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Commentary: The tax reform that Republicans are missing
October 4, 2017 / 4:14 PM / in 13 days

Commentary: The tax reform that Republicans are missing

Americans spend a collective 2.6 billion hours filling in their tax returns. Here taxpayers wait outside the Internal Revenue Service office in Brooklyn after hackers stole the personal data of about 100,000 taxpayers in 2015. REUTERS/Shannon Stapleton

Republicans in Congress and the White House haven’t been able to get any major legislation passed yet. But they're betting they can pull it off with a bare-bones proposal for tax reform outlined last week, which they claim will help the middle class despite the evidence that it will overwhelmingly benefit the rich.

Their plan to overhaul what they call a broken tax code leaves out many key details. But one point gets hammered home: Republicans say they want to make filing taxes easier. The first principle for President Trump’s tax plan, their outline states, is to “make the tax code simple, fair and easy to understand.” There are a dozen more references to simplification throughout the rest of the document.

The Republican promise is that they want to make filing taxes as easy as mailing a postcard. But their plan doesn’t get anywhere close to that, while overlooking a straightforward reform that would. Instead of reducing complexity, the GOP plan mostly lowers and flattens rates. For example, it reduces the number of personal income tax brackets from seven to three.

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However, the  effort of filing taxes has nothing to do with how many brackets there are -- figuring out which bracket you fall in is the easy part. What makes doing taxes complicated is figuring out which deductions, credits, and loopholes to claim. Republicans would close some loopholes, but they would open others -- including a lower tax rate on pass-through businesses that will entice rich people with the right accounting team to get creative in order to reap the rewards. (Tycoons with family-owned businesses, such as Donald Trump, especially stand to benefit from this change, which would allow law firms, hedge funds, and real estate brokerages to file under a much lower rate.) Such loopholes make the code more complex to navigate, not less.

Simple tax filing isn’t a hopeless goal, however. There’s something Congress could do that would radically simplify the process of filing taxes for the vast majority of U.S. taxpayers.

It’s called return-free filing. In countries such as Chile, Denmark, Estonia, Finland, Iceland, Japan, Norway, Sweden, and Spain, the government basically prepares tax returns for its citizens. It already has most of the information it needs: Employers have to tell tax authorities how much they pay their employees, while forms like W-2s and 1099s provide other necessary details. In Japan, for example, the country’s tax agency sends everyone a document with how much they earned, how much was withheld, and how much they owe or are owed in taxes.

If Washington adopted this policy, the government would fill out a return for every resident with the information it already keeps on file. Taxpayers who wanted to itemize their returns or dispute the numbers would be free to do so, but otherwise they could simply sign off on the government’s math. In some countries, merely taking no action constitutes an approval and therefore counts as doing your taxes.

President Donald Trump delivers a speech on tax reform during an event with workers at the Andeavor Refinery in Mandan, North Dakota, September 6, 2017. REUTERS/Jonathan Ernst

Instead, in the United States it’s up to every taxpayer to gather their forms, enter all the numbers into a long document, ensure that everything has been calculated accurately, and send it all in. It takes a collective 2.6 billion hours to get this done. Americans pay an average $200 each for the pleasure of doing their taxes, or around 10 percent of the average federal tax refund.

Return-free filing, on the other hand, could save an estimated collective 225 million hours of tax filing work and $2 billion in costs. Up to 60 million households would no longer have to file any returns.

The concept is not entirely foreign to the United States. President Ronald Reagan called for something just like it in his 1985 Tax Reform Act, arguing that Americans should “not even have to fill out a return.” Since then, Senator Elizabeth Warren has taken up the crusade, introducing legislation two years in a row that would instruct the IRS to develop a free, online return-free filing option, allowing taxpayers to download their information straight from the government and into a form. The idea is even supported by conservative anti-tax activist Grover Norquist.

But it hasn’t moved forward; last year, Warren’s bill didn’t even make it out of committee.

That’s because some deep-pocketed companies have worked tirelessly to bury it. If most Americans no longer needed help doing their taxes, business would dry up for tax preparers such as H&R Block and TurboTax. More than half of all individual tax returns filed in 2014 were prepared by a tax professional, while about 80 percent of Americans use either software or a preparer.

These companies have said as much publicly. Intuit, the software company that makes TurboTax, has said in filings that it “opposes IRS government tax preparation” and that such legislation “may present a continued competitive threat to our business in the foreseeable future.” Liberty Tax Service stated in 2015 that “demand for our products is related to the complexity of tax return preparation.”

So they’ve spent heavily to campaign against return-free filing. H&R Block, which ProPublica says spent $3 million on lobbying last year, fought hard against Warren’s bill. Intuit spent $2 million in the same year, much of it in favor of legislation that would block the government from offering return-free filing. The firm has lobbied in favor of a number of similar past bills.

Republicans have long claimed that they want to make taxes simpler, yet their proposals never live up to such promises. It’s not impossible, though; the answer is staring us right in the face. It would just require the government to put the interests of everyday taxpayers over big-spending corporate lobbyists.

(Bryce Covert is an independent journalist writing about the economy. She is a contributing op-ed writer at the New York Times and also writes for The New Republic, The Nation, and other outlets. @brycecovert)

The views expressed in this article are not those of Reuters News.

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