Lifestyle

Elizabeth Warren has a great idea for making Tax Day less painful

(Source: www.vox.com)

If you’re finishing up your income tax return at the last minute and frustrated by this annual ritual of busywork, you should know about a bill that Sen. Elizabeth Warren (D-MA) introduced last spring that would make doing taxes vastly easier for Americans — and would strongly push back against the tax prep industry’s attempts to keep taxes difficult.

The Tax Filing Simplification Act of 2017 would order the IRS to create a free online tax preparation and filing service comparable to TurboTax or other commercial programs. Moreover, it bans the agency from working with the tax prep companies, as it’s been doing for years.

Currently, the IRS collaborates with tax software providers (mainly Intuit, which sells TurboTax) on what’s called the Free File program. The program is supposed to provide free access to commercial software for low- and medium-income taxpayers. But because the eligibility rules are so complicated and the system is so poorly advertised, only 3 percent of taxpayers use it, and the National Taxpayer Advocate has repeatedly called for the program’s abolition.

Warren’s bill would kill the corrupt, feckless Free File program for good. But it goes further than that. Best of all, it establishes a new “return-free” filing option that would send millions of Americans with simple tax situations a pre-prepared tax return, which they can submit unchanged if they like. Warren isn’t the first person to propose this. Sen. Jeanne Shaheen (D-NH) and Rep. Bill Foster (D-IL) both have similar bills this Congress.

But it’s a great idea that a number of other countries have already adopted, which would put billions more in the hands of the working poor and make tax filing a cinch for millions of families. And it already has a huge amount of Democratic support, with Sens. Shaheen, Bernie Sanders (I-VT), Sheldon Whitehouse (D-RI), Tom Udall (D-NM), Tammy Baldwin (D-WI), Ed Markey (D-MA), Pat Leahy (D-VT), Tammy Duckworth (D-IL), Maggie Hassan (D-NH), and Jeff Merkley (D-OR) all on board.

We needlessly labor over tax returns every year

The actual work of doing your taxes mostly involves rifling through various IRS forms you get in the mail. There are W-2s listing your wages, 1099s showing miscellaneous income like from one-off gigs, etc. To fill out your 1040, you gather all these together and copy the numbers in them onto the 1040 form. The main advantage of TurboTax is that it can import these forms automatically and spare you this step.

But here’s the thing about the forms: The IRS gets them too. When Vox Media sent me a W-2 telling me how much it paid me in 2017, it also sent an identical one to the IRS. When my bank sent me a 1099 telling me how much interest I earned on my savings account in 2017, it also sent one to the IRS. If I’m not itemizing deductions (like 70 percent of taxpayers), the IRS has all the information it needs to calculate my taxes, send me a filled-out return, and let me either send it in or do my taxes by hand if I prefer.

This isn’t a purely hypothetical proposal. Countries like Denmark, Sweden, Estonia, Chile, and Spain already offer “pre-populated returns” to their citizens.

In a number of countries, like Japan and the UK, the vast majority of people don’t have to file tax returns at all, pre-populated or otherwise. Instead, through a system known as “precision withholding,” the government takes exactly the right amount out of every paycheck. If they find that a mistake was made — not accounting for a charitable donation or mortgage interest, for example — they find that mistake in charity and bank records, and they fix it for you. In journalist T.R. Reid’s great book A Fine Mess, he explains how the Japanese system works:

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, Kokuzeicho 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. …

As a result, paying income tax is a totally automatic process for about 80 percent of Japanese households, requiring no more work than reading a postcard once a year.

Closer to home, California has a voluntary return-free filing program called ReadyReturn for its income taxes.

And there are serious plans, like Warren’s, for adopting this idea nationwide. Austan Goolsbee, former chief economist for the Obama administration, designed a proposal called “The Simple Return” in 2006 that would provide pre-populated returns for everyone not itemizing their deductions. You could even conceivably extend it to many itemizers; mortgage lenders already send out 1098 tax forms listing interest paid over the year, and the IRS could mandate that charities do the same for tax-exempt contributions.

The Obama administration supports return-free filing, and Ronald Reagan touted the idea in a 1985 speech:

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, and it would be totally voluntary. If you decided to participate, you would automatically receive your refund or a letter explaining any additional tax you owe. Should you disagree with this figure, you would be free to fill out your taxes using the regular form. We believe most Americans would go from the long form or the short form to no form.

The proposal would be particularly good for low-income Americans eligible for the earned income and child tax credits, which are both refundable and offer substantial benefits to low-income taxpayers who file. But because you have to file, compliance isn’t perfect. Twenty percent of people eligible for the EITC don’t get it, and a big fraction of returns contain errors, usually because of the complexity of the credit and due to errors by commercial tax preparers.

Automatic filing would provide EITC payments to many of that 20 percent not getting them, and would spare taxpayers from doing complex calculations that sometimes lead to errors.

The unholy alliance of Big Tax Prep and anti-tax conservatives

Americans for Tax Reform And GOP Lawmakers Hold News Conference On Tax Reform

So why hasn’t return-free filing happened yet? The short answer is lobbying, and in particular lobbying by companies like Intuit. In 2013, ProPublica’s Liz Day wrote an incredible exposé on just how hard Intuit has lobbied to stop return-free filing from becoming a reality:

[In 2007] a bill to limit return-free filing was introduced by a pair of unlikely allies: Reps. Eric Cantor, R-Va., the conservative House majority leader, and Zoe Lofgren, D-Calif., a liberal stalwart whose district includes Silicon Valley.

Intuit’s political committee and employees have contributed to both. Cantor and his leadership PAC have received $26,100 in the past five years from the company’s PAC and employees. In the last two years, the Intuit PAC and employees donated $26,000 to Lofgren.

…In 2005, California launched a pilot program called ReadyReturn. As it fought against the program over the next five years, Intuit spent more than $3 million on overall lobbying and political campaigns in the state, according to Dennis J. Ventry Jr., a professor at UC Davis School of Law who specializes in tax policy and legal ethics.

They haven’t stopped; in 2014, Day reported that Intuit was involved with an astroturfing effort meant to manufacture the appearance of grassroots opposition to automatic filing. Intuit spent $13 million lobbying Congress from 2011 to 2015, with 41 lobbying reports relating to taxes in 2015 alone. Most of the reports reference lobbying to “enhance voluntary compliance” — a euphemism for opposing automatic filing.

In this, Intuit and other tax prep companies had a powerful ally: Grover Norquist. The anti-tax crusader vehemently opposes automatic filing on the grounds that it makes tax season insufficiently nightmarish, which might reduce people’s aversion to taxes and make it easier for politicians to pass tax increases. So even though Ronald Reagan himself supported automatic filing, Norquist has helped make the idea dirt in the eyes of conservative legislators.

What you can do to fight the tax preparation industry

Tax Preparation Gets Underway Ahead Of April Deadline

Warren’s bill would start the US on the path to return-free filing. It’s a great piece of legislation, and Congress would do well to pass it.

But in the meantime, what’s a regular person hoping for return-free filing to do? Well, you could do what Joseph Bankman, the Stanford Law professor who helped design California’s system, did and spend $30,000 out of pocket to hire a lobbyist to push the idea and counter Intuit’s lobbying.

But for those of us without $30,000 to spare for the greater good, there’s a less demanding option: Stop paying for TurboTax.

Now, if you have a relatively simple return without itemizations, I’m not going to argue that you shouldn’t use TurboTax for free. It, like most tax software, includes a free option for simple returns or for households making under $62,000 a year. Using that is totally fine, as is using Free File Fillable Forms, a program offered by the tax prep companies in conjunction with the IRS that has a computerized version of the basic 1040 form. As long as you’re not giving any of your money to a tax preparation company, it’s all good.

But resist the urge to pay for anything. Don’t pay for the state version. Don’t pay for one allowing for itemized deductions. Don’t pay for anything. Hell, don’t pay for Intuit’s other products like QuickBooks either if you can help it. Paying means putting money into Intuit’s pocket, which it can then turn around and use to lobby to make your taxes more complicated.

A boycott might seem a bit paradoxical: If the case for automatic filing is that it’s easier than doing your own taxes, isn’t TurboTax also easier than doing your own taxes? And, sure, it is. But it costs money, and you should get that convenience for free. In the meantime, doing your own taxes is a hassle, but not so huge of a hassle to not be worth it as a way to punish Intuit and push for a better system.

Moreover, that better system will help people who aren’t even filing taxes now, by making more of them aware of refundable credits. Even if a boycott isn’t in your own immediate self-interest, it’s worth doing to help them.

After years of using the paid version of TurboTax, I did my own taxes using Free File Fillable Forms for the first time last month. Yes, it was a bit annoying. But even though I itemize my deductions it only took a couple of hours, not much longer than TurboTax would. It’s absolutely worth it.

If you have yet to file, don’t pay TurboTax a cent. If enough of us get on board, we might finally get to enjoy the return-free world we deserve.

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More Info: www.vox.com

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