Question

At the federal level, tax laws are often public policy and financing laws. In the current economy with a large government deficit, does it still make sense for the IRS to pay interest on an overpayment? Rather than increase tax rates or find other ways of financing the government, is this an area where the government could (or should) save money by refusing to pay overpayment interest? What about underpayment interest? A few years ago, the government gave most taxpayers $300 as an economic stimulus. Would it be fairer to stop charging underpayment interest if the goal is to keep money in taxpayer pockets?

Answer 1

Tax laws are public policy and financing laws which the citizens need to abide by. If the government wants its citizens to have faith in truthfulness and fairness of the federal laws, the laws should be consistent from one period to another and should be equal and fair for all citizens based on their income band.

If, there is a situation of large government deficit, still, the government/IRS needs to abide by the existing rules to pay the interest on the overpayment of taxes. Just to control the deficit it would be unfair to raise tax limits or to stop interest payment on the overpayment. Rather, the focus should be to remove loopholes to avoid tax payment and to make the law stronger. Try to control the expenditure, increase exports, increase privatisation, etc these measure are more sensible. Although, the main source of revenue being the tax collection, there should be increase in tax base and more people should be broadened, black money should be curbed.

Also, the underpayment interest should be charged from the tax payers. If the same is not charged, most tax payers would delay the tax payment without getting affected by the late payment / underpayment interest.