Return-Free Filing Won't Fix What's Wrong with America's Tax System

Anybody who has ever filed taxes in the United States knows it is complicated, and that the level of complexity is getting worse. In May 2023, the Internal Revenue Service (IRS) released a long-awaited study about how to implement a direct e-File system in the U.S. and announced it has already built a pilot program to do so. Under such a system, the IRS would pre-populate tax returns with any third-party information the agency has from employers and other entities, and information that the IRS believes is relevant from the prior years’ tax return.

A return-free filing system (RFF) may sound like a common-sense idea, but there are a host of issues with this proposal:

• Does not Simplify the Tax Code – Adopting an RFF would not address the growing complexity of the U.S. tax code. Governments at the federal, state, and municipal levels all have taxing authority. The federal tax code, moreover, is encumbered with $1.6 trillion worth of tax incentives for a vast array of activities. And because we have a large number of self-employed workers and two-income families, moving to an RFF system would still necessitate a great deal of taxpayer involvement to ensure accuracy, completeness, and fairness.

• Does Not Raise Revenue - RFF would not eliminate the $1.6 trillion in tax incentives that benefit primarily wealthier taxpayers. Nor would it raise revenue to build new roads, rail, or schools; support scientific research; pay down public debts; make the tax code fairer and more progressive; or, help us close our $458 billion annual tax gap.

• Inaccurate - As tax codes around the world have become more complex, many countries that are currently using RFF systems are increasingly finding it necessary to re-engage taxpayers (and asking them to fill out paperwork) in order to ensure accuracy, which defeats the ultimate purpose of an RFF system.

• Does Not Stop Tax Evasion - The U.S. had a significantly lower level of tax evasion as measured by GDP than those countries that have utilized either system of return-free filing.

• Reduces Financial Planning - Filing one’s taxes provides a window of opportunity during which Americans can review their financial history from the prior year and reassess their needs for the future — such as how much to save for retirement. But shifting to an RFF system would eliminate or reduce that educational moment.

If policymakers want to reduce the amount of time taxpayers spend on filing taxes, they should not be distracted by the promise of a magical cure-all, but rather aim their sights on creating a simpler, more efficient, and fairer tax system that promotes economic growth and equity.