Lindsay Tedds is an Assistant Professor in the School of Public Administration at the University of Victoria
In comments on two of my recent Economy Lab posts ( here and here), readers have remarked about the efficacy of pre-populated income tax returns. The assumption seems to be that pre-populated returns will combat tax noncompliance (including both intended and unintended noncompliance) and ensure that withholding is better aligned to ensure a $0 owing or owed position at tax time.
In tax systems with pre-populated returns, the revenue authority sends out a pre-populated return at tax time that contains all the tax and related information the tax authority already knows about the individual. The individual then either accepts the information or modifies it.
Pre-populated returns were pioneered in the Nordic countries. Denmark introduced this feature in 1988, Sweden in 1994, followed by the other Nordic countries by the early 2000s. Pre-populated returns have since been adopted in Chile, Slovenia, Spain, Australia, Estonia – and even the state of California.
It might also be surprising to many Canadians to hear that pre-populated tax forms have been tried in Canada. For the 2007 tax year, Quebec initiated a pilot program where 100,000 tax filers received a pre-populated form. The province intended to expand coverage each subsequent year, so that by 2011 all tax filers would receive a pre-populated form; however, in 2008, Quebec dumped its plan to expand the program.
The obvious intent of pre-populated returns is to reduce both compliance and administrative costs for personal income taxpayers, which also seems to be the understanding of those readers who submitted comments about wanting Canada to move to pre-populated tax forms. While on the surface this proposal may seem appealing, it is not without complexities.
First, as noted by the OECD, accurate withholding at source is critical for the success of pre-populated forms. Accurate withholding ensures few taxpayers are owed or owe money. Accurate withholding is necessary to reduce administrative costs. Since it takes longer for the revenue authority to issue pre-populated forms and even longer to issue refunds, as compared to a system where individuals file their own information, accurate withholding is essential so that taxpayers are not owed money for extended period of time. Timeliness was reported to be a key issue in the Quebec pilot project. Accurate withholding, however, is not as simple as it sounds and requires either a very simplified tax system or the transfer of immense information from tax filers to the tax authority at the start of each tax year.
Second, the reduction in compliance costs incurred by individuals is questionable since they still need to check that their form has been filled appropriately and correct missing or incomplete information. In systems with many specialized tax credits – such as Canada’s – the revenue authority may not have enough information (e.g., Child Fitness Tax Credit, Medical Expenses Tax Credit), so the individual will still need to collect and submit receipts. Further, individuals with income not subject to third party reporting (e.g. rental income) will see little reduction in their compliance costs. Indeed, as concluded by this report, pre-populated tax forms only reduce compliance costs for a small number of individuals with very simple returns.
Third, as noted in this UK report, there is little evidence that pre-populated forms decrease tax non-compliance. By sending the pre-populated form, the revenue authority shows its hand to the taxpayer. There is little incentive for a taxpayer to disclose additional income that the tax authority is not aware of.
Last, there is little empirical evidence to support the claims regarding reduced administrative costs. Indeed, the cost of complying with such systems still falls heavily on small businesses. Administrative costs for the tax authority are also quite high in the early years of the program as it sorts out reliability, availability, comprehensiveness, and timeliness of the program. Over all, the administrative benefits from moving to a pre-populated tax form rarely appear to outweigh the costs.
The evidence overall suggests that pre-populated forms may not be tax panacea desired by many commenters. Indeed, a move to pre-populated tax forms should only be considered within a broader program designed to simplify and increase the accuracy of the tax system, as well as increase information and communication of the tax system to individuals – as was done in Australia. It also requires a shift in attitude and focus of both the tax authority and the tax filer, a shift that does not occur overnight.
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