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Return-Free Filing: What are the drawbacks?

Drawbacks to a return-free system include the potentially heavier administrative burden on employers and other businesses charged with withholding income tax, and on state and federal tax collection agencies. In addition, taxpayers and opponents of the plan have expressed concern that a return-free plan would shift taxpaying discretion to the government, limiting taxpayer independence and constraining taxpayers’ ability to appeal tax decisions by collection agencies.

  • Taxpayers appear to like receiving refunds, perhaps viewing them as a form of forced saving. Moving to a cumulative exact withholding system would eliminate refunds. In a tax agency reconciliation system, however, refunds could still be obtained.
  • It may be important to have a "visible" tax system, as now, on the principle that a well-informed citizenry can make better economic and political choices. In a return-free system that eliminates filing, taxpayers would presumably be less well informed about how they are being taxed, and hence less aware of the tax consequences of their actions. However, the link between filing and understanding may be overblown. Payroll taxes in the United States already operate under a return-free system for almost all taxpayers, yet interest in Social Security and Medicare does not appear to have suffered as a result.
  • The Internal Revenue Service concluded in 1987 that "there are serious timing and accuracy problems" in developing a tax agency reconciliation system. Even after almost a decade of technological improvements, the U.S. General Accounting Office in 1996 agreed that significant investments in IRS processing capabilities would likely be needed to implement such a system.
 
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   Entry 3 of 8