2021 Filing Season

 WM Oversight: IRS Commissioner on the 2021 Filing Season, March 18, 2021 

Finance, The 2021 Filing Season and 21st Century IRS, April 13, 2021

This tax season raises four  issues. The first is dealing with the pandemic.

The 2021 tax filing season has been overcome by the signing of the American Recovery Plan Act. Families that would have relied on their refunds because of the over-payment of taxes and using the Earned Income Tax Credit to catch up on their bills and spend money on a few luxuries are receiving stimulus payments, many this week. Those who, for whatever reason, do not usually file will do so this year. There is simply too much money on the table to do otherwise.

Many who simply do not know how to go about getting help in filing taxes need direction on where to find it. The President, members of Congress, the IRS, state and local government, (especially social services agencies) and community institutions can all help with this effort. Even members who did not support the legislation will be eager to be part of this solution. Politics is both the art of the possible and the stage of the ironic.

As the pandemic recedes (there are only so many possible vectors for the virus remaining), the IRS can begin to bring people back to work. Contractors, including former revenue agents, can be helpful in clearing the backlog. Such relationships should continue so that the portion of the tax gap due to non-compliance can be closed. As more well off individuals face enforcement, others will do a better job of paying what they owe under the law. 

IRS funding is not adequate at present to meet the immediate challenge. The recent change in government should bring about more of a willingness to spend the necessary funds.

The second issue is distributing the increased child tax credit to eligible families. For middle income taxpayers whose increased credits are less than their annual tax obligation, a simple change in withholding tables is adequate. Procedures are already in place to deliver refundable credits to larger families. For the coming year, they merely need to be expanded to all families with children. This fact was likely already included in Mr. Rettig’s testimony. If not, I am sure he can easily confirm that this is the case. 

Employers can work with their bankers to increase funds for payroll throughout the year while requiring less money for their quarterly tax payments (or estimated taxes) to the IRS. The main issue is working out those situations where employers owe less than they payout. This is especially true for labor intensive industries and even more so for low wage employers. A higher minimum wage would make negative quarterly tax bills less likely. Indeed, no one should have to subsist mainly on their child tax payments.

A further challenge is fraud. I am not speaking of fictional dependents, but of hiring more employees than workload demands in order to reduce tax payments. Once the American Relief Act expires, any permanent increase to and refundability of the child tax credit (and ideally an even more generous credit) will require permanent tax reform. At that point, the issue of possible fraud must be addressed. Even without comprehensive reform, corrective legislative language will be necessary.

Senior committee members and staff are likely familiar with the Center’s proposals for tax reform which, as usual, are included as an attachment. A summary of individual policy changes has been added. As the reader has likely surmised, tax reform is the third issue.

Allow me to highlight five points. 

First, the difference between changing quarterly withholding and enacting a subtraction VAT  is six of one and a half dozen of the other. 

The reason for this is that the proposed subtraction VAT is based on the notion that employers would be responsible for paying and reconciling the taxes now filed by employees. This would add little additional burden to employers (especially the self-employed) but end the burden of filing for all but the highest salaried employees.

The second is that this debate has gone on so long that the numbers have changed. What used to be proposed at $75,000 per year should now be delivered at $84,000. Proposals should always be indexed. 

Third, for the sake of parity, the minimum wage should be set to $10 per hour immediately, with a phase in to $12 per hour to restore wages to the level of productivity found in 1965. $15 should be treated as either a bargaining chip or as the inflationary position to reach the same buying power $12 wage would provide now.

Fourth, enacting an asset VAT allows for higher tiered subtraction VAT (as proposed by Lawrence B. Lindsey) to replace some or all taxation of  higher incomes at progressive, rather than proportional rates. The only advantages of keeping filing in place for high income individuals (rather than households) are that keeping the highest salary rate and the Asset VAT rate the same will reduce the incentive to game income streams to avoid taxes and to allow higher income individuals to purchase tax prepayment bonds, thus reducing the national debt sooner than later.

Fifth is that in reality, explicit and implicit value added taxes are already in force. 

Individuals and firms that collect retail sales taxes receive a rebate for taxes paid in their federal income taxes. 

Tax withheld by employers for the income and payroll taxes of their labor force is an implicit VAT. A goods and services tax simply makes these taxes visible.

A second attachment on tax fairness and the third on tax administration details the impact of tax reform on federal and state governments.

Attachment: Tax Reform

Attachment: Tax Fairness

Attachment: Tax Administration