Tax reform plan would shift tax return preparation to the IRS
March 23, 2008 4:00 AM
Stacy Innerst /Post-Gazette
By Mark Roth Pittsburgh Post-Gazette
We are three weeks away from one of the most dreaded times of the year: the federal income tax filing deadline.
With almost visceral aversion, millions of taxpayers haven't even touched their W-2s and tax forms yet. Millions more have eased the psychological burden by giving their paperwork to a paid tax preparer.
But what if, instead of this annual rite of revulsion, taxpayers could get a mailing from the Internal Revenue Service each year with their income and tax amounts already filled in, and all they had to do was sign it and return it?
That is the idea behind what is known as the "simple return," a reform that is backed by several tax experts, including Austan Goolsbee, a University of Chicago professor who is Barack Obama's chief economics adviser.
For a majority of taxpayers, these advocates say, the federal government already has all the information it needs to calculate someone's taxes, so why should it force people to fill out forms just to tell the government what it already knows?
"If you don't believe it," Dr. Goolsbee wrote in a 2006 op-ed article in the New York Times, "try not filling out the 'wages' line on your tax return next year and see what happens. You'll receive a notice that states your wages -- and assesses a penalty for not reporting them."
He and other simple return advocates say that if the federal government implemented such a program, it could cover more than 100 million taxpayers each year and save $2 billion to $4 billion annually in tax preparation fees and the value of time used to fill out forms.
Dr. Goolsbee, who could not be reached for comment, laid out his ideas for a simple return approach in a 2006 white paper done for the Brookings Institution, a Washington, D.C., think tank.
The government could phase in the simple return in three primary waves, he said.
The first would be single and married taxpayers who have no dependents and get most of their income from wages and no more than $100 from interest income. That group would cover 17.5 million taxpayers.
Of course, most of these taxpayers already use the IRS' simplest forms, the one-page 1040EZ and the 1040A. Yet a free simple return would still provide a big benefit to them, Dr. Goolsbee wrote, because more than 30 percent of 1040EZ filers and 56 percent of 1040A filers pay someone to prepare their taxes.
And a lot of those fees are paid not just because people have trouble figuring out how to do their taxes, but because they simply hate having to do them, said Joseph Bankman, a Stanford University law professor who is one of the nation's leading simple-return advocates.
"If you said 'How much would you pay never to have to fill out a tax return again?' " Dr. Bankman said, "some people would say 'I'd pay $500 a year.' People are dying to get rid of this burden."
The second wave of people who could get a simple return, Dr. Goolsbee suggested, would be those who get nonwage income that the government already knows about, such as interest, dividends, pensions and Social Security. This would primarily affect older taxpayers, and could pull in another 38.6 million people.
The third wave would come later, he wrote, and would comprise people who qualified for the simple return but had not filed one the previous year, including low-income people eligible for the government's Earned Income Tax Credit, which provides cash benefits far in excess of what those people have paid in taxes.
That wave could sweep in nearly 53 million more taxpayers, he wrote.
The IRS has taken no official position on the simple-return plan, and a spokesman said the agency does not comment on tax policy matters.
But Joel Slemrod, a University of Michigan economics professor and tax law expert, said the U.S. Treasury Department did in fact endorse a simple-return approach in a study it did nearly 25 years ago at the behest of incoming president Ronald Reagan.
The 1984 study said the IRS "will consider initiation of a system under which many individual taxpayers would no longer be required" to file for taxes. By 1990, the study predicted, 66 percent of taxpayers would be covered by a simple return program and would save $1.9 billion in tax preparation fees.
So if this is such a good idea, one that was endorsed by the Treasury Department itself under a classic conservative president, why hasn't it happened in the real world?
In some ways, it has.
California pioneered a limited but highly successful simple return program three years ago, known as Ready Return, and several other nations have different versions of such simplified national tax systems.
In 2005, California sent out 50,000 forms to single taxpayers with the income and tax amounts already filled in. Despite almost no publicity, 27 percent of those who received the Ready Return used it, and another 22 percent indicated they would have, but they had already filed their taxes.
State tax officials also studied the returns of a control group, and found that not only did the control group taxpayers spend an average of $30 on tax preparation fees, compared with no fees for the Ready Return users, but the Ready Return filers took 80 percent less time than the control group to do their taxes.
But it was neither time nor money that mattered most to many people who used Ready Return, said Dr. Bankman, who spearheaded support for the experiment.
"We got back thousands of comments," he said. "It's not just that 99 percent of the people wanted to do it again. It's that people said 'Finally, the government is doing something to make my life easier.'
"I thought people were going to like it," he said, "but I didn't think so many people would write to us saying this is the most wonderful thing the government has ever done."
With that kind of success, you might expect that Ready Return would have been introduced for all single taxpayers in California since then. In fact, though, the program didn't reappear until this year, because of opposition from Republican legislators and intense lobbying by Intuit, the California company that sells the extremely popular TurboTax filing software.
Intuit, which has $2.4 billion in annual revenue and controls more than 70 percent of the tax preparation market, spent more than $1 million in California lobbying against the Ready Return program, Dr. Bankman said.
The company and other opponents made several arguments against Ready Return, but the most emotional one played off the idea that the state tax agency was a greedy bureaucracy that shouldn't be trusted, he said.
Full-page ads showed a bulldog with a steak between its teeth, Dr. Bankman said, with the text: "You wouldn't send a dog to the butcher to pick up your steak. Why would you trust the state to pay your taxes?"
But Intuit officials say they already participate in a system that can help many of the lowest-income taxpayers. Known as the Free File Alliance, it is a group of tax software companies that provides free federal tax filing through the IRS for anyone who makes less than $54,000 annually in adjusted gross income.
Bernie McKay, Intuit's government affairs representative, said that system could potentially cover 70 percent of all taxpayers, without sacrificing their right to determine their own taxes.
While there is no doubt that the tax system needs to become simpler, Mr. McKay said, "it still comes down to a matter of whether it's good for the tax collector to hand the people a bill, or whether it's better for people to take responsibility for paying that bill."
Despite the lobbying against it, the state was able to reintroduce the Ready Return in California this year, although it is entirely online and has no publicity program attached to it, Dr. Bankman said.
In contrast to the bumpy ride in California, simplified tax systems in other nations have operated smoothly for years, said the University of Michigan's Dr. Slemrod.
Sweden and Denmark have highly successful simple-return programs. In Denmark, 87 percent of taxpayers use a simple return to pay their taxes. In Sweden, it's 74 percent.
Of the world's 30 wealthiest nations, Dr. Slemrod said, about half use another approach known as an exact-withholding system, where workers' employers deduct the precise amount they owe. The best known example, he said, is the United Kingdom, where the government sends a code to employers telling them exactly how much in taxes to deduct from paychecks.
"The typical British taxpayer wouldn't recognize an income tax form," he said.
Despite the lack of progress toward a simple-return approach, Dr. Bankman thinks that as the government collects more and more financial information on taxpayers in digital form, a simple-return program of some kind is inevitable.
"Sooner or later," he said, "it's too stupid for the government to have these records and for you not to be able to download these forms."
To promote the value of that approach, Dr. Bankman suggests the following thought experiment.
"Suppose Visa, instead of sending you a bill each month and showing all your transactions, sent you a blank piece of paper and said 'You fill in your transactions and figure out how much you owe us.'
"Nobody would go along with that, yet that's exactly what the government does with millions of taxpayers each year."
And one of the biggest benefits of all from a simple return program, he said, would be renewed trust in government.
As it is now, he said, "for a lot of people, the most meaningful interaction they have with the government is to make them feel like an idiot every April 15."