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Return-free filing proposal is not tax reform

{mosads}Yet every April, like some kind of hardy perennial, a supposed panacea crops up: A return-free filing system. Under this proposal, the same government responsible for creating the byzantine mess that is our tax code will undertake to calculate your taxes for you. No fuss, no muss: you just sit back and let the bureaucrats do all the heavy lifting.

However beguiling that might sound to some, there are at least three big problems with this idea. First, there’s the inherent conflict of interest in having the taxman do your taxes. Second, government has already implemented free solutions for tax return preparation – IRS Free File – that relies on the private sector without costing taxpayers a dime. Third and most important, return-free filing is a procedural trick that promises to reduce the burden of filing taxes without actually doing the hard, but essential work of tax reform. Indeed, return-free can actually hide tax dysfunctionality and inefficiency by making it invisible to citizens, which would work at cross-purposes to the long-term improvements and reform of the tax system that is long overdue.

The return free idea has been around for a while, and is currently in practice in Denmark, Sweden, Spain, and the United Kingdom among other countries, places with limited or no tradition of voluntary compliance. Under return-free filing, the Internal Revenue Service (IRS) would estimate your taxes using information your employer and financial institutions already provide to the federal government. Proponents of the idea argue it would be free and could provide a voluntary option, at least initially (if you don’t want to participate, you might not have to), as an alternative to hiring a tax preparer or purchasing commercial tax software.
Not surprisingly, advocates fail to discuss how the IRS would pay to build and operate the systems needed to deliver return-free, whether government can accurately determine all the unique factors in a family’s life that would impact what they fairly and accurately owe in taxes (it can’t), such as eligibility for targeted tax credits like the Earned Income Credit and deductions for retirement savings, things that directly impact average taxpayers with “simple” returns.

Like most Americans, we spend too much time and money making sure our taxes are filed correctly, and we are open to any ideas that would reduce complexity in the tax code. But that’s not what return-free filing would do.

Unlike comprehensive tax reform – like the modified Zero Plan proposed by the Simpson Bowles Commission or the Rivlin-Domenici tax reform plan – return-free filing would not close the over $1 trillion in tax incentives that benefit primarily wealthier taxpayers. Nor would it raise revenue for deficit reduction; provide funds to build new roads, rail, schools, and research; improve progressivity and fairness; or help collect the $300 billion in unpaid taxes (the annual tax gap). Nor would it fix our overly complex, inefficient, and uncompetitive corporate tax code.

In short, it is a political gimmick that would provide elected officials with yet another excuse to avoid the hard choices needed to revamp our tax code to promote economic fairness and growth. It would put the burden of contesting initial tax determinations on the filers rather than on the IRS, fundamentally reversing the presumption of the tax system today. And, if truly voluntary, it is unlikely to have a significant impact on the way most Americans complete their taxes. In California (which proponents often cite as a good example of how an effective return-free filing can be implemented) only 90,000 people use “Ready Return,” with the rest opting out –putting into serious doubt the idea that a federal system return-free filing system could be voluntary and actually achieve the benefits it proponents claim will occur.

Doing our taxes may be a royal pain, but it has one indisputable benefit: It’s a teachable moment. It prompts us to review our financial circumstances; reflect upon how much of what we earn goes to pay taxes, and on the quality of the public services we receive in return; and, examine all the political engineering of loopholes, exemptions and preferences that lower tax bills for some, and raise them for others.

Return-free filing, in contrast, is based on the premise – always dangerous in a democracy – that ignorance is bliss.

Marshall is the president of the Progressive Policy Institute and Weinstein is a senior fellow at PPI and director of the Masters in Public Management program at Johns Hopkins University.


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