Authors Cite Increased Compliance Cost for Employers
Contact: Amy Smorodin
September 29, 2010 – Adopting a return-free federal income tax system, or Simple Return, would introduce a host of challenges and would not result in overall cost savings, state Arlene Holen and Joseph Cordes in “Should the Government Prepare Individual Tax Returns?” released today by the Technology Policy Institute. The paper was submitted to the National Commission on Fiscal Responsibility and Reform in response to the President’s Economic Recovery Advisory Board’s report to the President on options for changing the current tax system.
“Any cost savings for individual filers and the Internal Revenue Service (IRS) would likely be modest at best, yet additional costs to employers and other payers of income could be substantial,” state Holen and Cordes, TPI Senior Fellow and Professor of Economics at The George Washington University, respectively. The authors explain that third-party compliance costs would increase “largely because reporting deadlines would have to be advanced in order to provide the government with access to necessary information to automatically prepare returns and timely tax refunds.” The compressed reporting schedules would also increase risks of error and would disproportionately burden small businesses.
In addition to an increased overall compliance cost, the authors assert that implementing return-free filing would introduce numerous issues at the policy, economic, and operational levels. These include:
- The Internal Revenue Service would face a conflict of interest in functioning as both tax preparer and enforcer.
- Taxpayers would become less cognizant of the incentives in the tax code and their personal finances.
- Risks of error would result from stretched IRS capacities.
- Taxpayers who are unwilling to challenge an official IRS document would nevertheless retain liability for errors in government-prepared returns, a problem particularly for lower-income filers and those with English as a second language.
- IRS preparation of individual returns could compromise taxpayers’ privacy.
- IRS tax preparation may pose greater security risks because private providers face stronger financial incentives to invest in sound security practices in an environment of rapidly advancing technology and changing threats.
- The government would enter into competition with the private sector, reducing incentives for investment in innovation and electronic tax preparation systems.
The authors advise that there are better ways to reduce costs associated with tax return preparation. “Reducing the burden of complying with the federal income tax can yield potentially significant benefits both to individual taxpayers and to the government,” state Cordes and Holen. “Simplifying the complex U.S. tax code is the most direct way to reduce the costs of collecting federal income taxes, both public and private.”
The authors conclude that adopting a federal return-free tax preparation system would not be advisable. “Any cost savings for government and individuals would likely be modest at best and additional costs to employers and other payers of income could be substantial,” they explain. “Moreover, a return-free system would introduce numerous challenges and issues for the federal government and the taxpayer.”
“Should the Government Prepare Individual Tax Returns?” is available on the TPI website.
The Technology Policy Institute
The Technology Policy Institute is a 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/.