources.   ...Download file to see next pagesRead More
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