April 22, 2014

Former Secretary of Defense Donald Rumsfeld thinks that completing your federal income tax returns should be a lot simpler than it is. And you will never guess who agrees with him – liberal publication ProPublica, left-leaning policy wonk Ezra Klein, tax expert Austan Goolsbee and presidents Ronald Reagan and Barack Obama. What is it they say about strange bedfellows?

Taxes are Complicated

Rumsfeld voiced his frustration with the federal income tax code in a letter penned to the IRS with links to the letter posted on his Twitter feed. In the letter, Rumsfeld claimed that he and other Americans have “absolutely no idea whether our tax returns and our tax payments are accurate.” Rumsfeld also complained about the expense associated with completing his income tax returns each year.

Like 60 percent of the American public, Donald Rumsfeld does not complete his own federal income tax returns. Instead, he outsources the task of dealing with the IRS to a paid accountant. Ordinary folks with fewer financial means take a similar approach, except that their tax returns are frequently handled by firms like H&R Block or Jackson Hewitt. Many people who DO prepare their own tax returns do so with the guidance of software from TurboTax or TaxAct.

Taxes are complicated. According to the Tax Foundation, the most recent version of the federal tax code is a hefty 2,652 pages thick and includes more than 1 million words. The so-called “long form” 1040 lives up to its name, having swelled from 30 lines on a single page to 87 lines and more than 200 pages of instructions. The U.S. Tax code is so complex that the Tax Policy Center released a 100-page annotated version of Form 1040 which includes factoids for every line of the document.

The No-Return Tax Return Proposal

There is little doubt that an affluent taxpayer like Donald Rumsfeld has tax issues that require the services of a certified public accountant. But the truth is that most people in the United States have neither the income nor the circumstances to warrant the need to designate the task of completing an income tax return. This truth is the guiding principle behind a proposal to allow the IRS to complete tax returns itself, and send completed returns to taxpayers for their approval. Taxpayers who wished to make changes in the IRS-completed returns would be able to do so, but the requirement to file income tax returns would no longer exist.

The proposal, which Goolsbee and ProPublicacall the Simple Return, would supposedly save 225 million preparation hours and$2 billion in fees paid to tax preparers. According to a 2006 white paper written by Goolsbee and published by liberal think tank the Brookings Institution, adopting the Simple Return as a general federal tax filing policy would translate to the equivalent of $44 billion in tax savings for the American public over the next 10 years. The IRS would also save $36 million through a reduction of tax errors committed by taxpayers – and the need to conduct fewer audits. Several European countries, including Denmark and Spain have adopted variations of the Simple Return as standard operating procedure.

The plan has actually been tested in the United States. In 2004, the Franchise Board of California launched a pilot program called ReadyReturn, Approximately 50,000 single taxpayers with no dependents and income only from wages received pre-filled state income tax forms in the mail with the option to accept or decline the returns. More than 11,000 taxpayers accepted the ReadyReturns,equaling 27 percent of taxpayers who had not previously filed their California state tax returns.

Among taxpayers who declined the ReadyReturns, 22 percent stated that they had already filed their state income tax returns. Satisfaction among taxpayers selected for the ReadyReturn program was high: 90 percent stated that they saved time by filing their state returns through the ReadyReturn program. A hefty 98 percent claimed to be “satisfied”or “very satisfied” and 97 percent stated that they would use the ReadyReturnto file their state income taxes the following year.

The Astro turf Push back Campaign

Of course, the Simple Return proposal has not gone without a push back effort. Representatives from the Jewish community, the NAACP and mayors from small-town America have written op-eds and letters to the editor protesting against the Simple Tax proposal, according to ProPublica director of research Liz Day. The letters and op-eds, each containing similar language, claim that the Simple Tax proposal would potentially result in a higher tax burden for low-income Americans.

One possible reason for the similar language of the letters and op-eds may be that they were at least in part influenced by JCI Worldwide, a public relations and lobbying firm with connections to Intuit, which markets the tax software program TurboTax, according to ProPublica. In one instance, Rabbi Elliot Dorff,who wrote an op-ed in the Jewish Journal criticizing the Simple Return, stated that he was inspired to write the piece after being approached by a former student, Emily Pflaster, who sent him derogatory information about the plan. But Pflaster neglected to mention that she worked for JCI Worldwide in her appeal, the rabbi told ProPublica.

Ezra Klein, formerly of the Washington Post, posted an animated infogram on his recently launched website Vox explaining the principles behind Simple Return. According to Klein, another opponent of the Simple Return plan is anti-tax activist Grover Nordquist. According to Klein, Nordquist fears that if filing tax returns were easier, people would be less opposed to the IRS and the notion of paying taxes.

But Can We Really Trust the IRS?

There is no doubt that the tax preparation industry stands to lose millions if a policy like the Simple Return were put into action. And any connection to a tax-preparation software package is potentially damming to any protest efforts against the initiative. Nonetheless, there is merit to adopting at least some caution to adopting a plan like Simple Return.

Would taxpayers leave potential tax savings on the table by simply accepting pre-filled tax returns rather than making the effort to check them out for possible errors? In addition, the vast majority of Americans are entitled to file their federal income taxes electronically for no charge under the FreeFile program; many states allow taxpayers to file free tax returns as well. Nonetheless, with proper safeguards in place to ensure that taxpayers receive the maximum tax credits and deductions to which they are legitimately entitled, the Simple Return or something like it could be a welcome change from an increasingly labyrinth-like tax code.

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