The Simple Tax Return

Economist Austan Goolsbee has a $44 billion idea called the “Simple Return”:

Around two-thirds of taxpayers take only the standard deduction and do not itemize. Frequently, all of their income is solely from wages from one employer and interest income from one bank. For almost all of these people, the IRS already receives information about each of their sources of income directly from their employers and banks. The IRS then asks these same people to spend time gathering documents and filling out tax forms, or to spend money paying tax preparers to do it. In essence, these taxpayers are just copying into a tax return information that the IRS already receives independently. The Simple Return would have the IRS take the information about income directly from the employers and banks and, if the person’s tax status were simple enough, send that taxpayer a return prefilled with the information. The program would be voluntary. Anyone who preferred to fill out his own tax form, or to pay a tax preparer to do it, would just throw the Simple Return away and file his taxes the way he does now. For the millions of taxpayers who could use the Simple Return, however, filing a tax return would entail nothing more than checking the numbers, signing the return, and then either sending a check or getting a refund.

By Goolsbee’s estimates, as many as 40 percent of all Americans could be covered by the Simple Return. He reckons this could save 225 million hours of tax preparation time per year and $2 billion in spending on tax preparers.

It is hard to see how anyone wouldn’t love Goolsbee’s idea. The only possible shortcoming I could see with the plan is that people have income that the government doesn’t know about. If taxpayers have to file their own return, they tend to report that additional income. If they are merely sent a Simple Return that is missing the other sources of income, they are more likely to try to cheat. To combat this, the IRS might have to do random audits of those on the Simple Return, perhaps with punishments such that anyone who abuses the program is forever banned from using it again.

Goolsbee’s plan reminds me a little bit of John Szilagyi‘s old idea of asking for the Social Security number of dependents on their 1040s. Both ideas are simple to implement, and worth billions of dollars. Once you hear them explained, it is hard to argue with either one. Yet somehow, people hadn’t thought to do either before.

Let’s hope that Goolsbee keeps the billion dollar ideas coming. As Barack Obama‘s head economic adviser, there is a real chance that Goolsbee will have the opportunity to put his ideas into action.


Rosario Cano

This system has already been working in Spain for at least two years. You can ask the tax office to send the proposal to you (also over the internet, no environmentally unfriendly printing of forms needed). If you agree, you can validate and send back. If there is some source of income or deduction that needs to be added, you inform them and they send you back their proposal again. It is true that it works best for simple cases (earnings from one employer, a mortage and a bank account), but it can accommodate some degree of complexity. Also, the percentage of people falling being able to use it is very high. I'd recommend you go for it.

pete

But isn't that part of the issue - how complicated we (to be accurate, our lawmakers) have made the process? How many pages is in the tax code?

I'm impressed by this proposal, though I still like the old right wing idea - eliminating automatic deductions, so people have to pay up themselves every 3-4 months and see what their tax bill actually is...

joshua

@james (comment #1) just because peoples jobs are based around a process does not make it worth keeping around around. Just because thousands of peoples paycheck is dependent on say burning piles of cash, and taking care of the pollution caused by burning piles of cash does not mean we need to stifle new innovations to keep that market alive - nor should we supplement it.

Aaron

Heh, I was about to say the same thing as James, only more tongue in cheek. Many people will fight any efficiency improvements, because there will be less work -- this is a very common situation with government-created and bureaucratic jobs. Of course, this tax change would overall be beneficial, because people would switch to other jobs that produce a lot more wealth, but that doesn't make it hurt any less.

Unfortunately, creative destruction is a necessary part of progress. Jobs are destroyed all the time as companies fail, but most of us don't have the option of lobbying to preserve our jobs after our work has become obsolete. We have to learn and change with the times.

We could make tax returns as complicated as possible, to create even more work for people, but think of how silly that sounds! If you don't want to create extra useless work, why object to getting rid of useless work that already exists?

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mgroves

#1 is a great example of "make-work bias". In what universe is a more productive economy with less labor a bad thing? I guess we should go back to hand-copying books instead of using a printing press too, since more people will be employed that way.

Sean

My main concern would be the random audits. It would seem that people receiving a form from the IRS simply asking them to sign and return would cause a lot of people to not consider amendments. If the simple return were amendable, making it easier to add additional income or earning I think this would be a better system.

Also, are we simply shifting the spending on tax preparation to the IRS? I don't think the program would need to cost $2 Billion, but certainly there is an increased expense for the government. Would a better strategy be to reduce the number of potential deductions and credits and create a more simple and straightforward tax that a lay person is more apt to understand? That would reduce the filing burden for all Americans and have less potential to shift the burden to bureaucracy.

Meagan

Interesting idea. I'd just like to see the tax code made simpler so ordinary people feel able to prepare their own taxes. You get a much better idea of where you stand when you fill in the forms and read the booklets yourself.

I think it is telling when our elected members of Congress find the tax code too complicated and pay someone else to prepare their taxes (I don't remember where, but there was a news report last year, I think, which indicated that the majority of Congress does not prepare their own returns). To me, that says there are too many deductions, exemptions, credits, etc.

Matt

Or you could make it really simple and do what the UK does - most people don't have to fill out a tax return at all: http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/SelfAssessmentYourTaxReturn/DG_4017116

It seems to work well in the UK. People who receive all significant income from a single employer don't have to fill out a tax return unless they're specifically sent one. Many people never have to file a tax return.

Mt

In Finland, a similar system has been in effect for quite a long time. I think it was piloted over 10 years ago and it has since been expanded to cover everyone (except some special groups such as farmers).

They tax officials send you a prefilled form ("tax suggestion"). If everything is correct, you don't even have to return it, but it is your responsibility to check it and fill in any missing details.

Susannah

This may be a dumb question, but how does one claim one is married if one isn't? Don't you have to put your spouse's SSN on the income tax form?

Yawar Amin

Old IBM ad
==========
A man, speaking to another man at a construction site, says: `Look at these new-fangled earth-mover machines. If it wasn't for them, ten men with shovels could do this work.'

`Yes,' replies the other, `and if not for the shovels, a hundred men with spoons could do it.'

Silvanus

I'm seeing a number of people chide Poster #1 on an ideological basis. In the book, Brave New World, that dystopic future was one that people's "jobs" were irrelevant, but it filled the time so they wouldn't question the system.

Capitalism's end game is total efficiency; more productivity means more efficiency. To get a totally efficient system requires a human-less economy. Marx noted this when he observed the demise of the cottage industry for mass produced goods. Now, Marx may not have been aware of contingency conditions (sanitation, regulation of the food supply, increased caloric intake thereby extending life span, cures to plagues, etc.) with his original prediction of the fall of capitalism... and so the capitalistic model has changed towards increasing concentrations of wealth in the hands of the few by exploiting the many- but this works only as populations continue to grow.

Note what happens when resources grow scarce when we reach 12 billion people in 30 years. Making sure there is full employment in an economy is often more important than efficiency in a system; don't worship efficiency as a new God... rather, think about your fellow human beings, as God repeatedly tells us in Scripture.

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Barb

I don't think the government can TRULY simplify anything - it just doesn't know how!

Sizer

This proposal must be causing H&R Block to @#$! a brick. Which seems like an extremely good argument for it.

Taran Baker

This is the exact situation that we in New Zealand have employed for at least the past 5 years. In some cases the IRS does not even send out a summary. In other cases a Summary of Earnings is sent out and then people are able to agree or disagree with the results.

I worked in the States for a short period and found filing my tax return an absolute nightmare. Even the Americans I was with had little idea! The proposed system would simplify things a lot.

Will be interesting to see if Goolsbee's idea is put into practice - it works in other parts of the world, so no reason why it can't work in the States.

Risma

Presumably when you say everyone would love this, you're including the IRS themselves, although you left out any discussion of why. The paper summary does say this:

A Government Accountability Office report estimated in 1996 that a plan similar to the one proposed here could save the IRS close to $36 million per year by reducing the number of errors in tax filings and the subsequent need for investigations.

(of course, as per james #1, that's now lots of IRS jobs lost too! Ideally they'd be redirected to the sorely underfunded business of catching tax evaders.)

Ironman

Once again, Austan Goolsbee shows his talent for slapping people with fish to point out the obvious!

More seriously, at least two candidates in the most recent presidential election cycle, no longer running, who offered significant income tax filing simplification proposals, with one having offered what would seem to fit what Austan has outlined as being desirable in a much simpler form to use in filing income taxes. While Austan is helping to make a compelling case for pursuing income tax simplification, it would be nice to see specifically what he, and presumably Senator Obama, has in mind. We'd love to model it!

And if he's willing to wait for April, Political Calculations will have a tool that he can use to redesign the U.S. income tax code.

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Chris

Goolsbee's plan is a good way to get to simplifying the tax code. Assume 40% will be covered by this plan. Great. The other 60% will soon be clamoring for how to make their lives easier too. Okay, here's a simplification that will let us cover another 5% of filers ...

If people are really as upset as they claim about how complicated the tax process is, this should be a fantastic mechanism over time to get to a more simple, straightforward tax code.

gator80

Sounds appealing but what I don't like about it is that it makes it easier to live with the ridiculously cumbersome tax code. If we want simplicity, why not simplify the code, which also benefits 100% of taxpayers.

At that point, by the way, we could also move toward the "Simple Return" process Goolsbee advocates.

Nathaniel

This is hardly a billion-dollar idea. You can already ask the IRS to calculate your taxes for you right on your 1040, sign it and you're done. It's using exactly this principle -- the IRS has data for most simple returns so it isn't a big deal. You're asking that the IRA spend an extra couple millions of dollars printing and mailing stuff just to get more people to use this service?

The problem with tax prep is not that people have difficulty copying a single number from their W2 and another single number from their interest statement. The problem with tax prep and calculation is when you get into deductions, credits, and what is or isn't considered income and things like that.