THE CASE FOR OVER-WITHHOLDING FEDERAL INCOME TAX: BENEFITS TO LOW-INCOME TAXPAYERS

The W-4 tax withholding form has been used by individual taxpayers for decades to calculate their tax withholdings. It is based, however, on the faulty assumption that most U.S. workers have a single source of income. This assumption has caused millions of taxpayers to incur unnecessary tax debt. The formula for calculating federal income tax withholding for employees routinely under-withholds for low-income workers who have multiple sources of income because, without substantial documentation and calculation by the employee, employers withhold as if they are the employee’s single source of income. Taxpayers may therefore see their income tax withheld at too low a marginal rate, oftentimes zero percent, and can have significant balances due on short notice at the end of the tax year.This Note documents that reality and proposes a solution. It proposes a reconception of the Form W-4 and the withholding formula through the lens of low-income filers and aims for a policy of over-withholding from those filers in order to reduce surprise tax due and related penalties. The proposed solution removes the bias towards achieving a “zero refund” from the form design by eliminating the tax-free threshold—for most filers, the equivalent of their standard deduction—from the withholding scheme. As discussed in the Note, the proposed policy would also have the benefit of increasing tax compliance, minimizing bureaucratic burdens, and providing a revenue-neutral solution for the government. This Note further suggests an extension of the proposed policy to provide a much-needed savings mechanism for low-income filers.

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The Changing Impact of the Alternative Minimum Tax on Horizontal Equity

Accounting and the Public Interest ◽

10.2308/api.2008.8.1.39 ◽

2008 ◽

Vol 8 (1) ◽

pp. 39-65 ◽

Cited By ~ 1

Author(s):

Peter J. Westort

Keyword(s):

Low Income ◽

Income Tax ◽

Horizontal Equity ◽

Lower Income ◽

Tax System ◽

Rank Reversal ◽

Income Groups ◽

Federal Income Tax ◽

The Impact ◽

Income Taxpayers

While prior research (Anderson 1985, 1988) indicates that the Alternative Minimum Tax (AMT) increases the fairness, or horizontal equity (HE), of the federal income tax system, changes in tax laws and the general inability of the AMT system to account for inflation raise serious questions about whether the AMT continues to increase fairness. Burman et al. (2002) observe that the reason many more taxpayers are now subject to the AMT is because of the increasing divergence of the regular tax and the AMT. This divergence subjects more lower-income taxpayers to the AMT, thus resulting in higher total tax liability. Using individual income tax return data for 1992, 1995, and 2000, and both dispersion-based and rank reversal-based measures, this study observes that the AMT still increases HE in many upper income groups, but decreases HE in many lower income groups. Moreover, overall measures of HE indicate that the AMT has a net decreasing effect on HE. There are two implications to these findings. First, it can no longer be assumed that the AMT uniformly improves HE. Second, the AMT generally continues to achieve its intended result at the upper income levels. This result suggests that regulators and legislators wishing to improve the AMT system need to address the causes of low-income taxpayers being subject to the AMT while maintaining the impact on upper income taxpayers.

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Inertia and Overwithholding: Explaining the Prevalence of Income Tax Refunds

American Economic Journal Economic Policy ◽

10.1257/pol.4.1.158 ◽

2012 ◽

Vol 4 (1) ◽

pp. 158-185 ◽

Cited By ~ 21

Author(s):

Damon Jones

Keyword(s):

Low Income ◽

Income Tax ◽

Consumption Smoothing ◽

Present Evidence ◽

Tax Refunds ◽

The Government ◽

One Year ◽

Rule Out ◽

Income Taxpayers

Over three-quarters of US taxpayers receive income tax refunds, which are effectively zero-interest loans to the government. Previous explanations include precautionary and/or forced savings motives. I present evidence on a third explanation: inertia. I find that following a change in tax liability, prepayments are only adjusted by 29 percent of the tax change after one year and 61 percent after three years. Adjustment increases with income and experience, and for EITC recipients, I rule out adjustment greater than 2 percent. Thus, policies affecting default-withholding rules are no longer neutral decisions, but rather, may affect consumption smoothing, particularly for low-income taxpayers. (JEL D14, H24, K34)

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Taxing Micro, Small and Medium Enterprises in Yogyakarta: Regulation and Compliance

BESTUUR ◽

10.20961/bestuur.v9i1.49184 ◽

2021 ◽

Vol 9 (1) ◽

pp. 59

Author(s):

Siti Rahma Novikasari ◽

Duc Quang Ly ◽

Kerry Gershaneck

Keyword(s):

Tax Policy ◽

Income Tax ◽

Government Regulation ◽

Small And Medium Enterprises ◽

Tax Avoidance ◽

Tax Compliance ◽

Legal Compliance ◽

The Government ◽

Medium Enterprises ◽

Compliance Constraints

Government Regulation No. 46/2013 has not been optimal in providing legal compliance on taxation for Micro, Small, and Medium Enterprises (MSMEs), especially in Yogyakarta. This policy was evaluated and amended with Government Regulation No. 23/2018. The amendment in tax policy for MSME actors was this research background to examine: First, how does the final income tax policy impact MSME taxpayers' compliance in Yogyakarta? Second, what are the legal compliance constraints of MSME taxpayers? The method used in this research was a juridical empirical, supported with the statute and conceptual approach. The results showed that the amendment in the final income tax tariff policy from 1% to 0.5%, as well as provide legal certainty of the timeframe of taxation had a positive impact on increasing taxpayer compliance. There was an increase in the number of taxpayers to 41,000 in 2019, or an increase of 15.5% compared to the number of taxpayers in 2017. However, tariff reduction has not been the answer to taxpayer non-compliance, the Regional Office of the Directorate General of Taxes of the Special Region of Yogyakarta still found tax avoidance. Tax compliance constraints were also caused by taxpayers' distrust of the government, poor tax morale, and tax knowledge. The government needs to conduct a cooperative compliance approach in taxation policies based on trust and dialogue between taxpayers and the government to improve MSME taxpayer compliance.Keywords: Tax Compliance; Final Income Tax Regulation; Micro; Small; Medium Enterprises.

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Tax Expenditures and the Tax Reform Act of 1969 in the United States

Social Science History ◽

10.1017/ssh.2021.41 ◽

2022 ◽

pp. 1-26

Author(s):

Seiichiro Mozumi

Keyword(s):

United States ◽

Income Tax ◽

Public Perception ◽

Tax Reform ◽

The United States ◽

Tax Revenue ◽

Tax System ◽

Federal Income Tax ◽

Federal Taxation ◽

The Government

Abstract In the United States, tax favoritism—an approach that has weakened the extractive capacity of the federal government by providing tax loopholes and preferences for taxpayers—has remained since the 1930s. It has consumed the amount of tax revenue the government can spend and therefore weakened the possibility of the redistribution of fiscal resources. It has also made the federal tax system complicated and inequitable, resulting in undermining taxpayer consent. Therefore, since the 1930s, a tax reform to create a simple, fair, and equitable federal income tax system with the capacity to raise revenue has been long overdue. Many scholars have evaluated the Tax Reform Act of 1969 (TRA69), which Richard M. Nixon signed into law on December 30, 1969, as one of the most successful steps toward accomplishing this goal. This article demonstrates that TRA69 left tax favoritism in the United States. Furthermore, it points out that TRA69 turned taxpayers against the idea of federal taxation, a shift in public perception that greatly impacted tax reform in the years to follow.

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FIN 48 and Tax Compliance

The Accounting Review ◽

10.2308/accr.2010.85.5.1721 ◽

2010 ◽

Vol 85 (5) ◽

pp. 1721-1742 ◽

Cited By ~ 78

Author(s):

Lillian F. Mills ◽

Leslie A. Robinson ◽

Richard C. Sansing

Keyword(s):

Tax Compliance ◽

Economic Effects ◽

Business Community ◽

Financial Accounting ◽

Financial Accounting Standards Board ◽

Publicly Traded ◽

Fin 48 ◽

Tax Benefits ◽

The Government ◽

Expected Payoffs

ABSTRACT: We develop a model to examine the effects of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), on the strategic interaction between publicly traded corporate taxpayers and the government. Several of our findings contradict conjectures voiced by members of the business community regarding the economic effects of implementing FIN 48. Specifically, taxpayers with strong facts obtain higher expected payoffs from uncertain tax benefits and some disclosed liabilities understate the expected tax liability. Consistent with the common conjectures, however, some taxpayers are more likely to be audited or are deterred from entering into transactions that generate uncertain tax benefits because of FIN 48.

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Study on system fairness dimensions and tax compliance in the Middle East context

Problems and Perspectives in Management ◽

10.21511/ppm.18(1).2020.16 ◽

2020 ◽

Vol 18 (1) ◽

pp. 181-191 ◽

Cited By ~ 1

Author(s):

Saeed Awadh Bin-Nashwan ◽

Ahmed Mubarak Al-Hamedi ◽

Munusamy Marimuthu ◽

Abobakr Ramadhan Al-Harethi

Keyword(s):

Middle East ◽

Income Tax ◽

Tax Compliance ◽

General System ◽

Analysis Tool ◽

Tax System ◽

Tax Rate ◽

Compliance Behavior ◽

Self Interest ◽

The Government

People’s perceptions of a fair tax administration system have garnered growing interest as a decisive ingredient that can install compliance behavior among taxpayers. The tax that taxpayers wish to evade is determined by their perceptions of the various robust dimensions of fairness (i.e., general fairness, preferred tax rate structure, exchange with the government, special provisions, and self-interest). Such an important matter, like tax fairness, has been overlooked in the extant literature, especially in the Middle East context, although tax administrations still suffer from low and unsatisfactory rates of compliance. This paper aims to empirically examine the influence of fairness perceptions of the income tax system on compliance behavior of taxpayers in Yemen. The study used a survey questionnaire administered to 400 individual taxpayers in Hadhramout, one of the most prosperous business regions in Yemen. Based on the PLS-SEM analysis tool, the study found that general system fairness, preferred tax rate, exchange with the government, and the extent of self-interest are significantly related to income tax compliance, while special provisions do not affect compliance decisions. The results of the study can alert the tax authority and policymakers to consider the non-pecuniary factors, other than the measures of the coercion. Establishing a fair tax system is probably one of the most successful approaches to boost compliance among taxpayers, thus yielding more tax revenue and diminishing the administrative cost for the tax authority.

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Why Is Tax Knowledge and Tax Understanding Important?

JEMA Jurnal Ilmiah Bidang Akuntansi dan Manajemen ◽

10.31106/jema.v16i2.2711 ◽

2019 ◽

Vol 16 (2) ◽

pp. 187

Author(s):

Jeni Susyanti ◽

Noor Shodiq Askandar

Keyword(s):

Low Income ◽

Crucial Role ◽

Income Tax ◽

Quantitative Method ◽

Tax Compliance ◽

Secondary Data ◽

Business Owners ◽

Compliance Level ◽

Level Of Understanding ◽

Positive Effect

Micro, small, and medium (MSMEs) business play a crucial role in the economy of Indonesia. Unfortunately, there is low-income tax receipt from MSME sectors. This study examined the effect of taxation knowledge and understanding toward tax compliance among MSMEs owners, exclusively culinary business owners. The quantitative method was used in analyzing the data collected. The sample size for the research was 50, with all MSME owners responded through the questionnaire distributed. This study concluded that there is a positive effect between taxation knowledge and level of understanding toward tax compliance. It means that an increase in tax knowledge and tax understanding level can lead to an increase of tax compliance level. Although this study succeeded to prove the effect between variables, the results of secondary data indicate that many MSME owners are still confused in implementing tax regulations, PP-23/2018.

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Taxing Nonrecourse Litigation Funding

The ATA Journal of Legal Tax Research ◽

10.2308/jltr-50939 ◽

2014 ◽

Vol 12 (2) ◽

pp. 85-104

Author(s):

John Gamino

Keyword(s):

Income Tax ◽

Tax Compliance ◽

Single Model ◽

Administrative Guidance ◽

Business Market ◽

Starting Point ◽

Federal Income Tax ◽

Business To Business ◽

Pro Forma

ABSTRACT This article examines the implications of the growing phenomenon of nonrecourse litigation funding. The increasing acceptance and use of such funding raises elemental federal income tax issues of characterization and timing for funding providers and for plaintiffs accepting such funding in exchange for agreeing to share the cash proceeds of any settlement or judgment. Emphasizing the commercial (business-to-business) market for litigation funding as it has evolved, this article addresses the lack of guidance as to the implicit tax compliance issues by testing alternative guidance models that may apply by analogy. It concludes by identifying the single model that should apply and offers a pro forma revenue ruling as a starting point for the government's further consideration of the issues and early promulgation of administrative guidance.

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The Economics of Tax Reform

News for Teachers of Political Science ◽

10.1017/s019790190000235x ◽

1986 ◽

Vol 50 ◽

pp. 1-8

Author(s):

Joseph J. Minarik

Keyword(s):

World War Ii ◽

Income Tax ◽

Tax Reform ◽

Dominant Factor ◽

World War ◽

Central Importance ◽

Federal Income Tax ◽

The Government ◽

People’S Attitudes ◽

Economics And Politics

The federal income tax is of central importance in both economics and politics. The income tax has been the mainstay of the federal government's revenue since the end of World War II. The income tax on individuals has consistently produced over 40 percent of total revenues for the last three decades. The income tax on corporations, while not as productive of revenue as it once was, still contributes about 10 percent of the total tax take. These large revenue yields make the income tax the main point of contact between the federal government and the broad population of typical American households, and perhaps also the dominant factor in people's attitudes toward the government as a whole.

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ACHIEVING OF INCOME TAX WITH AWARENESS OF TAXATION IN INDONESIA'S TAX LAW SYSTEM

Yustisia Jurnal Hukum ◽

10.20961/yustisia.v8i2.26136 ◽

2019 ◽

Vol 8 (2) ◽

pp. 292

Author(s):

Putri Anggia

Keyword(s):

Data Collection ◽

Income Tax ◽

Tax Compliance ◽

Tax Law ◽

Literature Study ◽

Law System ◽

Library Research ◽

Tax Education ◽

The Government

The journey of Indonesian taxation is full of dynamics in order to get the State's revenue target as the main source of the country's economy. Furthermore fulfillment of the country's income depends on ongoing policies. However Indonesian people does not found a point that the obligation to pay taxes is a form of voluntary awareness as citizens. This was captured by the Government as one of the points that must be observed and acted upon. The Minister of Finance Decree Number 36 / KMK.01 / 2014 concerning the Blueprint of the Ministry of Finance's Transformation Program for 2014-2025 provides space to take several steps in an effort to increase understanding of tax awareness through education. This study aims to examine in depth about tax education in the tax law system in Indonesia. The methodology used in this study is literature study that the data collection techniques, and library research aim to examine primary legal materials, secondary legal materials, and tertiary legal materials. The library materials are summarized and analyzed. This research found an assertive concept that was applied massively, consistently, and could be accepted by every society in order to succeed the goal of achieving tax awareness. It is tax compliance.

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