Today is Tax Day in the USA (for my non-American readers) when most of us who owe the US Government taxes write a check and send in our forms. Even if you don’t owe any taxes, all Americans are required to file a tax form. That alone is either inefficient or Orwellian depending on whom you ask. Even if you have most of your stuff in electronic form and use tax prep software, it’s a hassle putzing around with W-2s and gathering various bank statements and other forms. It’s the 21st Century however and you would think there would be an easier way to handle it.

A lot of people think that since the government already knows what you make, — and literally everything else about you —  the IRS could electronically pre-populate their paperwork with the information it already receives from banks and employers, and tell filers how much they owe. The idea that is often pitched is that this would be totally voluntary; if you wanted to, you could still file a traditional tax form (more on that later). It would cost the government (thus taxpayers) a bit of money upfront but would save citizens tons of time, hassle, and money spent on tax preparation.

For a lot of Americans, they could just fill their their taxes out for them. It would save billions of dollars in tax preparation fees and hundreds of millions of hours in time spent filling out tax forms. Source

Politicians ranging from President Obama to Ronald Reagan have supported this tax change and every so often (including this year) there is a bill in Congress to make it so with plenty of bipartisan support. Even Scott Adams of Dilbert fame thinks the government should do this.  So why hasn’t it happened yet? For one thing the tax preparers have lobbied to prevent this from happening. On the surface they are protecting their cash cow. Mass-market tax preparers—Intuit, H&R Block, Jackson-Hewitt, etc make billions each year preparing tax returns.  Even worse, they’ve been joined in their crusade by conservative anti-tax activists like Grover Norquist who’ve decided, without any real evidence, that the best way to shrink the state is to make paying taxes as annoying as possible.

Pros and Cons

According to economist Austan Goolsbee, automatic filing would save tax payers $2 billion in fees and 225 million hours saved not working on tax returns.  That’s countless amounts of recaptured hours for posting pictures of cats, and meals and cats eating meals on Facebook!

The downside:  Can you really trust the entity you owe money to to correctly determine how much money you owe?  Do you trust the Internal Revenue Service to both calculate and collect your taxes? You kinda do this now. Roughly  two-thirds of taxpayers take only the standard deduction and do not itemize. Frequently, all of their income is solely from wages from one employer and interest income from one bank.  Thanks to tax withholding, most people overpay their income taxes in the first place.  They file a return to get…a return.

If you try to cheat on your taxes, or even make an honest mistake, the IRS usually catches you. And if you pay someone to do your taxes for you, can you really be certain they aren’t taking short cuts on your tax form in order to process more returns per day which equate to more dollars in their pocket?

Other challenges:The Tax Code is very complicated hence the reason many people hire CPAs or other Tax Prep Professionals to do their taxes. Honestly, there are just GOBS of social policy built into the tax code. We use it to reward and penalize behaviors, fine the rich, subsidize the poor (and versa), and thousands of other things (many of which are quite noble – yay parks, bridges and highways!). Even Obamacare is somewhat implemented via the tax code. So even if this idea were implemented, it probably would not be an option for everyone.  Such a system wouldn’t be ideal for Americans with complicated taxes.

Tax Preparers also wouldn’t go away overnight. They would initially swtich their focus on Rich people with complicated taxes, Poor people who don’t trust the government and still want to file traditionally. Eventually they would go the way of the Travel Agent or move to the corporate sector.

Personally, I think it is like communism, a good idea on paper but unlikely to be implemented well if humans are involved. To make it work, we’d have to simplify the tax code considerably (not a bad thing) and adjust the standard deduction to placate those who might lose some deductions in order to incent them to switch to a automatic system. Also, remember that voluntary part? I don’t believe it would be voluntary forever. A system like this should reduce the Internal Revenue Department considerably (which also costs taxpapers $$ annually) over time. It would be great if the IRS was scaled down to a skeleton dept that handled the few people who file more complicated forms. Instead they would likely switch focus on Tax Fraud since filings would be streamlined and digitized.


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