Inequities in the Federal Withholding Tax System

PAD-78-5: Published: Dec 2, 1977. Publicly Released: Dec 2, 1977.

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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.

Matter for Congressional Consideration

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Matter: The Secretary of the Treasury should: (1) provide better information on the withholding system to employers and employees; (2) conduct surveys of employers to determine the withholding methods used and whether these methods could be modernized; and (3) recommend to Congress revisions to the Internal Revenue Code which would allow quick refunds to the unemployed.

 

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