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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.