Thursday, April 14, 2016

Simplifying Taxes in the Real World

by Neil H. Buchanan

The days before April 15 each year witness the return of a hardy perennial: tax pandering.  The usual story has a Republican politician promoting some kind of tax plan that will supposedly "reduce tax forms to the size of a postcard," or "get rid of the income tax altogether," or "tear out the tax system from its roots and starting over," or some such grandiose statement.

April 15 is not the only time for anti-tax demagoguery, of course.  Last September, soon-to-fail-miserably presidential candidate Rand Paul posted a video showing him using an assault rifle to shoot a copy of the tax code (or, more likely, just a bunch of blank paper).  But the message is always the same: Vote Republican, and we'll change the whole tax code.

In all events, such politicians will also toss in gratuitous attacks on the IRS.  Ted Cruz is only the most prominent Republican promising to "get rid of the IRS."  (Not every Republican, of course, is quite that vapid.  Even poor Marco Rubio deviated from his script during one Republican presidential debate long enough to tell Cruz that "[s]omeone's going to be collecting [your proposed] tax," even if Cruz refuses to call it the IRS.)

What those politicians never offer, however, is a realistic plan to make people's lives better as soon as possible, in a way that would not involve completely unknowable transition costs, and that would not ultimately be a Trojan Horse for increasing income and wealth inequality.

This year is different.  All of the things that I listed above are still happening, of course, but we finally have a group of politicians proposing a proven plan that would make people's tax lives simpler and better, and that could be adopted immediately and cheaply, if Republicans would only agree to this sensible plan.

My Verdict column today describes the Tax Filing Simplification Act of 2016, which Senator Elizabeth Warren and seven Senate colleagues (Baldwin, Franken, Markey, Shaheen, Udall, Whitehouse -- and some guy named Sanders) introduced yesterday morning.  I signed onto a letter from tax professors and economists who endorsed the plan.

I strongly encourage readers to read today's Verdict column, where I describe the many reasons to support the Warren bill.  Yes, I always hope that people will click over to my Verdict columns, but today is different because the column addresses an easily achievable, yet somehow politically impossible, way to make tax filing easier.  This issue has an immediacy that differs from some of the more theoretical columns that I write.

The Tax Filing Simplification Act would require the IRS to do two big things: (1) Allow people to ask the IRS to send them pre-filled tax forms containing all of the information that has already been reported to the IRS (by their employers, banks, and so on), with all of the computations completed and a bottom line of tax owed or refund due, and (2) Provide a system allowing everyone to file their taxes electronically with the IRS, not through a third party.

Long-time readers of this blog will recognize the first part of the bill, because I described it almost exactly a year ago in the second half of this post.  Stanford Law Professor Joe Bankman has long been an advocate of such "pro forma" filing, which worked incredibly well when it was tested in California.  It turns out that people really like having someone else do their taxes for them, leaving them only to correct any errors or omissions that they might find.  And given that the IRS is already required to correct mistakes (in either direction), having the taxpayer make the first move is guaranteed to waste time and resources.

As Senator Warren's staff has explained in various releases accompanying the announcement, the major opposition to both aspects of her plan comes from the people who have opposed Bankman for years: the software maker Intuit (which makes TurboTax) and anti-tax conservatives who view all taxes as illegitimate.  (The leader of those anti-tax forces once likened the logic of taxing the rich to "the morality of the Holocaust."  I am not making that up.)

What I and others have called an "unholy alliance" between the tax-prep people and the anti-tax ideologues is actually quite bizarre.  After all, as I discuss in today's Verdict column, the overall mission of the anti-tax people is to make filing and paying taxes an immiserating experience, whereas TurboTax and other companies make it easier to file taxes.  But at least TurboTax shovels people's money to private for-profit companies, so from the standpoint of anti-government conservatives, it is evidently at least acceptable to use government's coercive power to force people pay for simplicity, so long as the money lines Republican donors' pockets.

My editor at Verdict pointed out an interesting similarity between the tax filing problem that I discuss in today's column and an ongoing fight being waged by Justia (the site that hosts Verdict).  Justia, after all, is a site that tries to make public information such as statutes, judicial opinions, and so on available for free to the public.  They are, however, constantly fighting against companies that want to be able to continue to charge high subscription fees to people who want to find that public information.  The problem is not that "the market" is trying to keep information private, it is that some private actors want to use their influence to force the government to be more opaque, at the expense of the public at large.

In any event, I continue to find the "make taxes as unpleasant as possible" concept almost irresistible in its invitation to mockery.  In my column today, I note that the same people who oppose the Warren bill also have proposed eliminating tax withholding, on the theory that a once-a-year big check to the government would enrage people enough to make them want to shrink the government.  As I note, that proposal is not only unpopular, but it has no limiting principle.  Why not once every ten years?  Or once at death.  (Now there's a "death tax.")

But why stop with the frequency of payments?  We could, after all, require people to pay in nickels, and to do so in person.  Maybe require everyone to do so within a one-hour period at the IRS building in Washington, D.C.  Moreover, if we are trying to make the tax filing process itself more difficult, why are Republicans supposedly so upset about the long wait times for people to reach IRS help lines?  Why have help lines at all?

For that matter, why not forbid the IRS from providing any written guidance on the tax code?  Better still, why not get rid of tax forms themselves, given that the 1040 (and the 1040EZ, and the various forms and schedules) represent attempts by the IRS to allow people to obey the tax laws without actually reading them?  People could be told: "There is an Internal Revenue Code.  Pay a subscription fee, and you will be able to access the code.  Then, you will have to fashion your own tax form based on what you read there, and if you make a mistake, you will be punished."

Yes, I know, reductio ad absurdum is sometimes too much fun.  Even so, there is no end to the logic that says that taxes need to be made more unpleasant in the service of some larger political goal.  For example, one tax law professor frequently argues against having the courts resolve ambiguities in the tax code in favor of simplicity.  Why?  Because, he insists, Congress must be forced to confront the complexity of the law that it has written, and the only way to do that is to make it absurd and complex even beyond what Congress has achieved on its own.  Unsurprisingly, that professor is one of the only tax law professors who opposes the Warren bill.

The happy news is that prominent Democrats are finally taking Professor Bankman's idea to a national level.  As Senator Warren's staff discovered, moreover, this is an idea that Ronald Reagan once enthusiastically endorsed: "We envision a system where more than half of us would not even have to fill out a return. We call it the return-free system ... .  We believe most Americans would go from the long form or the short form to no form."

Once again, Democrats are embracing an idea that Republicans once championed, but current Republicans will not take yes for an answer.  The rest of us should.


John Boanerges Redman said...

Oh My God !!! "undermine government and its ability to solve the country’s problems.". And here I thought that the (nearly) only ability the government has is to MAKE problems but here comes Neil to 'teach' me otherwise. Let's see; on point, just how large IS the tax code? Just who is qualified to explain it? Just which Tax Court judge and her husband JUST got indited for multi year tax fraud (Diane Kroupa - I know, I know, only 1 out of a thousand gets caught and fewer made to have a grand jury do their duty on)? Some "legal scholar and economist" YOU are. Ever heard of M. Rothbard? Yeah...... right. Bureaucrats only CREATE problems, Neilly boy. Ever hear of corporations? A 'creation' of government. Ever hear of WARS ("What are they good for. Absolutely nothing")(undertakers, arms merchants, etc., well, them, they are "good" for), a "creation" of government and NOT a 'solution' to problems. You, sir, are an apologist for murder, a red-handed thief (but photogenic, an asset in the lying business). I'm sorry that Justia employs the likes of you, really. As to that other 'ability' that I referred to, that is the 'ability' to enrich its 'friends', the parasites that make the problems. You are a statist, Neil, a thing akin to a devil-worshiper. I pity you.

Scott said...

Unless you pave all your own private roads for those long-distance bike rides, John, the government has very directly solved a major problem for you.

John Boanerges Redman said...

I don't buy it, Scott. The private sector is and always has been more responsive to the needs of human kind while bureaucrats are only incidentally and rarely so disposed. Can you jerk my heartstrings about the education sector? I don't predict any success on that either. Dr Walter Block of Loyola made the case that I align with a decade ago concerning roads ( So, government NEVER solves my problems though it is very good at taking credit for (only) the good stuff). Trouble is, the bad things are hidden like the Wiz of Oz behind the curtain (boy, was that ever an anti-government screed. Loved it). I invite you to look at the ENTIRE picture. As one of the good parts of the Bible teaches, There is no good fruit from a poisoned tree" and force/coercion IS that poison. Free markets are the most honest leveller of the playing field, not, of course, the government version of the same. So, you know about my affection for vintage Motobecanes and the lonely road? BTW, on another subject, what do you see coming on the 19th when the gold-backed Yuan is introduced and is non-convertible to USD? <> I mention this because government "economists" have not predicted this.

David Ricardo said...

This concept has been proposed for several years and Mr. Buchanan is to be commended for championing it. However there are two problems, only one of which he acknowledges.

The first problem is this statement from his Verdict column

“the government already has the information necessary to compute most people’s taxes, and it could do so easily.”

This is just simply incorrect and I think results from his background as an academic rather than as tax professional.

The largest shortfall in the government’s data base is with respect to the standard/itemized deductions. Even for tax filers who claim the standard deduction the computation of itemized deductions must take place to confirm that the standard deduction is higher than the taxpayer’s itemized deductions for all but the most simple of returns. And the most of the information to make this computation is not collected by the IRS, the most significant missing pieces being property taxes and charitable contributions and payment of estimated state taxes. And a number of tax adjustments, subtractions that get to AGI are also not reported to the IRS. Filers with Sched C and Sched E income and expenses will not have that data automatically sent to the IRS.

So before the reform that Mr. Buchanan and others support can even be considered the IRS must be set up to collect a lot more data than it currently does. This is years away and the mechanics of doing so are going to be a burden on many entities that will have to report and will strain the IRS’s ability to process the huge increase in data. But over time it could be done.

The second issue, which Mr. Buchanan does acknowledge is that the private tax preparers for profit will simply not allow the IRS to move in this direction. Their millions of lobbying dollars have and will stop tax prep by anyone other than themselves. So what is needed is a way to bring the tax preparers into the process. One way might be to do this.

1. Instead of having the IRS prepare the pre-file returns, the IRS would authorize/license and pay on a per return basis private preparers including Intuit and CPA’s to prepare and send taxpayers the pre-filled out forms.

2. A taxpayer who wished to go this route would pay a small fee, say $25.00 for a single return, $75.00 for a joint return. After a taxpayer had selected a firm to prepare their return, the firm would be allowed to enter the IRS data base and download the data on that particular tax payer into the pre-filed form. This form, along with a questionnaire would be sent to the taxpayer.

3. The taxpayer would review the form, forward additional information to the prep firm and get back a final draft of the return. The taxpayer would then certify to the firm that all of the information was correct and that all of the information necessary for the filing had been provided. The tax return would then be filed.

4. Here is the key point. Any additional tax, penalties or interest resulting in the return other than from missing or incorrect data would be the liability of the tax prep firm. Once the payer had given the tax prep firm the correct and complete information the taxpayer would have no future liability.

This method should have broad appeal. The tax prep firms would continue to make money from preparing tax returns, getting a revenue stream from both the taxpayer and the IRS. The IRS would replace the costs of having to prepare returns with the cost of paying the tax prep firms, and the private firms would be taking over a huge problems facing the IRS today which is giving taxpayers guidance taxpayer and taxpayer fear and loathing of the IRS who would now deal primarily with the paid tax preparers. Taxpayers would have the simplicity of a pre-filled out return and the comfort that if they provided the tax prep firm with the correct info, they were now off the hook.

Should work.

John Boanerges Redman said...

I'm Irish and claim a spiritual relationship to the engineer known as Murphy. One way of stating his law is Whatever CAN go wrong WILL go wrong. And here you go proposing more levels of complexity. Shame on you (statist!). Your final two words relate to another wise admonition, The road to Hell is paved with good intentions. If you could only travel that road alone, I would not care but you control freak central planners push innocents ahead of you on that broad path. Bad sess ta ya.