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Automatic Tax Filing?

Summary:
Pro-publica regularly reports that H&R Block and Quicken lobby against allowing the IRS to pre-fill tax forms. Sure, of course they do and that’s bad. It doesn’t quite follow, however, that “Filing Taxes Could Be Free and Simple” if only for such lobbying. In fact, Lucas Goodman, Katherine Lim, Bruce Sacerdote & Andrew Whitten estimate that less than half of tax forms could be filled out correctly by the IRS and those are the simpler types where the costs of private tax preparation services are lower: Each year Americans spend over two billion hours and billion preparing individual tax returns, and these filing costs are regressive. To lower and redistribute the filing burden, some commentators have proposed having the IRS pre-populate tax returns for individuals. We evaluate this

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Pro-publica regularly reports that H&R Block and Quicken lobby against allowing the IRS to pre-fill tax forms. Sure, of course they do and that’s bad. It doesn’t quite follow, however, that “Filing Taxes Could Be Free and Simple” if only for such lobbying. In fact, Lucas Goodman, Katherine Lim, Bruce Sacerdote & Andrew Whitten estimate that less than half of tax forms could be filled out correctly by the IRS and those are the simpler types where the costs of private tax preparation services are lower:

Each year Americans spend over two billion hours and $30 billion preparing individual tax returns, and these filing costs are regressive. To lower and redistribute the filing burden, some commentators have proposed having the IRS pre-populate tax returns for individuals. We evaluate this hypothetical policy using a large, nationally representative sample of returns filed for the tax year 2019. Our baseline results indicate that between 62 and 73 million returns (41 to 48 percent of all returns) could be accurately pre-populated using only current-year information returns and the prior-year return. Accuracy rates decline with income and are higher for taxpayers who have fewer dependents or are unmarried. We also examine 2019 non-filers, finding that pre-populated returns tentatively indicate $9.0 billion in refunds due to 12 million (22 percent) of them.

Jeremy Horpedahl has an excellent post explaining why:

…there is one major thing missing from your income tax withholding estimate: your spouse’s income. You see, the United States is one of the few remaining OECD countries that primarily taxes income based on the family unit (you can use “married filing separately” as a status, but generally there is no benefit and you might lose some deductions). Most countries tax based on your individual income, even if you are married. This is important for two reasons. First, it means there is a “secondary-earner penalty,” where one spouse faces a much higher marginal tax rate (this is different from the “marriage penalty,” but that’s a topic for another day. For purposes of a pre-filled tax return, the second and larger issue is that your employer has no idea how much tax to withhold because it is dependent on how much your spouse makes (and whether you are married).

Moving the US to a system of individual taxation…would simplify the calculation of your taxes.

The other major factor that Jeremy mentions is that the US simply tries to do a lot through the tax code so we have lots of itemized deductions or special tax structures–veterans, widows, widows of veterans–which make it difficult to pre-fill taxes without either simplification or a major overhaul of the administrative data system.

Jeremy also worries that pre-filling will further disconnect the payment of taxes from services rendered thus making costs more opaque. Probably true, although I think that ship has sailed.

The post Automatic Tax Filing? appeared first on Marginal REVOLUTION.

Alex Tabarrok
Alex Tabarrok is Bartley J. Madden Chair in Economics at the Mercatus Center at George Mason University and a professor of economics at George Mason University. He specializes in patent-system reform, the effectiveness of bounty hunters compared to the police, how judicial elections bias judges, and how local poverty rates impact trial decisions by juries. He also examines methods for increasing the supply of human organs for transplant, the regulation of pharmaceuticals by the FDA, and voting systems.

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