While people will always argue
about who should be paying what level of taxes, all would agree that the very process
of paying taxes is painful, needlessly complicated, time consuming, and
becoming expensive as more people are forced to seek help in filing their
returns. T. R. Reid addresses this issue
at length in his recent book: A Fine Mess: A Global Quest for a Simpler, Fairer, and More Efficient Tax System.
In it, he tells us that the tax code does not have to be as complicated
as it has become, and that there are other filing mechanisms that are much more
accommodating for the taxpayer. Reid’s
goal is to survey systems in place in other countries and determine the
approaches that would benefit the United States. We have a lot to learn from other countries.
Much of our problem arises from
the complexity built into tax code.
“The
U.S. tax code has grown so huge that nobody really knows how long it is. During the 2016 presidential campaign,
candidates routinely cited a figure of seventy-three thousand pages—a number that
seems to include thirty-five hundred pages of the law itself, plus another
seventy thousand pages of regulations.”
We tend to curse the IRS when we
struggle with our forms, but the real culprits are our representatives in
Congress.
“Members
of Congress love to harangue the IRS bureaucrats about lengthy tax forms and
unfair rules and complex instructions—but of course the IRS isn’t responsible
for the length, the fairness, or the complexity of our tax code. It is Congress that writes the tax laws. It’s Congress that adds hundreds of new
exemptions, allowances, credits, and calculations to the tax code every
year. It was Congress that decided to
give the IRS the responsibility for managing the health insurance subsidies
flowing to millions of Americans under the Affordable Care Act (Obamacare)—and
then cut the agency’s staff after assigning it this major new task. It was Congress that assigned to the IRS the
management of the earned income tax credit (EITC), which has become one of the
nation’s largest support programs for low-income Americans. It was Congress that crafted the much-hated
alternative minimum tax, which spawned whole new levels of complexity, and
hours of additional work, for millions of families. And yet congressmen and senators can’t seem
to resist pointing angry fingers at the IRS, as if someone else had created the
legislative monster that is the U.S. tax code.”
Reid points out the perversity
of a code which burdens those least able to afford tax-paying assistance with
some of the most complex filing procedures.
He uses the EITC, which provides a payment to support low-income workers
and families, as an example.
“The
instruction book for low-income taxpayers hoping to get this benefit
(Publication 596) is fifty-nine pages long.
The book lists fifteen separate conditions, spread over three chapters,
that you have to meet to claim the credit….The whole thing is so complicated
that the error rate is 27%, which means one out of four filers, and the IRS,
have to spend even more time trying to get it right. This has prompted a mini-industry of tax
fraud, with shysters going door-to-door in low-rent neighborhoods offering to
fill out the EITC forms (for a fee of course) whether the client actually
qualifies or not. Similarly the tax
credits for people buying health insurance on the ObamaCare exchanges are
generally aimed at low-income taxpayers and are also ridiculously complicated.”
The IRS has the appearance of being
an efficient agency in that its cost for collecting taxes compares with the
best in the world at that task. However,
it does that by putting the burden of tax filing completely on the taxpayer.
“While
the tax agency spends $11.4 billion, American taxpayers end up paying vastly
more just to file their annual returns.
The Office of the Taxpayer Advocate says American families spend 3.16
billion hours each year getting their taxes done—gathering the data, keeping
records, and filling out forms; businesses spend about 2.9 billion hours on the
same tasks….At an average wage, those 6 billion hours devoted to filing tax
returns represent about $400 billion per year of working time; six billion hours
is the equivalent of 3.1 million people working forty hours per week, fifty
weeks per year. In terms of time and
cost, just paying our taxes has become one of the biggest industries in the
United States.”
The complexity of the process is
such that very few people remain who attempt to perform the task on their own.
“Because
the system is so complicated, hardly any Americans still fill out Form 1040 by
themselves….Today, barely 10% of Americans do their own tax returns. About 60% of all individual taxpayers hire
tax-preparation agencies to do the work for them; another 30% buy
tax-preparation software each year to get them through the process. The IRS says an average family at medium
income shells out about $260 per year for tax-preparation services; those with
higher incomes can easily pay ten times as much.”
One of the curious features of
filling out income tax forms is that you are spending a lot of time giving the
IRS information it already has. Given
that, and the possibility that an effort could be made to arrive at revenue-neutral
simplifications, and a small expansion of reporting requirements could be made,
one should be able to arrive at a system in which the IRS fills out your tax
forms for you and just sends you a summary to approve or dispute. That is just what other countries have done,
with more of them pursuing that goal.
Consider Japan’s system of tax
collection.
“Japan’s
equivalent of the IRS, Kokuzeicho, gathers all the pertinent data for each
worker—income, taxable benefits, number of personal exemptions, tax withheld,
and so on—and then computes how much the worker owes in tax, down to the last
yen. Because Japan uses a system known
as ‘precision withholding,’ with the amount changing whenever pay goes up or
down, most people withhold the exact amount due. In early March, Kokuzeicho sends a postcard
to every citizen that sets forth all this information: how much you earned, how
much tax you owe, how much tax you’ve already paid through withholding. If you’ve paid in more tax than you owe,
Kouzeicho deposits the refund amount in your bank account; if you did not withhold
enough, the agency takes the tax that’s due from your bank account. If the figures on the postcard look about
right, the taxpayer does nothing. The
tax has been computed and paid already.
If the numbers look wrong, you go into the local tax office and try to
straighten things out. As a result,
paying income tax is a totally automatic process for about 80% of Japanese
households, requiring no more than reading a postcard once a year.”
Britain has a system that is
similar to that in Japan. In fact it
maintains a bureau called the U.K. Office of Tax Simplification (OTS).
“….the
office has made some four hundred formal proposals to simplify either the tax
code or the tax return forms and 50% of them have been implemented, at least in
part.”
“The
U.K. has established a system rather like Japan’s, with Her Majesty’s Revenue
and Customs filling in the tax return with data it has received from employers,
banks, brokerage houses, charitable recipients and so on. The Brits also use a ‘precision withholding’
system, called Pay as You Earn, or PAYE, which takes into account wages and
benefits, Social Security and health-care deductions, student loan deductions, and
various other adjustments to income.
With that, most British wage earners find their yearly total tax
withholding just about equals the tax they owe; in 2014, according to the
Office of Tax Simplification, only one in five Brits had to file a tax return.”
Reid lists a number of countries
that have followed or are beginning to follow the path taken by Japan and the
U.K.: the Netherlands, Denmark, Sweden, Spain, and Portugal.
Implementing such a system in
the United States would be much easier if the tax code were simpler: there
basically would be less data to collect.
It would be expensive to move in this direction, but the data indicates
that a simpler system increases compliance with tax laws; the initiative would
soon pay for itself with increased revenue.
Reid points out that such a
system already exists as a trial project in California for state taxes.
“California
has launched what it calls an ‘experimental’ program known as CalFile in which
the revenue department will send you a state tax return that is already filled
in; if the numbers look right, you sign it, and the work is done. If they don’t, you send back the return with
your changes. The state has never spent
much money to publicize this system, so it is poorly known and little
used. But of the ninety thousand
Californians who did file through this prefilled form in 2012, 98% subsequently
told pollsters that they loved it and would definitely use it again.”
Such a system could be
implemented in the United States. There
is no reason, other than politics, why software like the commercial tax filing
programs couldn’t be implemented by the IRS thus saving the public billions of
dollars in unnecessary expenses. But
many of our legislators are not in the business of representing their constituents;
rather, they are tasked to represent the corporations that feed them money for
reelection campaigns.
“It
turns out that the complexity of the U.S. tax system is a money maker for some
large companies. So they have lobbied
strenuously, and successfully, against all efforts to simplify the tax
code. The ‘Tax Complexity Lobby,’ as Forbes magazine called it, includes
tax-preparation firms like H&R Block and Jackson Hewitt, as well as
companies that make tax-preparation software.”
“The
biggest spender in the anti-simplification camp is Intuit, the maker of
Turbotax, the top-selling tax software program.”
Yes, the United States continues
to strive to be “exceptional,” whether for the good or the bad.
The interested reader might find
the following articles informative:
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