A new report on the U.S. tax code by a Paul Volcker-led presidential advisory board starts with a single, careful line: "America's tax system is complex." Well, yes. Another way to put it might be that America’s tax system is a bloated, ugly, resource-hogging mess that wastes huge amounts of time and money every single year. According to the report, Americans spent about 7.6 billion hours complying with the federal tax code in 2008 alone. In dollar figures, that's about $140 billion, or about one percent of GDP. That's a problem, right? Probably! What should we do about it? Well, see, that’s tougher to say—especially for the Obama administration, which asked for the report, but told the advisory board not to go so far as to make recommendations.
Instead, the report carefully discusses, without endorsement, a variety of proposals for simplifying the tax code, some good, some bad, including the option to have the IRS fill out your tax returns for you. In theory, this reduces the compliance cost. You get your pre-filled form, make any quick corrections, then turn it around. But as the folks at e21 explain, doing so would not actually reduce complexity—and it would ultimately put more power in the hands of the IRS to push taxpayers toward filling out their returns in a particular way:
Under the proposal, the IRS would send taxpayers with relatively simple returns a pre-populated tax return based on information taken directly from employers and from last year’s return. Taxpayers who opted against preparing their taxes themselves could update the pre-filled tax return as needed–for example changing the number of dependents–and would only have to sign the return and mail it back.
Simplification proposals that would allow taxpayers to file on single forms (or even a postcard) have been common in the last several years, so we’ve seen this part before. However, we haven’t seen one where the IRS essentially does your taxes for you. Many are already skeptical of the IRS’s ability to proactively calculate the tax burden for so many Americans, even if only for those with relatively simple returns. Given the compliance gap the IRS already faces, this proposal may cause more problems than it solves. And of course, it would do little to alleviate the compliance burdens for those with more complicated tax returns–the population most in need of simplification.
If anything, I would worry that a proposal like this could lead to increased tax-code complexity, as forms would increasingly be designed around the needs and wants of the bureaucrats who actually filled them out. Pre-filled out tax forms might save some taxpayers time, but they would also encourage taxpayers to pay less attention to what’s being done with their money.