The High and Regressive Costs of Tax Preparation

April 11, 2014
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The costs of tax preparation help can vary, but unlike the taxes themselves, preparation costs don’t get any smaller for low-income people. At times, they can even get larger. The New York Times ran an article this week on unscrupulous tax preparers who exploit information asymmetries to grab large portions of people’s refunds. Some of them even deliberately file the refundable credits fraudulently so that they have a larger refund to draw from:

There are plenty of stories here in Alabama of tax fraud in which the taxpayer is complicit. There are also many in which taxpayers find out only after being audited that their refunds had been fraudulently inflated by preparers, who since then has[sic] disappeared.

The incidents described are not isolated. Improper payments on the EITC alone exceed $11 billion per year and many of those are the work of unscrupulous tax preparers.

The federal tax system is vulnerable to this abuse because of its opacity; it takes the income of low-wage earners through the payroll tax, deposits it in the Social Security Trust Fund, which lends back to the rest of the government through bonds, which then uses the money to distribute back to people in the form of refundable tax credits, which are difficult to compute and sometimes stolen by charlatans.

The reason people part with their money so easily is that – through all the employer-side payroll deductions and accounting gimmicks and  withholding – they never truly realize it was theirs to begin with.

The federal tax code is wretchedly and unnecessarily complex, and it reserves its most wretched and unnecessary complexities for the very poor, driving them into the hands of mountebanks – as if poverty alone weren’t indignity enough.

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