Tax code

A better fit for a better tax code


Binyamin Applebaum from The New York Times recently wrote an op-ed calling for adoption of the no-declaration filing. Under filing without a return, many taxpayers would receive an already completed return that they could amend. It’s an attractive idea, but in order for it to deliver the benefits promised, the US tax code would have to be much simpler.

The potential benefits of filing without declaration are well established. In 2006, future Chairman of the Council of Economic Advisers, Austan Goolsbee, found that adopting no-declaration filing would save taxpayers $ 2 billion a year in tax preparation costs, as well as $ 225 million. hours of time saving. When calculating the opportunity cost, he estimated that filing without filing would reduce tax compliance costs by $ 44 billion over a decade. Taking into account population and economic growth, as well as inflation and the increase in the cost of tax preparation fees since 2005, those numbers are likely much higher today.

At least thirty-six other countries have some version of a no-return deposit system. There are two main approaches: exact withholding tax and tax reconciliation. As part of the exact withholding tax, employers generally withhold as close as possible to the exact value of the taxes owed. Meanwhile, as part of the reconciliation of tax agencies, the tax administration sends a provisional statement to the taxpayer, based on information from third parties, such as employers and financial institutions, which the taxpayer then verifies.

Ultimately, a no-return filing system is only as good as the tax code it administers. As a 2003 Treasury Department report noted, without a series of simplifying reforms, no-return filing would end up primarily shifting the compliance burden from individuals to employers, financial institutions, and the IRS, rather than to actually reduce it. The U.S. tax code has changed significantly since 2003 – in some ways towards simplicity and compatibility with a no-return system, as the use of itemized deductions has declined, especially after the Tax Cuts Act and the employment of 2017. But in other respects, policymakers have become even more dependent on the tax code as a tool for non-revenue public policy objectives.

Here are some issues with the U.S. tax code that make undeclared filing less feasible than it would be in other countries.

  1. Administration of social programs through the Tax Code. Programs like the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) are major parts of America’s social safety net. The United States is more dependent on its tax code to provide social protection programs than most European countries with no declaration. Both credits also have complicated eligibility rules and conditions, which a taxpayer’s employer might not be aware of.
  2. Household deposit. Many countries that have reported without reporting do not tax households as a combined unit, but tax individuals separately. As a result, administrators do not need to track spousal income as well as employee income. It might be desirable to eliminate joint reporting, but it might be closer to a household’s ability to pay taxes.
  3. Non-wage income. Most no-declaration systems focus on salary income. Interest, dividends and capital gains are often either totally excluded from tax or subject to a single, often reduced tax rate. In the United States, we classify certain capital income (like short-term capital gains) as ordinary income and subject it to the same set of seven tax brackets, but it is currently not subject to withholding. Self-employment income would also not be subject to withholding tax.

Declaration without declaration and tax difference

Many have argued (myself included) that filing without a declaration would narrow the tax gap, or the difference between the amount of taxes owed and taxes collected. And there’s some analysis to back it up: In 1996, a Government Accountability Office (GAO) report found that some form of non-filing would save the IRS about $ 36 million by reducing errors. After adjusting for inflation and income growth, that number is likely much higher now.

But the current tax gap is estimated at around $ 630 billion. Even if the savings were about twice as much today, they would only represent a tenth of a percent of the tax gap. The main reason the magnitude of this change is so small is that the types of income that would be subject to exact withholding already have low rates of non-compliance. There is only a 1% underreporting tax gap for employee salaries. However, income with higher non-compliance rates, such as income from partnerships, would not be affected by the no-report filing system.

Other concerns

These are not the only concerns with the No Return Deposit. Making the IRS now the tax collector, the tax preparer could create a misalignment of incentives and cause taxpayers to overpay. Conversely, some (including supporters of the idea, such as Stanford law professor Joseph Bankman) have argued that it would lead to more less-paid, because taxpayers would dispute an overestimation of the IRS’s liability, but would say nothing if the IRS underestimated. In more abstract terms, the tax filing process arguably has some civic value and removing the taxpayer from much of the filing process reduces transparency.

Ultimately, filing without declaration could reduce compliance costs for many taxpayers, but would not be as efficient as the system it administers. Significant reforms of the random set of policies administered through the tax code are a prerequisite for undeclared filing to be a truly effective reform.

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