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After the debt deal: A tax reform idea

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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.

European countries, Scandinavian in particular, use what is known as a Tax Agency Reconciliation (TAR) system. In Denmark and Sweden, the vast majority of taxpayers use the program.

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.

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