Elizabeth Warren Wants the IRS To Create Its Own TurboTax. What Could Go Wrong?

A simplified tax code is the answer, not giving the IRS more funding.

Earlier this week, New York Times editorial board member Binyamin Applebaum wrote an opinion column criticizing Intuit's decision to exit from the federal program that allowed some people to use the free version of the company's TurboTax software. Applebaum accused Intuit of "abandoning the pretense of good citizenship" in favor of seeking profit before making his real case: that the federal government, more specifically the IRS, should make their own tax-filing software—an argument enthusiastically applauded by Sen. Elizabeth Warren (D–Mass.), who rarely misses an opportunity to decry a company for "chasing profits."

Intuit spent years chasing profits under the guise of helping low-income taxpayers. The government shouldn't be relying on private industry to provide essential services. The IRS can, and should, create its own free tax preparation and filing system. https://t.co/GKXo30lWPE

— Elizabeth Warren (@SenWarren) July 20, 2021

There's some truth to Applebaum's criticism: In 2002, the government made a deal with the tax-prep industry, called the Free File Program, which guaranteed that companies like Intuit would provide their services free-of-charge to qualifying taxpayers. Although about 70 percent of taxpayers are technically eligible to take advantage of these free offerings, only 2.4 percent actually do. This may be in part because the IRS has not advertised the program in many years (a failure of government!) and because the tax-prep companies themselves, acting in their own self-interest, sometimes use design and coding tricks to ensure would-be customers get directed toward the paid version of the software.

But even the paid "deluxe" version of TurboTax—the software produced by Intuit, which had about 60 percent market share as of 2019—costs only $60. (The company says this version is their most commonly used offering.) For many taxpayers, this cost is a small imposition that comes around once a year that greatly simplifies filing and paying taxes. It's hard to see how a government-run version would handle tax filing better than TurboTax does.

There's also a concerning incentives problem created by government-run software that seeks to help people file taxes. TurboTax has every reason to help taxpayers take advantage of all deductions available to them and even pledges to refund the software purchase price if another tax-filing software gets a customer more money back. TurboTax also provides services, for a fee, like audit insurance. But an IRS-built system would probably be built to represent government interests, not to maximize your deduction or protect you from the prying hands of those meddlesome auditors.

For those of us who have provided interest-free loans to the government this year, and have struggled to get reliable information from the IRS on when they'll get around to sending out tax refunds (ahem!), it's hard to imagine this highly dysfunctional government agency doing a better job at helping people file their taxes than the existing market players who have provided an immensely valuable service to millions of Americans.

Yes, other countries have better, simpler ways of collecting taxes from their citizens, and the IRS creating a publicly funded free system could make filing easier, if it functioned better than competitors' software (which is a giant if). But the real way to fix the problems with tax filing is to simplify the tax code—something that companies like Intuit are guilty of lobbying against, but something that's well within a senator's power to champion.

But Warren would never. For one, she's a proponent of wealth taxes, which would require the IRS chasing down the vast and rarely liquid fortunes of billionaires and millionaires, who have great ability and incentive to find creative ways to write off their wealth and offshore their fortunes. Never mind that wealth taxes winnow away those fortunes over time and would likely incentivize more consumption by people who would otherwise see their fortunes taxed away. That Warren fails to grapple with the logistical impossibility of this Herculean task and instead wants the government to take over for Intuit (with more funding sent to the IRS), shows just how unserious she is about reforming the tax code in a practical way, despite the fact that she could marshal her power to bring legislative attention to the issue.

"Our problem is inequality," said Binyamin in an NPR interview, "and the solution is to make inequality an explicit focus of public policy. Not just 'is this good for society as a whole?' which is a meaningless abstraction, but who actually will be the beneficiaries? And if the answer is that wealth concentrates at the top, then we ought to reconsider those policies."

Warren, who wants a wealth tax for those at the "tippy-top," shares Binyamin's ethos. Regrettably, their proposed solution—a TurboTax equivalent developed and run by the IRS—will not level inequality or benefit those at the bottom rung the way they claim. It will be dysfunctional at best, and fail to represent taxpayers' best interests at worst, all while spending more money the federal government doesn't have.