Letting government fill out tax returns won’t help, says study

Letting government fill out tax returns won’t help, says study

Letting government fill out tax returns won’t help, says study

Stakeholders in the Canadian financial-services space are tightening their focus on “nudge” policies, which aim to encourage good investor decisions. Among the most popular suggestions is to simplify the process through the use of pre-filled forms, which could help with retirement planning — but probably not when it comes to tax returns.

According to a new study from the Montreal Economic Institute (MEI), the system of pre-filling tax returns proposed by certain politicians will not necessarily reduce costs for taxpayers; it could even raise costs for businesses and the government.

“To implement such a system, the revenue agency would have to require employers, banks, and charitable organizations to provide it with information,” said Kevin Brookes, Public Policy Analyst and author of the publication. Based on the experience of Britain, he said, such a policy change would lead to higher costs for smaller businesses.

The institute also questioned the theory that simplification would help the government lower costs by reducing errors, as well as time spent on verification and dispute resolution. The additional resources needed to collect data from third parties, calculate taxpayers’ incomes, and transmit and store data will likely result in added costs.

“There is also an increased risk of errors in the calculation of income tax to be paid under such a system,” said Pascale Déry, Vice President of Communications and Development. She noted that countries with complex tax systems like Australia and France have been hit with unfortunate computer bugs.

MEI referred to Canada’s recent troubles with the electronic Phoenix pay system: aside from federal government employees being overpaid or underpaid, the system has also reportedly sent T4 tax documents with incorrect information. An incorrectly filled T4 could lead to errors in determining the available contribution room in an employee’s RRSP. “This episode raises doubts about the government's ability to manage an infinitely more complex tax collection system,” the institute said.

Letting the government pre-fill tax returns would also constitute a conflict of interest, since it would want to maximize tax revenue from taxpayers who would want to minimize their own tax liability. There’s also a concern of taxpayers becoming less responsible: “By filling out their tax returns themselves, taxpayers have an opportunity once a year to think about public finances and the contribution that they must provide,” the institute said.

Instead of pre-filled tax returns, Déry called for a simplification of the whole tax system as a “less expensive, less risky, and more equitable way” to make taxpayers’ lives easier.”

 

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