DEATH AND TAXES

Filing your income taxes is a pain, and that is not an accident

There’s a strangely fascinating video on YouTube of an unseen man in Estonia walking the viewer through his personal income tax filing. What’s incredible about it is the length: two minutes and 50 seconds.

He logs into his bank account and verifies the income data his employer sent to the government in advance. He reviews his contact information, clicks a box to have his €158 refund paid directly to his bank account, and voilà. Taxes done, in less time than it takes the average US taxpayer to set up a TurboTax account.

In many parts of the world, personal income tax preparation is not the stress-inducing slog that taxpayers in the US (deadline: April 15) and Canada (April 30) are preparing to undertake. Preparing a 1040 form will take the average US taxpayer eight hours, according to the US Internal Revenue Service.

Estonia is just one of several countries in which the burden of preparing personal tax returns falls to the government instead of the individual. Generally speaking, this is accomplished one of two ways. In the pay-as-you-earn systems used in Japan, Germany, and the UK, the government calculates withholdings to match the amount of annual taxes due. Most citizens, particularly those whose income is derived from a single employer, never even see a tax return.

Other nations like Belgium, Spain, Denmark, and Estonia use what’s called a pre-populated return. Employers report individuals’ income directly to the government, which then sends the taxpayer a pre-filled return he or she just has to verify.

So sign me up! cries the beleaguered North American taxpayer from behind a stack of receipts and income statements. If only it were that easy. There are, in fact, powerful interests working to ensure that filing your taxes remains as much of a hassle as possible.

First, the logistical arguments. Pre-populated forms work best on very simple tax returns. When you start factoring in deductions, tax credits, and varying forms of income, “the whole system falls apart,” said Lindsay Tedds, a visiting professor of economics with the School of Public Policy at the University of Calgary. “The more complexity you have and the more niche systems you have, this just does not work.”

Governments use tax collection to accomplish different goals and to incentivize certain behaviors, like the deduction for interest on a home mortgage offered to taxpayers in the US, Switzerland, and the Netherlands. These various rules may offer more breaks to more people, but they make a one-size-fits-all tax return harder to achieve.

“Simpler is good, but it means that everybody is treated the same,” Tedds said. “As soon as you want to start incentivizing [or] motivating, it gets more complex.”

It’s not necessarily in the government’s best interest either. Taking on more responsibility means higher costs, and it’s not clear that return-free regimes result in better tax compliance and thus more revenue.

It puts the government at a disadvantage if the money the tax authority thinks an individual earned is less than he or she actually earned. A devious taxpayer may be tempted not to report income the government obviously doesn’t know about. An unsophisticated one may mistakenly assume he or she doesn’t have to.

The government also doesn’t have an incentive to lessen individual taxpayers’ bills, critics point out. Conservative anti-tax activist Grover Norquist has railed against return-free systems, calling the concept a “money grab by the government.”

But the most vocal arguments against pre-filled tax returns have come, unsurprisingly, from the tax preparation industry. Intuit, maker of the popular software TurboTax, has spent $13 million on government lobbying since 2011, more than Apple or Amazon. Opposing return-free taxes is one of its primary issues.

Rep. Zoe Lofgren, D-Calif., and former Rep. Eric Cantor, R-Va., introduced a bill to curb return-free filing in 2007 after receiving donations from Intuit’s PAC and employees, according to an investigation by ProPublica and NPR. That bill failed, but there’s been no serious effort to simplify the federal tax filing process since.

The IRS did not respond to queries about the agency’s position on pre-populated returns.

When California launched ReadyReturn in 2005, a pre-populated form available to certain state taxpayers, the industry came out hard against it. It spent nearly $3.5 million on lobbyists and campaign contributions in California between 2005 and 2010.

“In all my years as a state senator, a U.S. congressman and state finance director, I never saw as clear a case of lobbying power putting private interests first over public benefit,” former U.S. representative and California state senator Tom Campbell wrote in 2006 of the industry’s opposition to ReadyReturn.

ReadyReturn eventually morphed into CalFile, a program that pre-fills some taxpayer data on the return. It doesn’t include a bottom line—taxpayers still have to review the information and calculate their final tax burden—but it simplifies the process, and could be used to streamline more complicated tax returns as well, said Joseph Bankman, a Stanford Law School professor and an advisor on the ReadyReturn program.

We’d suggest you move to Estonia, but the IRS will find you there, too.

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