How to Simplify the Tax Code. Simply.

taxes

We are in the midst of a burst of new thinking about revising the Internal Revenue Code, and the voices in favor of simplification for both corporate and personal taxes are getting louder. Apple CEO Tim Cook, who recently testified before the Senate on legal tax avoidance, commented that “Apple’s tax return is two feet high. It’s crazy … It’s time to trash [the code] and go back to something simple.” But long before the current tax controversies, many people embraced the idea of radical simplification of the code.

Tax simplification is often thought to involve big issues on which Americans are sharply divided — which loopholes should be closed, whether rates should be made more or less progressive, whether exemptions should be expanded or instead eliminated. While debating those issues, we must not lose sight of the excessive paperwork and reporting burden that the tax system imposes on the American public. Serious efforts to reduce that burden would save a ton of time and money for individuals, nonprofits and businesses both large and small. Even without resolving the divisive issues, we could undertake those efforts through a bipartisan war on paperwork.

The Department of Treasury imposes about 6.7 billion annual hours in paperwork per year (in monetary terms, about $134 billion, a larger amount than the discretionary budget of nearly all Cabinet departments). The IRS accounts for the bulk of that burden, most of which is required by Congress. By streamlining the system, reducing redundancy and allowing less frequent and detailed reporting, Congress could cut that figure significantly. It should also give serious consideration to an idea that would count as a genuine game changer.

Suppose that in late February of next year, you received a pre-filled tax return, complete with the relevant information. Suppose that the return was accompanied by a brief letter asking you to make any corrections, to sign the return and to file it (electronically if you like). The whole process might take five minutes.

An approach of this sort, called the Simple Return by Austan Goolsbee, former chair of the Council of Economic Advisers, could be used by up to 40% of taxpayers, and all by itself it could eliminate hundreds of millions of hours in annual paperwork burdens. California is already using a program of this kind, called Ready Return, and some version of the basic system is in place in several European nations, including Denmark, Sweden, Portugal, France and Spain.

In principle, this approach is feasible for the U.S. Many millions of Americans receive their income from just two sources: their employer and a single bank. The IRS gets that information already, and it could use it to create pre-filled returns. The Simple Return program would be purely voluntary. People could opt in and see how it worked.

To be sure, the Simple Return faces challenges, both political and administrative. In California and elsewhere, it has been fought intensely by tax preparers, including TurboTax, which have a large economic stake in requiring taxpayers to do the paperwork on their own. Fortunately, proposed legislation (the Autofill Act of 2013) has been introduced to adopt the Simple Return. Unfortunately, other legislation has been introduced to forbid the IRS from taking steps in its direction.

In addition, much of the current concern about complexity comes from corporations and nonprofits. Consider Apple’s 2-ft. return. While it’s not clear whether something like the Simple Return could be designed for corporate and nonprofit taxpayers, an aggressive reduction in the number and complexity of the required forms should be part of the first order of business.

People also have real questions, especially in the current climate, about how to ensure accuracy and especially to reduce the risk that the IRS will err in the government’s direction. These questions need to be answered, but in principle, they should not be obstacles to serious consideration of the Simple Return.

To those who oppose that particular proposal, the fundamental question remains: What will Congress do, now or soon, to reduce the unacceptably high paperwork and reporting burdens now imposed on American taxpayers?

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