Beware of Simple Solutions to the Tax Code

A former U.S. Senator argues against the popular idea of having the government prepare our tax returns

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Sometimes an idea that sounds good when you first hear it looks worse when you examine it closely. This is particularly true when the idea involves a fundamental change in the way the federal government operates.  Usually these ideas are given names that make the idea sound irresistible.

Such is the case with the simple return, a proposal supported by, among others, Cass Sunstein, former administrator of the White House Office of Information and Regulatory Affairs in the Obama Administration. The simple return would seek to give the IRS statutory power to automatically calculate our taxes for us.  Under this plan, the IRS would first determine how much we owe, send us a pre-completed return we could “voluntarily” sign and save us all the trouble and time of doing it ourselves. It is described as a progressive solution because of its alleged benefit to non-itemizers. But it is neither new nor simple.

Fifteen years ago I co-chaired the IRS Restructure and Reform Commission, and one of the ideas put forward to us at the time was for the IRS to convert to a “return-free” tax system.  The concept called for the agency to significantly enhance its data-collection efforts, develop comprehensive personal financial databases that would be ready by early in the tax season and invest in the necessary IT systems to use the data to automatically prepare and deliver pre-completed tax returns to taxpayers.

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Such a system would obviously be a big change, so we wanted the idea thoroughly analyzed before Congress could consider whether to authorize IRS to do it. We tasked the Treasury Department with doing feasibility studies and reporting back. The bottom line:  a lot would have to change about our tax code for the idea to even be feasible, including the whole system of deductions and credits that today are an active instrument of the nation’s economic policy. There would also have to be big changes in how and when small businesses and others report financial data to the IRS.  For all of this to happen, a lot of money would have to be spent by both the private sector and the government.

So it is interesting to see that the return-free concept is now being advocated as the cure-all for tax simplification and reform.  Advocates often point to a California experiment with the idea called ReadyReturn, building on the state’s first effort, CalFile.  Proponents urge that this strategy be adopted nationally.  Senior California tax officials described it as making income taxes function “how property taxes are collected,” where “you don’t fool with anything.  You get it, and you pay the tax.”  However, proponents fail to note that Californians have not embraced the idea, with only about 3% of taxpayers accepting the government-prepared return among the millions who’ve been offered it. The GAO has said that the costs of government tax-preparation systems like California’s exceed the benefits.

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But there are other reasons we should be wary of adopting such a program. A government-centric system would put our successful voluntary-compliance system at risk. With the IRS in charge of calculating our taxes for us, suspicions about its motives would grow, and public trust in the fairness of the tax system would be undermined. (There is also the risk on the flip side that the less honest among us might just accept whatever the IRS says in the returns it prepared and not voluntarily report any additional income the IRS showed it didn’t know about.) Every national poll on the IRS has long shown it to be perhaps the most unpopular and mistrusted entity in government. Flying in the face of this kind of consistent public sentiment just doesn’t meet the common-sense test.

Perhaps the worst aspect of the simple return is that it reduces or eliminates one of the most important activities that occur during the tax-filing season: individual financial review and planning. Calculating how much we owe in taxes is an unpleasant activity, but it is also central to understanding our personal financial situation and planning our financial futures — and often the only time all year that the average family looks at its finances.  As federal health and retirement programs approach unfundability, we need to do more, not less, with this teachable moment for financial literacy and the need for enhanced personal savings.  Reducing or eliminating the engagement of the individual and family in their own financial affairs would not be an improvement.

To be clear: I am all for making our individual and corporate income taxes much simpler than they are today.  It is critical.  But tax simplification is the responsibility of Congress, not the IRS.   The simple return will not make our tax code simpler.