Inequities in the Federal Withholding Tax System

The present system for withholding individual income taxes causes most low-income wage earners to be overwithheld. The primary reasons are complex tax laws and inadequate information provided to the taxpayers.

From 1966 to 1973, 80 percent to 90 percent of the taxpayers subject to withholding had more money withheld than they owed. The average amount overwithheld for 1973 was $380. The Federal Paperwork Commission reported that in 1975 more than 8 million individual income tax returns showing no tax liability were filed solely to claim refunds. About 90 percent of taxpayers earning under $5,000 had too much money withheld. Although the system does not generally compel overwithholding, it strongly encourages it. Congressional options for solving the problem of overwithholding include: (1) simplifying the income tax law to allow a closer match of amounts withheld with actual tax liabilities; (2) continuing the present system, but paying interest on the refunds; and (3) revising the present system to give wage earners the freedom allowed to others under the estimated tax by allowing as many withholding exemptions as necessary and by requiring employers to withhold specific additional amounts for wage-earners also claiming withholding exemptions.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: No director on record Team: No team on record Phone: No phone on record