Tax fairness: lack of data limits the ability to analyze the effects of tax policies on households by demographic characteristics

What the GAO found

GAO found that tax data is not consistently linked to household demographic information. The Internal Revenue Service (IRS) collects demographic data that is explicitly referenced in the tax code. According to the Treasury Department, the IRS cannot collect demographic data under current law unless that data is necessary for the administration of the tax code. As a result, analysts have a limited ability to assess the effects of tax laws, including COVID-19 related tax relief provisions, based on demographics such as race, ethnicity and gender. households.

Legal restrictions on inter-agency data sharing limit agencies’ ability to analyze how the tax system interacts with households by demographic characteristics. Several entities, such as the Office of Management and Budget, highlighted the importance of collecting and sharing population data for policy evaluation. The entities also emphasize the importance of protecting the confidentiality and security of this data. GAO has identified options for consistently producing related tax and demographic data, such as surveys and cross-agency data matching. Another option is to impute taxpayer demographic information. The Treasury is developing an imputation method. Although the Treasury is evaluating the reliability and limitations of imputation, it has not evaluated the feasibility of other options to produce data that would support more reliable analyses.

If tax data could be linked to household demographics in a way that still protects the privacy and security of that data, policymakers and researchers would have better tools to consistently and systematically analyze the relationship between tax policies. and household demographics (see figure).

Examples of options for data collection and analysis

In the absence of linked taxpayer and demographic data, GAO used a model that simulated household tax outcomes based on 2017 Census Bureau survey data. For most provisions examined, GAO estimated disparities in tax outcomes between households based on race, ethnicity or gender. For example, there were differences by race in estimated eligibility for use and average child tax credit dollar amount. These disparities generally remained after the GAO controlled for some variations in income—using income quintiles—indicating potential inequalities beyond those based on income.

Why GAO Did This Study

The United States has a large and growing income and wealth gap by race, ethnicity, and gender. However, little is known about the effects of tax policies on demographic characteristics. The tax code does not tax individuals differently based on certain demographics. However, some scholars have noted how this could lead to potentially disparate and unintended tax results.

The CARES Act includes a provision for GAO to report on its ongoing COVID-19 monitoring and surveillance efforts. GAO was also asked to examine how certain tax policies affect households by race, ethnicity, and gender as part of this monitoring.

This report (1) examines approaches to analyzing the effect of tax policies, including some of the CARES Act and related legislation, on households by race, ethnicity, and gender, and (2) estimates how households use certain tax provisions by race, ethnicity, and gender. The GAO interviewed 21 experts and reviewed the literature on fiscal policy and demographics. The GAO also used census data to estimate household use of tax provisions.

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