Imagine a world in which taxpayers need not file a tax return. Americans spend more than $200 billion a year complying with the tax code. To dramatically reduce this cost and relieve taxpayers of the associated stress, time and burden would be a dream come true. But here’s a reality check—in the present-day United States, developing a return-free system would divert resources away from vulnerable tax filers and towards those who need help the least.
The New York Times editorial board is the latest to call for such a return-free system, pointing to industry pressure as the main obstacle. While it’s true that the tax preparation industry has come out in force, many advocates look past the real and significant policy barriers to return-free filing in the United States, which were discussed in a recent BPC paper by Jason Fichtner, Bill Gale, and Jeff Trinca. These include two key considerations: the complexity of the tax code and the capacity of the Internal Revenue Service.
The NYT editorial board points out that return-free filing is used by 36 other countries. What goes unmentioned is that countries with widely applied return-free filing share one key characteristic—they have much simpler income tax codes than the United States. For comparison:
- They apply the same “basic” marginal rate to most taxpayers;
- They tax individuals, rather than couples or households;
- They mostly do not tax capitals gains;
- They have few deductions, exemptions, and exclusions;
And the list goes on. Over the years, U.S. policymakers have chosen to implement many social policies through the tax code. Doing so comes with some big advantages, such as low administrative costs for programs like the Earned Income Tax Credit (EITC). But the downside for Americans is that tax filing is much more complex. This complexity, in turn, means a return-free system could not cover “all but a few taxpayers,” as some proponents claim—far from it.
That a return-free filing system cannot serve all Americans should not necessarily be a fatal flaw, but it ought to raise the question of which filers would be served versus those who need the most help today. If those left out of the return-free system were solely upper-income households, which can more easily afford tax-prep assistance, or if the IRS had greater capacity to assist taxpayers in the first place, this might be less of a concern. Unfortunately, neither is true.
Crucially, a return-free system would not be able to accommodate many EITC and Child Tax Credit (CTC) claimants, arguably those most in need of tax-filing assistance. The EITC and CTC are important anti-poverty measures, providing critical support to many low- and middle-income families. But because these programs are specifically targeted towards children in working families, they have complex and confusing eligibility requirements, which reduce take-up rates and are partially to blame for improper payments in the programs.
Some claim that return-free filing would improve administration of the EITC by doing calculations for claimants. But this is a false promise, given that the EITC’s eligibility requirements demand intimate knowledge of families and their living situations—knowledge the IRS just doesn’t have. Paid tax preparers working for EITC claimants are required to extensively probe and document the claimant’s family situation. Furthermore, families and living situations are becoming more complex—recent work has documented that this complexity causes confusion for potential EITC and CTC claimers. Fully 70 percent of EITC improper payments stem from authentication errors due to complex living situations, not calculations required of the filer. If families have a difficult time reporting on their living situations, it’s hard to imagine that the IRS would do better.
Challenges arising from the complexity of the tax code are compounded by longstanding resource and staffing issues at the IRS, as Congress has made a habit of asking the agency to do more with less. Last week, the IRS commissioner testified to Congress that roughly half the IRS workforce is eligible to retire within the next couple of years. Between 1988 and 2017, as the population and number of filers grew dramatically, IRS staffing declined from 115,000 to just 77,000 employees. The IRS budget, meanwhile, has declined by more than 15 percent (in real terms) since 2010. These reductions harm the agency’s ability to enforce the tax code and to assist taxpayers—for example, restricting the types of questions that IRS representatives will answer by phone. Additionally, the IRS IT systems are in desperate need of updating.
Resource and staffing issues at the IRS also have very real consequences for vulnerable taxpayers. In part because of its constrained budget, the IRS conducts more than 70 percent of audits through the mail. These include EITC audits, which are hard to understand and come with long and costly delays for refunds, which are often much-anticipated lifelines for taxpayers of limited means. Resource constraints also prevent the IRS from pre-emptively flagging suspect EITC claims, as well as providing assistance to help EITC claimants file correctly. For immigrant taxpayers, a lack of IRS resources and staff makes it much harder to pay their taxes at all.
While a new return-free filing system could eventually make tax administration more efficient, it’s an unfortunate political and practical truth that pursuing return-free filing would almost certainly mean neglecting these other challenges. That’s what happens when an agency is starved of resources over a decade. Even if Congress ensured the IRS robust, consistent funding moving forward, all the above problems would take years to solve. For example, the agency’s normal onboarding process for new staff takes 8 to 9 months to complete, to say nothing of the additional years of training some roles require. Shifting limited resources away from solving these current problems and into return-free filing would primarily help those with the simplest returns—who, arguably, need help the least—while likely harming the most vulnerable and burdened tax filers who already struggle today.
The NYT editorial board concludes with the observation that, “members of Congress pay lip service to ideas like filing taxes on a postcard, but they continue to perpetuate the current system of mass April immiseration by preventing the most obvious and effective way[s] to simplify tax collection.” On this point, the column is absolutely correct. Our paper lays out a list of these obvious, effective solutions—including simplifying and expanding the EITC, giving the IRS adequate resources and improving their training, and more strongly regulating paid tax preparers, to name a few. Return-free filing just does not make the cut, at least until these other fundamental issues have been resolved.
We need a simpler, more equitable, and more effective tax system, and it’s good that the NYT is shedding light on the painful state of tax administration in the U.S. But return-free filing, despite its dreamy appeal, is a distraction from achievable reforms that could save millions of Americans, especially the most vulnerable filers, from the headaches and nightmares associated with our tax system today.