In a previous post, I half-jokingly suggested that the government should pay us interest on our tax returns. This is because they are basically over collecting throughout the year until we are able to file for what is (usually) a return in order to make the necessary adjustments to bring us back to where we should be.
Well, they may not be paying us interest, but we could be seeing that money much sooner.
The UK, Canada and the US have been in discussion regarding replacing the current income tax system with an electronic real time one. This would reduce the year end tax return frenzy we experience, and create more reliable returns since the information would be consolidated from electronic sources rather than paper records.
I can hear the celebrating already. No tax returns?! This is great! Well, hold on….
There are most definitely pros and cons associated with this potential policy change. Here is my take on it. As the details on this new tax program have yet to be released, there are certain assumptions I’ve made in this list that could be up for debate.
- Real time collection of information could result in less taxes paid. Assuming the new system is able to track expenses which are tax deductible, it could result in more money in your pocket each payday (we see you bought a bus pass this month for commuting, so we are going to reduce your taxes payable)
- Faster processing of information due to electronic system
- Less opportunity for human error, both by individuals and by the government employees processing returns
- Electronic processing will reduce costs by eliminating postage, envelopes, printing, and labour time (assuming there is an incremental savings associated with going electronic). This means more dollars available for things like education and innovation
- There is no doubt in my mind that productivity declines during tax return month as individuals spend sometimes hours collecting and analyzing the required information. Simplifying the process frees up time which people can spend generating more income, spending time with family or working on personal development. It also frees up time for the professionals which provide tax return services. However this is a double edged sword. More on this in the con list below.
- Real time collection of information could result in MORE taxes paid. The government will likely not put themselves in a position where they under collect so individuals could potentially be at a disadvantage. Where there is a requirement to make an assumption regarding your financials, they will likely error on the side of conservatism
- The demographics of the population could jeopardize the success of implementing such a program. The baby boomers are not likely to easily accept this transition, even if it is forced, they may have many additional questions and concerns which could eat up government resources (call centers, emails, that sort of thing)
- Protection of information would be a huge hurdle for these governments to tackle. With so many stories in the news about hackers and leakage of private information, citizens will want demonstrated proof that their information is safe and secure
- A system which tracks our lives in such detail could be viewed as too “Big Brother”
- Those whose employment is highly correlated with tax return season could suffer from reduced earnings and reduced earnings potential. These individuals will need to determine ways to re-brand or offer different services
As with anything, proper implementation can really make or break the success of this plan. Although I welcome the movement into the digital age, I fear that the government will not be sufficiently proactive in addressing the stumbling blocks that will undoubtedly arise from such a drastic change to the status quo. In addition, although this system may work beautifully for 80% of the population, you will have the 20% that have complex situations which cannot be handled effectively by such a system which tries to capture everything in real time. The Pareto principle at it’s finest.
Do you think it’s a good idea? What can we do to make the implementation a success?