Anybody who has ever filed taxes in the United States knows it is complicated, and that the level of complexity is getting worse. The Inflation Reduction Act (IRA) enacted last year directs the Internal Revenue Service (IRS) to study how to implement a direct e-File program. Under such a system, the IRS would pre-populate tax returns with any third-party information the agency has from employers and other entities, and information that the IRS believes is relevant from the prior years’ tax return.
The goal, according to Ariel Jurow Kleiman — an associate professor of law at Loyola Law School who will be one of the authors of the upcoming IRS report — is to “eliminate all tax compliance activities” related to filing taxes, because doing so “will be disproportionately more valuable to taxpayers than reforms that merely shave an hour or two off their total tax preparation time.”
Choi and Kleiman’s research is informative and well-researched. The authors are correct that tax reform should focus on simplification and ease of filing, eliminating as many compliance activities as possible, and dramatically reducing the risk of taxpayer error, which their study shows is most important to taxpayers.
The problem lies with some of their conclusions. Their argument that direct e-File and Free-File programs are answers to the problems noted above is not supported by facts.
In their paper, Choi and Kleinman cite exact withholding type systems in the United Kingdom and German as models for the U.S. But as tax codes around the world have become more complex, many countries that are currently using such systems are increasingly finding it necessary to re-engage taxpayers in order to ensure accuracy. A 2017 report by the UK’s All-Party Parliamentary Taxation Group on Pay-As-You-Earn (PAYE), found that as a result of a number of economic changes since the creation of PAYE, roughly one-third of British taxpayers were effectively filing their own taxes via a process known as Self-Assessment — negating much of the “will save the taxpayer time” rationale for direct e-file and free-file systems. The number of taxpayers who will need to file Self-Assessments is only expected to increase with the rise in two-earner households, self-employed workers, labor mobility, and targeted tax incentives that make the code more and more complex.
Furthermore, the report noted that error rates had been rising significantly in the United Kingdom, costing the government and taxpayers billions over the years. Asking the already overburdened IRS to take on e-File would siphon away resources from enforcement and create more opportunities for wealthy tax evaders like Donald Trump to reduce their tax liability.
Reducing the burden of tax compliance and error rates should be a top priority of any national government. However, gimmicks like direct e-file, the FAIR Tax, and various versions of the Flat Tax, are more gimmicks than good policy. All three are “quick fixes” intended to do away with the inconvenience of tax filing, while ignoring the need for a well-designed income tax. Policymakers should instead turn their attention to the hard work of reducing the growing number of tax expenditures that litter the code and simplifying important incentives such as the Earned Income Tax Credit.
