New Report Finds Government Tax Prep Would Disproportionately Harm Low Income Americans

Share on Facebook
Tweet this Story
Pin this Image

Posted by Alex Hendrie on Friday, October 30th, 2020, 12:14 PM PERMALINK

Government run tax preparation, often misleadingly described by the Left as “return free filing,” would disproportionately harm low and moderate income families, according to a recent study by Progressive Policy Institute.

As this report notes, the IRS does not have the information it needs to prepare tax returns for American families. This could deprive low-income Americans from important tax credits like the child tax credit and earned income tax credit (EITC). As the report notes, correctly filing would require the IRS to have a “deep knowledge” of the personal lives of a family:

“The IRS does not have the necessary information in its databases to accurately determine a low-income taxpayer’s eligibility for EITC and/or correctly calculate the amount of credit due to the taxpayer—indeed, far from it. The EITC is based on a stew of residency, family relationship, and income limits, with complex tie breaker rules. And like a giant puzzle, it requires deep knowledge of the personal lives of people living in the same household or family unit, with who else, for how long, and what their relationships and incomes are, just for a start.”

Far-left politicians such as Rep. Alexandria Ocasio-Cortez (D-N.Y.) and Senators Bernie Sanders (I-Vt.) and Elizabeth Warren, (D-Mass.) routinely call for the government to take over tax preparation. This would a terrible idea. While supporters of government tax preparation routinely describe it as a way to streamline tax compliance, it is not as simple as they claim. As the PPI report notes, families that claim the EITC have complex tax returns, which the government would have no way of properly administering: 

 “Oddly enough, low- and moderate-income taxpayer returns that claim the EITC have been repeatedly described as “simple” returns by advocates of having the IRS take over tax preparation. But a study by the Tax Policy Center highlights the sheer complexity of low-income tax returns, noting that ‘…eligibility for child benefits has increasingly relied on the concept of a tax unit, which has not evolved with families…. The income tax law is based on annual filing and bases the definition of a filing unit primarily on legal relationships, child residency, and support. Consequently, families that change throughout the year may have difficulty correctly determining their filing status and who can properly claim a child for the purpose of receiving child-related benefits.’”

Government tax preparation is a terrible idea and would represent a huge conflict of interest for the government. Under this system, the IRS would assess taxes owed and process payments. This could create an incentive to overcharge or withhold information from taxpayers. It would require taxpayers to have an intricate understanding of their personal finances to ensure they are not being overcharged. It would empower the IRS to collect even more personal information and could even create a new pathway for the agency to target taxpayers.

Perhaps unsurprisingly, government tax preparation is unpopular. According to polling data by the Computer & Communications Industry Association, 60 percent of taxpayers oppose government tax preparation including 45 percent that “strongly oppose.” Just 8 percent of taxpayers strongly support government tax preparation.

Not only would government tax preparation harm low-income families, but there is already a solution to tax complexity. The Free File program – a public private partnership between the IRS and tax preparation companies – provides taxpayers with adjusted gross income of below $69,000 with access to free federal tax preparation software. Since its inception, this program has been used by more than 56 million families as a way to successfully navigate tax complexity. 

Moving forward, policymakers should focus on improving Free File, rather than pushing for a government takeover of tax preparation. While the left claims that return free filing would be a simple way for the government to file and prepare tax returns for the American people, the reality is that this would be a near impossible task and would harm low and moderate income Americans.

Photo Credit: S.E.B.

×