Taxes

The Earned Income Tax Credit (EITC) is America's most successful poverty alleviation program, but too few families actually claim this benefit. Happy Tax Day.

Data Source: IRS

The Path Forward 

The 16th Amendment gave Congress the power to collect federal taxes in 1913 and since then people have been figuring out how taxes really work. While this article cannot go in depth on how to reduce tax code complexity, two possible solutions exist to reduce inequality in our tax filing system. First, automatic tax filing could entail sending out pre-filled 1040s to households with simple tax filing statuses based on information that the IRS already has. Second, free-filing information could be more easily provided so that low-income families in particular can avoid predatory filers and exorbitant fees.

 

  • 🤖 Automatically prepare returns for people with simple taxes — The American system of tax filing can reduce the burden placed on individuals for filing their taxes. When the IRS checks if you have filed taxes correctly, they validate this information against the information that your employer, your bank, and other sources have already sent to them. While this would likely only work for people with simple tax situations, Austin Goolsbee at Brookings estimates that 40% of Americans would qualify for this ‘Simple Return’ process, saving 225 million hours each year, reducing $2 billion in tax fees, and increasing taxes collected by $36 million each year. This is already the practice in Spain, Sweden, and Denmark. In 2005–2006, California ran a pilot of this with great success, saving millions in auditing costs, reducing hours spent by citizens, and increasing tax revenue for the government.

    • Unfortunately, Grover Norquist and tax lobbyists have made it nearly impossible to pass such legislation since it would disrupt the multi-billion dollar tax filing industry. Intuit spends more on lobbying each year than do Apple or Amazon. Tax software companies made over $1 billion in revenue in 2019 off of people who should have been filing taxes for free.

  • 💆 Increase access to tax volunteers — 70% of Americans qualify for free tax filing, but only 3% of them actually take advantage of this. The use of free tax preparers can actually be more accurate than paid prepares, with studies showing that paid preparers make errors 49% of the time, compared to volunteers which only make errors 11% of the time. The average cost of paying taxes is $242, but this can be far lower if more people took advantage of the paid options. Many Americans don’t know that free filing exists, and this fact is often hidden intentionally. In 2019, TurboTax hid its free file site by unindexing it from Google — this meant that if you searched for “TurboTax Free File” or similar, nothing would come up. Even fewer Americans know about the Volunteer Income Tax Assistance (VITA) program administered by the IRS. 5 million Americans relied on VITA last year to help them file tax their tax returns, but far more are eligible.