Kevin Brookes is policy analyst at the Montreal Economic Institute.
“The hardest thing in the world to understand is income tax.” This quote attributed to Albert Einstein is particularly relevant in describing Canada’s increasingly complex income tax system. The burden on taxpayers increased significantly from the beginning of the 1990s to 2014, with the text of the Income Tax Act and regulations having grown by 62 per cent.
There had been no major review of the Canadian tax system for half a century, but recently the House of Commons standing committee on finance instituted what it called a “comprehensive review of Canada’s tax system.” This is timely, but we must heed the lessons of the past in order to avoid repeating the same mistakes in pursuit of what seems like a good idea.
One such mistake was the proposal for the government to prefill your tax return. Recently, Quebec’s Finance Minister said he was open to putting forward the idea to simplify the lives of Quebeckers.
As a matter of fact, Quebec ran a prefilled-returns pilot project back in 2008. Following an access to information request, the Montreal Economic Institute got hold of the details of this experiment. To test the concept of prefilling tax returns, the government targeted a portion of the population that already had a simple tax situation. Hence, 80 per cent of the “guinea pigs” were 65 years old or older. Generally, the revenue sources of this tax group are few in number and vary little from year to year.
The results of this pilot project? In light of the information we found, it was a fiasco.
An avalanche of errors and additional costs
Of the 100,000 taxpayers contacted, only a third elected to use the government form that was sent to them. Why? Because most people want to have control over their tax returns. (After all, it is our money.) But also, the returns were sent late by the government. Talk about a project that got started on the wrong foot.
The government report on the experiment showed that the system ran into technical problems that led to additional delays for Revenue Quebec’s schedule. Imagine if the delays were not just for 100,000 people, but for all 6.5 million Quebeckers who file a tax return. It would have been total chaos.
Civil servants received more than 14,000 phone calls during the pilot project, mostly from people needing the forms explained. That’s 14,000 calls for just 100,000 forms. As we might expect, this pilot project cost a small fortune: $2-million, most of which went to pay the civil servants who had to spend time dealing with the files and answering questions.
Prefilled tax returns: A very bad idea
The Quebec experiment confirmed the conclusions of our recent study in which we explained how letting the government fill out your tax return is costly, inefficient, and increases the likelihood of errors.
The international experience also confirmed the adverse effects of prefilled tax returns. Australia, England, Denmark, and France have all experienced problems, and suffered through large-scale mix-ups.
For example, in 2010 in Britain, nearly six million taxpayers’ income taxes were incorrectly calculated. In France, prefilled tax returns were adopted in 2006; one-quarter of tax returns included an error the first year, and in 2018, 500,000 returns had undervalued the amount of tax owing.
Taxpayers know best
These experiences remind us of a few facts that we should never forget. Whether we do it ourselves, use a specialized software program or hire an accountant, we taxpayers are the best-placed to fill out our own income-tax returns. Doing so informs us about taxation and the size of government, makes us more aware of government spending, and gives us a sense of responsibility as citizens.
There are better paths to tax simplification. Britain has established an independent Office of Tax Simplification that sets clear objectives to be attained in terms of efficiency. Other countries such as Australia and New Zealand have put a lot of effort into reducing the length and the complexity of the language of their tax codes.
These are the kinds of examples we should be following in reviewing our own tax system.