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Return-Free Filing: How would the tax system need to change?

Although many other countries have adopted return-free tax systems, most of them have much simpler tax codes than the United States. Implementing a return-free system in which most U.S. taxpayers could participate would likely require changes in the tax code that would bring the U.S. system closer in several important respects to those of other countries that use return-free filing. Common elements of such codes include a "basic" rate for most taxpayers, individuals (as opposed to families) as the unit of taxation, interest and dividend income taxed at one rate and at the source, exemption of some capital gains from taxation, and few deductions, allowances, and credits. But the current system could still accommodate return-free filing for tens of millions of taxpayers with just minor reforms. Most studies place the potential number of taxpayers that could relatively easily be accommodated by the current system as ranging from 10 million to 60 million.

  • The current system would have to be modified in several ways to eliminate a filing requirement even for most of the 20 million taxpayers with relatively simple returns (those in a low tax bracket with wage income only, no credits other than the earned income tax credit, and no itemization of deductions). The current withholding formulas are not designed to be exact for dependent filers, dual-income couples, or taxpayers with more than one job during the year. If dependent filers and filing units with income from more than one job were still required to file a return, only 8 million taxpayers with wage income could be exempted from filing. Even among these 8 million, changes in personal circumstances during the year could cause withholding errors. Without changes in the law, it may still be possible to fine-tune withholding formulas to meet the needs of most taxpayers, but the additional precision would add significant complexity to the Form W-4 and the computation of withholding allowances.
 
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   Entry 4 of 8