Cost Benefit Analysis Needed for Proposed Real-Time Tax System

Cost Benefit Analysis Needed for Proposed Real-Time Tax System

Holen Estimates Costs to Government and Third-Parties Could be Significant

Contact: Amy Smorodin
(202) 828-4405

February 9, 2012 –¬†Arlene Holen, Senior Fellow at the Technology Policy Institute, urged policymakers to consider the costs and benefits of its proposed “real-time tax system” in astatement submitted to the Internal Revenue Service.

In her comments, Holen explains that many costs and concerns associated with adopting a pre-filled tax system, identified in her paper “Should the Government Prepare Individual Income Tax Returns?” also apply to a real-time system.

Specifically, Holen states cost savings for individuals would likely be modest at best because most costs to filers stem from recordkeeping, checking and verification, and tax planning. Those costs would still exist in a real-time tax system.

Costs for the government could substantially increase due to investment and staffing requirements of developing and managing new systems. Moreover, the IRS lacks the essential electronic processing capabilities and would face a range of challenges in carrying out new responsibilities.

Holen states third-party costs-those of employers, financial institutions and other payers of income to individuals-would rise because reporting deadlines would have to be advanced in order to provide the government with the necessary information. These costs could range from $500 million to as much as $5 billion annually, disproportionally burdening small businesses. Compressed income reporting schedules would also increase risks of error.

Security issues are also of concern because private providers face stronger financial incentives than government agencies to invest in security practices. Moreover, the Government Accountability Office and the Treasury’s Inspector General for Tax Administration have frequently reported weaknesses in IRS security capabilities. The centralized data hub essential for a real-time tax system would pose far greater security risks than the IRS has previously faced and those risks should be thoroughly addressed.

Holen concludes that, “notwithstanding its worthy goals, the real-time tax system outlined by Commissioner Shulman should be subjected to a broad and systematic cost-benefit and security risk analysis before further steps toward implementation are undertaken.”

Holen’s statement and the paper, “Should the Government Prepare Individual Income Tax Returns?” are available on the TPI website.

The Technology Policy Institute

The Technology Policy Institute is a non-profit research and educational organization that focuses on the economics of innovation, technological change, and related regulation in the United States and around the world. More information is available at https://techpolicyinstitute.org/.

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