Return-Free Tax Filing
A Good Idea Whose Time has Come and Come and Come
by thomas j. healey
tom healey, a former assistant secretary of the Treasury, is a senior fellow at Harvard’s Kennedy School of Government.
Published December 15, 2022
Of the many government bureaucracies Americans must confront regularly, none is more reviled than the IRS. It has earned this distinction in a variety of ways, as evidenced by the 35 million unprocessed tax returns that had piled up in its offices by the end of the 2021 filing season, dashing hopes of speedy refunds by countless individuals. Not to mention the 73 million phone calls from taxpayers seeking help during the 2022 filing season, of which a dismal 10 percent actually reached an IRS agent.
It can safely be said this nation’s tax agency is not about to win the Malcolm Baldrige Award for Customer Service. Making matters worse, only $3 billion of the $80 billion infusion to the IRS as part of the Inflation Reduction Act signed by President Biden in August is actually earmarked for improving taxpayer service. Nearly half of the $80 billion will be channeled into beefing up enforcement, and a portion of the remainder for upgrading antiquated technology.
The President has finally named a new head of the IRS: Danny Werfel. He’d be well served, I believe, to focus on a tiny $15 million component of the new funding which could well hold the key to the future of the sprawling, 75,000-employee agency. This money is earmarked to study an idea that could transform how Americans pay their taxes and free up billions of dollars for other uses.
The initiative, known as “return-free filing,” would mean that a significant proportion of American earners would no longer need to fill out federal tax returns. Instead, the IRS would do the paperwork for them based on information it already has about households and the taxes withheld from their paychecks throughout the year. An effective model already exists: the “exact withholding systems” used in other countries, where authorities work to match withholding with tax liability, minimizing the need for a administratively costly and often long-delayed refunds.
Indeed, an estimated 36 countries — including the United Kingdom, Germany, Japan, Spain, Denmark and Sweden — have implemented return-free filing. The UK’s “Pay as You Earn” system, in operation since the 1940s, taxes around two-thirds of its taxpayers at the same basic marginal rate. That system was revised in 2013 to require employers to report salary payments in real time with the goal of decreasing withholding errors. The change also linked revenue collection and benefit payments to the same database, increasing the system’s efficiency.
Any of this sound familiar? In 1985, President Reagan mapped out a system that would have relieved about half the population of the chore of filling out a tax return. At the end of the year, taxpayers with simple returns would receive either a refund or a notice detailing taxes owed. (Those with more complex returns could continue to use the system in place.) While the idea made enormous sense, it never gained traction.
The primary reason why return-free filing, for all its promise, was never able to get off the ground in this country is stout resistance and unrelenting lobbying from the tax-preparation industry.
In 2006, the Obama administration picked up the ball, suggesting a process in which taxpayers would be sent a completed tax return for their review and correction. It was estimated this overhaul of 1099s-as-usual could have saved the public more than $2 billion annually in tax-preparation fees. And therein lay the primary reason why return-free filing, for all its promise, was never able to get off the ground in this country: stout resistance and unrelenting lobbying from the tax-preparation industry.
Actually, the U.S. has offered some form of free basic tax return preparation to tens of millions of households for over half a century. In a report by the Government Accountability Office in April 2022, however, the watchdog agency reported that while 70 percent of taxpayers were eligible for free-filing programs, a mere 3 percent took advantage of the offer.
How could that be? Perhaps it’s because these programs are run by a consortium of tax software companies with nothing to gain by giving away what they might sell.
In light of the well-recognized flaws of the American tax system — its complexity and the legions of wealthy who exploit that complexity — giving the public a break in the form of return-free filing is an idea whose time has definitely come. Again!
Ideally, any reform would be coupled with a sweeping overhaul of the tax law that leveled the playing field between the rich and the middle class. But even in the absence of such change, it is unconscionable to surrender to the tax-preparation lobby and forego an elegantly simple repair that would transform April 15 into just another spring day.