A simple reform to the income tax system would spare the average American $200 year and 13 hours of work.
The reform would be to implement a “return-free” income tax system, a report from the staff of U.S. Senator Elizabeth Warren (D-Massachusetts) concluded. Under such a system the IRS would simply send taxpayers a bill stating how much they owed.
The IRS already knows what most Americans make because W-2 forms; which detail salaries and wages and W-9s, which list freelance or contract income are already in its computers. Generating a bill or estimated return based on that data would take a modern computer a few seconds.
That would make income tax as easy as paying your electric bill. The taxpayer would then have the option of either paying the bill or contesting it. Those entitled to a refund would simply get a check or direct deposit from the IRS. Persons who wanted to file their return would still have that right.
Why the IRS needs to adopt Modern Accounts Receivable Practices
Such a system would be easy to implement because the Internal Revenue Service already has the income information of most Americans on file, American Conservative Editor in Chief Robert Verbruggen noted. All it would have to do is use software to create a bill based on those amounts and send it out.
Basically what Verbruggen and Warren want is for the IRS to adopt modern accounts receivable practices. Such practices are widely used by banks, credit card companies, utilities, retailers, loan companies, vendors and many governments.
Property taxes in the United States are usually collected in that manner. The county assessor or treasurer simply sends property owners a bill that they have to pay. The system works well because time and resources are concentrated on those few problem cases.
A return-free income tax system would be easy to set up with off the shelf software and accounting practices that are effective and time tested. It would also save taxpayers a lot of money, and eliminate a great deal of anxiety and hassle.
Return Free Income Tax would save Americans a Fortune
The average American spends $200 and 13 hours a year filing income tax, the Warren Staff Report Tax Maze concluded. This reduces the average tax refund by 10%.
Around 40% of taxpayers would save a combined $2 billion and 225 million hours of time a year under the simplified return-free system, Tax Maze claimed. Between 8 and 60 million households would no longer to file a tax return under the system.
It also costs both government and citizens a fortune because large numbers of people simply don’t bother to file income taxes. Many of those people never receive the refunds they should get which hurts the overall economy. The IRS ends up spending vast amounts of time and money trying to track down and collect from the non-filers.
Sending out such pre-filed returns would save the IRS around $37 million a year by greatly reducing errors and fraud, a 1996 reported by the U.S. Government Accountability Office (GAO) concluded. Errors would be reduced because there would be just one set of data to check. Fraud would be reduced because refunds would be based on accurate income data.
The system would save those state and local governments that collect income tax money because they would simply send out a bill like the federal return. Taxpayers who live in those areas would be spared the hassle and expense of filing two or more returns. The system might be streamlined further by simply having the federal and state tax bills sent out at the same time.
The Disgusting Reason why we do not have Return Free Income Tax
“We envision a system where more than half of us would not even have to fill out a return,” President Ronald Reagan, May 1985. “We call it the return-free system, and it would be totally voluntary.”
Those words were spoken 32 years ago so the return-free income tax system is not a new idea. It has been technologically possible for a long time as Reagan’s speech indicates.
“If you decide to participate, you would automatically receive your refund or a letter explaining any additional tax you owe,” Reagan said. “Should you disagree with this figure, you would be free to fill out your taxes using the regular form. We believe most Americans would go from the long form or the short form to no form.”
Despite that no serious action has been taken to implement return-free income tax despite support for it from President Barack Obama and Congressional Republican leaders. Eight bills to implement such a system have been introduced in Congress since 2007, and all have died.
How Corporate America Profits from the Income Tax System
The reason for the bills’ demise and the lack of reform is obvious: corporate America is making a fortune off the current tax system. Intuit (NASDAQ: INTU) the maker of Turbo Tax reported revenues of $4.852 billion on January 31, 2017. During 2017 those revenues grew by $385 million rising from $4.467 billion to $4.852 billion.
Intuit also reported $969 million in in net income, $637 million in cash and short-term investments, $1.359 million in cash from operations and assets of $4.373 billion on the same day. Its shareholders enjoyed a 101.6% return on equity on January 31, 2017.
Nor was it just Intuit, Liberty Tax (NASDAQ: TAX) reported revenues of $167.22 million, a net income of $15.97 million and profit margin of 4.49% on January 31, 2017. Its larger rival, H&R Block (NYSE: HRB) reported revenues of $3.006 billion and a net income of $326.26 million on the same day.
Not surprisingly these companies spend a fortune on lobbying to protect their cash cow. Both Liberty and H&R Block have actively lobbied against return free taxes. Intuit’s opposition was a bit more sophisticated; it tried to argue that that the government lacks the resources to implement such a system.
Such claims are nonsense; as Intuit’s executives undoubtedly know, the only resource the government would need to “create” such a system is Oracle’s phone number. Larry Ellison’s team would probably such a system up and running within a year.
Why the IRS Opposes Return-Free Taxes
Another obstacle to return-free taxes is the IRS itself, or its staff. Adopting modern accounts receivable practices would reduce the size and scope of the agency and a lot of jobs for a lot of bureaucrats. Many of whom would have few other job prospects.
A rational tax system would also reduce the lucrative employment and business opportunities many IRS employees enjoy after they perform their “public service.” In 2014 around 56% or 82.32 million of the tax returns filed were prepared by a “tax professional.” A large percentage of those tax professionals are ex-IRS staff members who make a good living performing simple data entry.
There are also those companies, many of which advertise heavily on radio, that employ ex-IRS agents to solve citizens tax problems. To that we can add the legions of tax attorneys and accountants that can be found in almost any American city. Many of whom are also former IRS employees.
America lacks an efficient modern tax system for the same reason it lacks single payer health insurance. An unholy alliance of big business, self-serving bureaucrats and politicians profits from the status quo and is willing to fight for it.
Given this situation it is easy to see why anti-establishment populist politicians like Donald J. Trump, Warren and U.S. Senator Bernie Sanders (I-Vermont) have such large followings. The system is rigged in favor of special interests and against the average taxpayer.