After the debt deal: A tax reform idea
The debt deal punts on tax reform. That's unfortunate. But when lawmakers finally get to it, this idea can garner bipartisan support and save the government serious money: Have the IRS fill out tax returns for millions of taxpayers. It's a proven concept in Scandinavia -- and California.
Santa Barbara, Calif.
The great debt debacle in Washington is over – for now. One idea that was punted for later consideration is tax reform. This is stupefying because the elimination of all corporate and individual “loopholes” from the tax code would free up about $1 trillion each year to either reduce tax rates or debt – or both.Skip to next paragraph
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The issue was too politically hot to handle, yet talk of tax reform doesn’t always have to spark a beltway bonfire. Here is an idea that should find common ground and one that immediately yields to common sense: Simplify the process of preparing tax returns by shifting the burden from the individual taxpayer to the government itself.
Why and How?
Often the Internal Revenue Service has all the information it needs to do the same thing that taxpayers toil over every April, except it can complete the task much more efficiently and accurately. Wages and salaries (the W-2) and interest and dividend income (the 1099) are tabulated on forms that employers and financial institutions feed directly into IRS computers.
Why require taxpayers to reinvent the 1040 wheel by spending time gathering documents and struggling to master the tax man’s gobbledygook in the tax forms and instructions? Particularly when, as is often the case, taxpayers incorrectly fill out their returns and are contacted by the IRS telling them how they erred and how much more (or less) they owe.
Or why force 60 percent of taxpayers to hire professional tax-return preparers, many of whom have their clerks take the taxpayer’s information, feed it into software that spits out the tax return, and then send a bill for anywhere from $100 to $1,000?
This idea for the tax agency to do the heavy-lifting computations is not new. California launched such a program, called “Ready Return,” as a pilot plan in 2004 and 2005 and made it permanent in 2007.
This is more than a theoretical idea. The multi-page, multi-form 1040 tax icon carries with it an instruction booklet of 179 pages of gibberish. The IRS estimates that US taxpayers toil 3.8 billion hours each year gathering information and preparing the 1040 alone, at an imputed cost of $120 billion, or a full 10 percent of the tax revenues collected by the agency.
Yet tax return simplification is not just about easing the burden for 150 million individuals come April 15. It’s also about converting confused, agitated, and tempted noncompliers into silent, mollified, and compliant taxpayers.
The country’s tax compliance rate is 86 percent and the “tax gap” – the amount of taxes that are owed annually but not paid – exceeds $300 billion a year. Each 1 percent improvement in compliance will produce an added $20 billion in revenues. That’s serious money in today’s era of unsustainable trillion-dollar deficits.
Here are some of the details of what I call the “EZTax.” About two-thirds of all taxpayers don’t itemize but claim a standard deduction. Many of these taxpayers have compensation income from one employer and perhaps interest income from one financial institution. These are the ideal candidates for EZTax returns, estimated to be up to 50 percent of all filers. If Congress were to undertake “real” tax reform and eliminate the many loopholes that fill the 30 lines on Schedule A (itemized deductions), then the number of added eligible candidates would surge dramatically.