Want to help the poor? Don't cut their taxes. Do their tax returns for them instead.
Forbes 07.07.03
Because the rich tend to pay most of the income tax in the U.S., it is hard to cut taxes in a way that helps poor people--witness the debate over whether to extend the child credit to families that pay no income tax. But there is an alternative, once you start including the weighty costs of doing a tax return as part of the tax burden. People have to either spend many hours filling out forms and following arcane instructions or pay someone to fill the forms out for them. These costs are just as real as the tax liability shown on the 1040, but since they don't appear in the government budget, they tend to be ignored. They shouldn't be. Joel Slemrod at the University of Michigan has calculated that complying with the income tax costs us more than $80 billion per year.
The burden of complying is especially high at the bottom of the income distribution, where people frequently have poor educational backgrounds, aren't adept at numerical calculations or do not read English well. The best way to reduce the tax burden for the poor, without costing the government much money, would be to make it so that as many people as possible don't have to file tax returns at all. Let their taxes be computed automatically using information the Internal Revenue Service already has. Doing this just for the simplest tax returns like the 1040EZ could save millions of low-income taxpayers a collective sum in the billions of dollars each year.
The EZ forms are meant to reduce the compliance burden on people with less than $50,000 of income who receive their money as wages and small amounts of interest. Last year people filed over 20 million 1040EZs. But how easy are they for someone without a high school degree? While the 1040EZ has only 13 lines, the instruction booklet is 32 pages long. The IRS' own estimate (almost certainly underestimated) is three hours and 43 minutes to fill out the 1040EZ form. If these filers are worth even $12 an hour in the workplace, the EZ form represents a burden as big as a tax raising $1 billion.
That calculation assumes that the filers do the work themselves. The truth is that close to half of them go to a paid tax preparer, and many, short of cash, take out a loan against their refund. These loans carry effective interest rates as high as 650%. The result is that low-income people end up paying an average of $150 to fill out the forms and get a refund. The irony is that, for millions of these people, all of the information that the preparer is filling out for them is already on file at the IRS.
Instead it should work like this: If you have only one job and a low income, your employer would give you not a W-2 but a filled-out 1040EZ. You would sign it and be done. The IRS already has the information, so you could get your refund right away. If you owed money, it could come out of your next withholding or you could mail in the check. If need be, people could qualify by certifying in advance that they have only one job, no dependents, no capital gains income or whatever else the IRS deems necessary. Once you qualified, you would have to fill out a tax return only if you switched categories or acquired other sources of income.
Even if we restricted the no-filing program to single people or to married people where at least one spouse doesn't work (to avoid matching of family W-2s across employers) and left out people with kids (to avoid earned-income tax credit issues), estimates are that as many as 12 million returns would qualify. This would be the equivalent of a tax cut worth billions, but it wouldn't cost much revenue. For employers already handing out computer-generated payroll stubs, the burden would be minimal.
Once people see how much more convenient it is to be return-free, they might motivate Congress to simplify the tax code so that more taxpayers could enjoy return-free filing. It's H&R Block's nightmare--but wouldn't it be nice if Apr. 15 were just a regular day? |
