Genuine Tax Simplification—Not Grandstanding—From Senator Warren and Friends

Posted in: Tax and Economics

Tomorrow is April 15, Tax Day, which means that this is the week in which politicians make speech after speech attacking the U.S. tax system and its severely under-funded enforcement agency, the IRS. Typically, these pronouncements are accompanied by silly proposals or stealthy Trojan Horses to further rig the tax system to favor the rich.

Senator Ted Cruz’s campaign promise to eliminate the IRS and abandon the income and estate taxes gives us a full helping of both silliness and stealth, but he is hardly alone. His Republican comrades in the Senate and the House are busily doing everything possible to make the public hate the tax system even more than they already do, as part of a longer-term conservative strategy to undermine government and its ability to solve the country’s problems.

Happily, this year brought us a refreshing respite from the usual empty anti-tax talk. Elizabeth Warren, joined by seven of her Democratic colleagues in the U.S. Senate (including, notably, presidential candidate Bernie Sanders), yesterday unveiled the “Tax Filing Simplification Act,” accompanied by a fact sheet and a report from her Senate staff regarding the bill and why it is needed. I joined dozens of my tax professor colleagues from around the nation in signing a letter endorsing the Warren bill.

What makes the Warren bill so appealing is that it would actually make tax filing easier for millions of Americans, but not by promising some pie-in-the-sky complete rewrite of the tax code, or by vilifying the government employees who must enforce the tax system that Congress has created.

Instead, Senator Warren and her colleagues are pointing the way toward allowing everyday Americans to handle their taxes in the most time-saving and stress-free method possible. Importantly, the bill would also save people money by making it unnecessary to buy tax-preparation software or to pay tax preparers to file their returns.

Not surprisingly, the software makers and other companies that profit from the current system are not happy about this bill. The rest of us should be.

The Easy Path to Simpler Tax Filing

Inevitably, we all make mistakes when filling out forms. We transpose numbers, skip steps, or otherwise innocently err in our good-faith efforts to follow the rules. Imagine, for example, that you are filling out a tax form, and you are eligible for $4,850 in a particular deduction. You transpose some digits, however, and enter $4,580. What happens next?

Many people might imagine that they will be in trouble. Popular mythology says that making mistakes on tax forms, even mistakes that hurt you, can lead to serious trouble. That is one of the reasons that people feel such stress about filling out even the simplest tax forms—they understandably fear the consequences of making a mistake on such an important document.

What actually happens in the case that I described above, however, is a pleasant surprise. The IRS will send the taxpayer a letter explaining that the correct number was $4,850, not $4,580, and that because of the larger deduction, the taxpayer owes a smaller amount in taxes. A check to the taxpayer in the correct amount accompanies that letter. (I know that this is true, because it has happened to me two out of the last four years. Yes, even tax law professors make simple errors in filling out their tax forms.)

Once a person has absorbed the good news of receiving an unexpected tax refund—or, in the opposite case, discovering that an error in the taxpayer’s favor needs to be corrected—the next question is: “Hey, wait a minute. How did the IRS know what the right number was?” And the answer is that, for the information that the vast majority of taxpayers need to enter on their tax forms, the IRS has already received the relevant information.

For example, your employer reports your total income and your tax withholding, which is listed on your W-2 form each year, to the government. (Your employer does this not just to fulfill its legal obligation, but also because doing so allows your employer to deduct your salary as a business expense). Banks report to the IRS the mortgage interest that you pay, which you can deduct from your income. In fact, however, most people do not itemize their deductions, so they receive a “standard deduction” that is determined by filing status (single, married filing jointly, and so on).

This means that the government already has the information necessary to compute most people’s taxes, and it could do so easily. Senator Warren’s bill would adopt a nationwide version of the California ReadyReturn system, which was designed by Stanford Law Professor Joseph Bankman. ReadyReturn was started as a pilot project several years ago, and the lucky Californians who were able to participate were wildly enthusiastic about it. Unfortunately, the tax-prep software companies have prevented a more widespread adoption of the system, both at the federal level and in the states.

In the Warren bill, a taxpayer could opt into a “return-free” tax system. That is, a taxpayer could say to the government: “Please send me a tax return that includes all of the information relevant to my tax situation, including the correct computation of my tax owed or my refund.” When this pre-filled return arrived, the taxpayer could check for errors or omissions, and send in a corrected form, if necessary. For those who see nothing amiss, they would merely need to approve the result and either receive the correct refund or pay the net amount due.

With this simple approach—using information that the government already has in its possession—the stress of filing taxes would be eliminated or significantly reduced for millions of people. Anyone who wished to continue to fill out forms from scratch could continue to do so, of course. For the rest of us, the dreaded sentence, “I need to find time this weekend to finish doing my taxes,” would be a thing of the past.

Why Should You Have to Pay a Company to File Your Taxes?

Beyond the pre-filled return, the Tax Filing Simplification Act would also address another important source of anger and stress for taxpayers. As it stands, a person has two options for filing her taxes. She can either file electronically by paying a company to do so, or she can fill out traditional paper forms and send them to the IRS through the U.S. mail.

Personally, I have always refused to pay money to buy a tax-filing program like TurboTax, or to pay a tax preparer (who likely would use TurboTax anyway), when I know that I can print out forms from the IRS website and mail them, at the cost of a single postage stamp. By doing things that way, I also avoid having to share my confidential financial information with third-party companies that, not surprisingly, have a less than stellar track record when it comes to protecting consumer information.

The problem is that filing my taxes by mail is actually wasteful, because it is much less expensive for the IRS to receive tax forms electronically. Even so, the IRS has engaged with private tax preparation and software companies to make tax filing—which is, after all, nothing less than fulfilling one’s duty as a citizen to help pay for the cost of civilized society—a profit-making opportunity for these private companies.

Even the system that currently is supposed to provide free tax filing for lower-income people is captured by the tax-prep industry. The “Free File” program prohibits the IRS from directly providing free filing options to citizens. Instead, the IRS provides links to a list of private companies, each of which has its own eligibility criteria. Unsurprisingly, only three percent of taxpayers use Free File.

For both poor and non-poor Americans alike, therefore, the current system prevents citizens from using secure, accurate electronic free filing systems to meet our citizenship obligations. The Tax Filing Simplification Act would require the IRS to make available truly free electronic filing, directly between the citizens and their government—rather than through profit-seeking intermediaries.

What’s Not to Like? The Unholy Alliance Between For-Profit Companies and Anti-Tax Ideologues

There are myriad examples of companies profiting by getting the government to protect their narrow interests. Local car dealerships, for example, have long thrived only because laws (mostly at the state level) prevented direct sales of automobiles from manufacturers to customers. Unsurprisingly, the process of buying a car is one of the few non-medical experiences in life that is even more unpleasant than the annual tax filing ritual. (Tesla Motors is currently attempting to disrupt that business model, apparently with great success.)

For most Americans, it is infuriating to learn that both the federal and state governments have been successfully lobbied by companies for the simple purpose of keeping a gravy train running, at the expense of everyone else’s money and time in filing their taxes. Those companies have thrown up specious arguments over the years in an attempt to prevent the public from taking action, all the while engaging in bare-knuckle lobbying efforts.

While this truly is infuriating, what is worse is the political ideologues who have decided not to allow us to adopt a simpler tax filing system because they fear that the public will actually like it. As strange as it sounds, there are people who genuinely want the government to be as user-unfriendly as possible and who persistently frustrate efforts to improve citizens’ day-to-day lives.

Back in the 1990s, former House Majority Leader Dick Armey and other Republicans proposed ending tax withholding. They did this because they knew that people would not set aside the necessary amount of money during the year to pay their taxes, which would surely result in people being enraged when they had to pay a large tax bill once each year.

It did not matter to Armey or his ideological allies that this made no sense. Not only do people like tax withholding, but it is absurd to say that people should pay only once each year to pay for services (national defense, environmental protection, law enforcement, Medicare, scientific research, and so on) that are provided throughout the year.

It would be like saying that people can take groceries from stores as needed but must pay for all of the year’s grocery bills once every April 15. And if the point is to gratuitously inflict pain on Americans, why not make the payments even less frequent? One tax bill every ten years would certainly hurt more than merely annual payments. But why should we try to hurt people at all?

Undaunted by logic or public opinion, Armey’s successors in the Republican Party and the conservative movement nonetheless insist that the public must consider paying taxes to be an excruciating experience. Otherwise, people might actually notice that their government is doing many good things that most people like.

It is important to remember all of this, when conservative politicians try to gain applause by claiming that they are against the complications of the current tax system. The fact is that even the current system is already fairly simple for most people. (The filing process is what is unnecessarily complicated.) For conservatives, their version of simplification is simply a Trojan Horse that contains further tax giveaways to the rich.

There is much work to be done to change the tax and spending system in a progressive way, but return-free filing and an end to corporate capture of the tax filing system is a very good start.

For everyone who wants to do what we can now to make the tax system surprisingly easy for people to deal with, Senator Warren’s Tax Filing Simplification Act of 2016 is just what we have been waiting for.

  • It is hard to discuss this matter with regards to the article as it sounds all the way through like all Democrats are good and all Republicans are bad. Kind of reminds me of a predigest mentality. Some of it may be OK but do not think it will work throughout and what would be involved for those that it does not work for. I sold a property with a mobile on it this year, there was a simple way and there was a better way that more than paid for itself by having someone do it for me. Both way were legal and upfront but big difference in what I got back. I would say that most do not know what they may be entitled to within the tax code and therefore would not know to challenge the IRS simple form and would just pay it. As for the poor underpaid or overworked IRS agents, have a very hard time buying that. The transposed figure idea is correct except what if it was the other way around where you inadvertently ended up owing more in taxes, I suppose you would not get a penalty or interest – THINK AGAIN. The idea may be good except that more control and trust is being put into the hand of person who are above being held accountable and have used that to hurt the public on what looks like on purpose in the recent past. BUT STILL LOOKS LIKE A DEMOCRAT PARTY AD and lowers your personal credibility in my opinion.

    • Joe Paulson

      You reference “all the way through” but it seems to me that “some” (Sen. Warren etc.) Democrats are good and certain (Ted Cruz etc.) Republicans are bad. At least on this issue. Much of the article simply discusses the matter. But, yes, on certain issues, the parties are different. And, it is somewhat notable that the party (Republicans) who are more concerned with taxes being intrusive are not more supportive of simplifying things. Is an essay on abortion that discusses anti-abortion legislation in a sympathetic light a “Republican” ad? Would it be inaccurate not to note who supports the legislation or who opposes it?

      The law doesn’t force people to use the simplification mechanism & already you are today asked if you want the IRS to figure certain things out. The law provides an OPTION and currently “more control and trust” is not put in the government, which we vote for and Congress provides oversight for, but PRIVATE COMPANIES like Turbotax. As to penalties, it is expecting a bit for the government not only to correct mistakes that HELP YOU and take money away from them & also allow mistakes that would wrongly deny them money. But, actually, especially if done before 4/15, you often won’t get a penalty — it will inform you of the problem to fix.

  • John Redman

    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.