The U.S. can look to the U.K. on many policies, our tax system shouldn’t be one

By Ian Liddell-Grainger

In the 1940s, the U.K. established a “Pay As You Earn” system in which the king’s government calculates tax withholding to match the amount of annual taxes due. For most of the 20th century, the system worked fairly well, as the majority of taxpayer income was typically derived from a single employer, which meant most taxpayers never had to see a tax return.

Today, families are typically supported by more than one income earner, and more taxpayers are self-employed or have multiple jobs. As a result, approximately one-third of British taxpayers were effectively filing their own taxes through a process

known as Self Assessment — negating much of the “will save the taxpayer time” rationale for a return-free file system.

Nevertheless, a number of U.S. lawmakers continue to push for a government-run tax filing system in America — similar to what we have in the U.K. — run by the Internal Revenue Service (IRS). These policymakers claim the IRS has the technical expertise and capability to handle such a system, including Senator Elizabeth Warren (D-Mass.), who last year said, “Nations around the world do versions of free-file in order to make it easy for people to support their government. There’s no reason the United States should not be doing that as well.”

With all due respect to Senator Warren, it’s just not that simple.

For one, the IRS doesn’t have the information needed to prepare a complete and accurate tax return for filers, especially to determine eligible credits and deductions which lower individual tax bills and maximize refunds. Similarly, their claims about the ease at which America could adopt the tax systems of other countries are equally flawed.

The U.K. has a significantly less complicated tax code than the United States with far fewer deductions, fewer credits, and higher rates of taxation. In essence, about 65% of U.K. taxpayers fall into one of three tax brackets. Conversely, the U.S. has graduated tables that can result in a much more complex calculation.

While the British system does have some tax incentives, these pale in comparison to the $1.3 trillion in federal tax expenditures available to U.S. taxpayers. Rather than allowing taxpayers to claim those deductions at the end of the year, the U.K. effectively makes employers responsible for calculating every taxpayer’s obligations. This system also provides no year-end tax refunds, something many Americans rely on as part of their annual household budgets.

Unlike the U.S., the U.K. also does not have tax credits like the Earned Income Tax Credit or Child Tax Credit tied to a year-end tax return. The U.K. does have tax-related support payments for lower-income taxpayers, but British citizens can apply for those credits throughout the year and they are not distributed as a tax refund.

Independent experts who have studied government-run tax preparation have repeatedly rejected false comparisons between the U.S. and U.K. A 2021 report from PWC and Center Forward found, “most countries that have a return-free filing system have far simpler tax systems than the United States has.” Similarly, a 2020 report from the Progressive Policy Institute found, “as tax codes around the world have become more complex, many countries that are currently using [return free file] systems are increasingly finding it necessary to re-engage taxpayers in order to ensure accuracy.”

The U.S. has a complicated tax code and any notion that IRS-generated tax returns would simplify the process for American taxpayers is sorely misguided. A report from the National Bureau of Economic Research found that pre-populated returns would be accurate for less than 50%of taxpayers. Worse still, virtually all inaccuracies would likely result in higher tax bills for individual taxpayers. The IRS has almost no information about the personal circumstances of taxpayers, making it nearly impossible to determine if they qualify for the credits and deductions that lower their tax bills.

The only way for America to simplify the annual tax filing experience is to simplify the tax code. Doing so could dramatically reduce the amount of time and money Americans spend filing taxes each year.

Ian Liddell-Grainger is a UK Member of Parliament and Chair of the All-Party Taxation Group.