Editorial written by the Bloomberg Editorial Board
It probably escaped your attention, but the Internal Revenue Service recently piloted a program to help Americans cope with its notoriously complex tax system. Direct File was meant to help taxpayers in 12 states prepare and submit their returns electronically. Some 19 million people were eligible to use it. Thanks partly to a rollout late in the tax-preparation season, fewer than 1% of them actually did.
The IRS was pleased with the results nonetheless: Taxpayers who used the system said they liked it, according to a survey, and the idea all along was to “start small, make sure it works, and then build from there.” Fine. So what about next steps? “No decision has been made about the future of Direct File at this time,” the agency says.
Dull as the topic of tax administration might seem, it demands far more ambition and urgency. Each year, Americans spend roughly 2 billion hours and more than $30 billion on personal tax-preparation fees. This compliance burden falls disproportionately on the less well-off. The system’s complexity also means that credits often go unclaimed; again, in relative terms, the lower-paid suffer the biggest losses. At the top of the income scale, in contrast, complications yield loopholes — and every loophole dictates higher taxes for the rest.
A working Direct File system would be a start, but it’s the least of what’s required to disentangle the mess Congress has created. Next year, legislators will have to think about tax reform as changes in the 2017 Tax Cuts and Jobs Act expire. They should use the moment to simplify the system and follow the example of many other advanced economies: Spare taxpayers the need to fill out any return at all.
Two complementary strategies would make this feasible.
First, go one better than Direct File by tasking the IRS to pre-populate the main tax form for most taxpayers. The agency already has much, and in many cases all, of the information it needs. According to one recent study, roughly 70 million returns — upward of 40% of the total — could be accurately pre-filled.
Second, simplify the code. This is desirable in its own right, because endless accretion of complexities is self-defeating. (Each new incentive or accommodation confounds the others.) In addition, a simpler code would allow more comprehensive use of pre-filled returns. A recent report from the Brookings Institution suggests some options. To be sure, even the least ambitious of these ideas is radical by contemporary standards. It would repeal itemized deductions, preferential rates for capital gains and dividends, head-of-household filing status, and the alternative minimum tax, and replace existing personal credits with refundable ones of $1,000 for each family member and a work-related credit that phases out as income rises.
A tall order, politically speaking — yet consider the benefits. By design, it would be both revenue-neutral and fairer than the current code. It would also be vastly easier for the IRS to administer and for taxpayers to understand and endure. With such a system, pre-populated returns could be standard practice.
As it stands, the U.S. system delights the tax-prep industry but imposes enormous avoidable costs on the country’s citizens. It’s abysmal by international standards and violates the Eighth Amendment’s prohibition against cruel and unusual punishment. Next year, changes to the tax code will be unavoidable. For once, maybe Congress can come up with a reform worth the name.
