The Tax Complexity Lobby

Len Burman for Forbes.com writes: You might think that everyone hates tax complexity, but you’d be wrong.  Two factions like things just the way they are: tax software companies (especially Intuit, the maker of TurboTax) and government haters like Grover Norquist, president of the ironically named Americans for Tax Reform.

Both Intuit and Norquist were featured in a recent story in ProPublica and NPR titled “How the Maker of TurboTax Fought Free, Simple Tax Filing.”

Software makers like the status quo because they profit so handsomely from it. Intuit’s profit fell by 40% ($47 million) in the first quarter because the start of the tax season was delayed. Imagine what would happen if most filers could do their tax returns without help.

The second group has a more Machiavellian perspective. Grover Norquist is famous for saying that he wants to shrink the federal government so much that it will fit in a bathtub… and then he wants to drown it. A simpler, less onerous tax system would presumably make people feel better about the government, and that is the last thing Grover and his fellow travelers want.

The Obama Administration had proposed that government pre-fill your tax return with information it collects from employers, financial institutions, etc. The idea has gone nowhere, at least in part because of fierce opposition from the tax software industry. Intuit had also temporarilyderailed a free file program in California and killed a simple online filing system in Virginia.

Grover portrays himself as the defender of “seniors, low-income and non-English speaking citizens” who might be intimidated into signing an erroneous tax return completed by the IRS. Maybe, but I’m pretty sure that Norquist’s main fear is that taxpayers would appreciate the simplicity.

Forbes investment editor, Janet Novack, has a smart essay about how the complexity of our current tax system makes any efforts at simplified filing problematic. One goal of tax reform should be to simplify things enough that the IRS could accurately prepare most people’s returns for them. Novack also invited commentary from law profs Joe Bankman and Dennis Ventry, strong advocates ofCalifornia’s ReadyReturn system, and Arlene Holen, a critic.

Novack is surely right that our current tax system is needlessly complex, but Bankman responds that the IRS could still simplify matters by assembling data from information returns and providing it to us as a starting point. Holen argues that this would create an undue burden on small businesses. (Holen’sresearch institute is partially funded by Intuit.)

The burden could be lessened by extending the filing deadline to give companies time to get their info to the IRS. We tend to think of April 15 as a date set in stone, but the original filing deadline was in March. It could be pushed back again.

Tax reform obviously creates the possibility for much more sweeping simplification. Several proposals would banish “Tax Day” altogether.

Columbia law professor Michael Graetz proposed to replace the income tax with a VAT (a kind of national sales tax common in the rest of the world) for most households. Only upper-income households would have to file income tax returns. Refundable tax credits would offset the regressivity of the VAT for those with low incomes.

The Bipartisan Policy Center (BPC) proposed to simplify the income tax codeso much that half of households would no longer need to file. (Joe Minarik and I designed this proposal.) The income tax would be a flat 15% for most households; thus, tax withholding at a flat 15% rate would exactly match liability. Like Graetz’s proposal, there would be refundable credits tied to employment and children that would offset the regressivity of the flat income tax rate. Tax subsidies for mortgage interest, IRAs, and charity would be delivered directly to financial institutions and charities, obviating the need for tax deductions or filing. For example, if you gave $100 to your favorite charity, they’d claim a matching $18 on your behalf from the IRS. The UK uses this system, called Gift Aid, to promote charitable contributions without requiring tax filing.

The BPC plan would discourage the creation of new complexifying tax credits and deductions, which might make tax reform more durable than in its last incarnation.

Supreme Court Justice Oliver Wendell Holmes once said that taxes are the price we pay for civilized society.

But needless tax complexity is the price we pay for Washington’s dysfunction, aided and abetted by the complexity lobby. We should just say no.