This paper presents a comparative study of systems for withholding income tax on wages. It identifies types of withholding that can be used in developing countries and countries in transition where administrative capacity is a major consideration. Another consideration examined in the paper is the compatibility of withholding taxes with the income tax. A comprehensive income tax, which applies to all taxable income regardless of the source, offers a different environment than a schedular income tax with final taxation by source.
Following the introduction, Section II discusses the different aspects of preliminary and final withholding. Section III addresses the subject of integrating withholding of income tax from wages and withholding done for social security purposes. Section IV outlines the administrative constraints that developing countries and countries in transition face in designing and operating a withholding system. Section V summarizes the wage withholding systems of three developed countries, four developing countries, and two countries in transition. Section VI analyzes the impact of inflation on the withholding system. Finally, Section VII recommends a simple pay-as-you-earn system for developing countries and countries in transition that entails a minimum of return filing. The paper concludes that, ideally, taxation of income, including that from employment income, should be comprehensive and the return filing rules should be pragmatic.