Money: Brace yourself for the American way

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The Independent Online
MOST American habits cross the Atlantic after an average time lag of 10 years or so, and American financial lifestyles could provide an early warning of what is in store for us in the new millennium. Some will be welcome, others much less so.

The average American pays 11.6 per cent income tax a year. They have state and local taxes on top of that, but can get a tax break on those payments. It's enough to make a Brit feel sick. And it gets worse - wealthier people have good accountants and shell out even less. As little as 2 per cent of the net worth of US millionaires goes on income tax, says Money magazine.

Tax avoidance is a national sport in the States at this time of year, as US workers go through the annual trial of filling in tax returns for the Internal Revenue Service. The newspapers are full of unusual tax-saving tips.

Self-assessment for tax has just begun here, with attendant teething troubles as a million people didn't get their forms in on time. An estimated 6 per cent of forms will have to be sent back because they have been wrongly filled in. But at least our Inland Revenue didn't scare us with doorstop- size tax manuals (standard in the US). Maybe they are saving them for next year.

Before we feel too jealous about low US income tax, think about other undesirable imports that may follow self-assessment. The US has joint taxation for married couples: 20 million couples pay more tax than they would if they were living together and taxed separately. Although separate taxation has only been in force here since 1990 we have already seen the new government float the idea of a backdoor return to joint taxation. Any new system may involve swapping personal tax allowances for family tax credits, saving billions for the government by stopping higher-rate payers from putting savings and assets into the names of lower-earning spouses.

Next week's Budget looks certain to shave income tax rates, especially for lower earners. But there will be a price to pay. As our welfare state is whittled away, it is worth looking at how the US experience may shape developments in the UK if the right to free health and state benefits is reduced even further.

If you're middle class in the US, what you save on tax you'll pay out again in medical insurance and other welfare substitutes. Most US firms offer health insurance to workers, but even the insured have to make co- payments (such as a fee to see the family doctor) as well as paying monthly premiums to share the cost with their employers (tax-deductible, of course). The cheap option is an HMO, a managed healthcare plan running something like the NHS here: members have to see named family doctors who act as "gatekeepers" to the health service to cut costs.

Americans who are self-employed or work in a job with no health plan are stuffed. They can't join HMOs and so are looking at $200 (pounds 120) plus per month for an individual health plan - and there's usually an excess on claims, which can mean you pay $2,000 a year for medical expenses before the insurer starts to chip in.

We get away much more lightly over here. Just over 6 million Britons are covered by private health insurance, but it's usually part of a company deal: only 1.2 million have personal health insurance, and this is likely to fall as thousands of elderly people are giving up their individual private plans after tax relief was withdrawn.

It is also very hard to get federal disability benefits in the US: most applicants are refused. So people who are disabled or too ill to work for months or years are likely to be stuck in poverty, unless they take out insurance. There are early signs that the UK is moving in the same direction in shifting the burden from the state to private insurance.

In the UK, insurance which protects your income or pays a lump sum if you fall seriously ill hasn't really taken off yet. In 1996, the most recent year for which figures are available, just 145,000 people bought income replacement insurance. That's peanuts in insurance terms, but insurers are playing the long game - they believe we'll all come round to the idea. Some US states require firms to provide this insurance as an automatic perk to staff, and that may happen here. But if you're not a conventional worker you may miss out.

All of this is depressing. But the Americans have brought us some good things - and not just Ben & Jerry's ice cream. Their finance companies are much more customer-focused and offer better deals (probably because Americans won't tolerate poor rates and service). For example, Americans are used to paying average credit card rates of 14 per cent APR, and many of them pay much less. Now American low-cost credit card firms RBS Advanta, Capital One and People's Bank are offering cards at introductory rates as low as 6.9 per cent (Capital One: 0800 669000).

This is all good news, but there may be less welcome developments. Many of us would feel uncomfortable knowing that our financial history was for sale. But that's what happens in the US: credit card firms (and anyone else) can buy lists of names and personal data from the credit reference agencies. Brace yourself ...

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