Return-Free Tax Systems

Testimony

Return-Free Tax Systems

Testimony Before the President's Advisory Panel on Federal Tax Reform
May 17, 2005

Abstract

In a return-free system, either all taxes are paid in advance through withholding (exact withholding system) or the tax agency computes liability based on reports from third parties (agency reconciliation). The UK has an exact withholding system for many taxpayers and California is experimenting with agency reconciliation. Exact withholding would require major tax simplification and administrative changes. Agency reconciliation is more feasible, but would impose large costs on the IRS and private businesses, could result in delayed refunds, and would not help taxpayers with the most complex returns. Return-free systems are not a substitute for tax simplification.

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