Filling out federal income tax returns for individuals and businesses takes so much time that it’s the equivalent of creating three million full-time jobs, according to IRS Taxpayer Advocate Nina Olson.
In China the highest-paid workers are required to file an income tax return every month. I filled out one of their returns in less than a minute.
That enormous gulf raises an obvious question: Can we make it simple to comply with income tax laws? And do we as a nation really need to put in as much time on our taxes as all of the full-time employees do at Wal-Mart, Home Depot, Sears and Target for an entire year?
Actually, we don’t. But reforming our tax code faces a huge obstacle – resistance from the industry that makes tax software and prepares tax returns. It exists only because of make-work requirements imposed by Congress and the 46 state legislatures with income taxes. And the industry is determined to protect its interests. But, we have two basic options to simplify our tax system.
The Californian model
The first is already available to a limited number of Californians. It’s called ReadyReturn and it is wildly popular with those who have used it since 2007.
With ReadyReturn, state government computers prepare tax returns that are then offered to individuals for their approval. Those who agree with the tax calculations just sign and they’re done. Anyone who disagrees is free to fill out his or her own tax return, but almost no one does because the ReadyReturn shows the exact tax imposed, not a dollar more or less.
How is that possible?
Only those taxpayers who are single and whose sole income is from wages can use ReadyReturn, as of now. The California Franchise Tax Board, like the IRS, knows exactly how much such taxpayers earned because employers are required to tell the government exactly how much they paid each worker.
As long as a taxpayer does not itemize deductions, all the government needs to know to calculate the income tax due on wages is marital status. (Less than a third of taxpayers itemize deductions on their federal income tax returns.)
ReadyReturn could easily be expanded to include capital income that is verified the same way wages are. Thus single workers who get interest, dividends or capital gains and some types of royalties could easily be added to the system. So could married couples.
If Congress authorized a federal ReadyReturn and made minor some tweaks, we could end tax preparation for about 100 million of the 145 million tax returns that individuals and couples file each year.
The only people who would have to file their own returns would be those who itemize deductions or costs, such as mortgage interest, or who are sole proprietors of a business. If Congress went further it could even eliminate many of the 45 million returns involving itemizing or sole proprietorships
People who have used ReadyReturn rave about it. In surveys its approval rating stands at about 98 percent. Many users describe it as the best government program ever.
Dennis Ventry, the University of California at Davis law professor who has championed ReadyReturn, notes that the Franchise Tax Board estimated that the system would cost the state about $145,000 annually. It turned out they were wrong. Instead California nets about $80,000 annually as a result of implementing ReadyReturn.
The system saves time and money by eliminating an expense for taxpayers and by reducing government costs. Plus it relieves people of the frustration involved in preparing taxes. So why hasn’t ReadyReturn expanded to other states and the federal government?
Blocking the path to reform is the lucrative business of tax preparation, especially opposition from Intuit, which makes TurboTax and other tax-preparation tools. Intuit once lavished $1 million in support of a single California legislature who vowed to kill ReadyReturn. The money was spent to support then Assemblyman Tony Strickland, a leader of the Club for Growth, a Republican organization that seeks the ouster of Republicans who speak in favor of any tax increase or are considered inadequately vigilant in seeking lower taxes.
Strickland’s position illustrates how those who campaign on a platform of lower tax rates are not necessarily in favor of saving taxpayers money or reducing jobs that exist only because of government paperwork requirements.
Intuit says that ReadyReturn violates taxpayer privacy. But by law the government already receives verification of all wages paid, as well as of all dividends, interest, capital gains and some royalties as well as some profits from partnerships.
Instead of ReadyReturn, Intuit favors a system of free income tax filing for low-income and older people. Professor Ventry calls this alternative “inferior in every way” to ReadyReturn. It is also a way to market TurboTax to people who use it for free now, but who may buy the software in the future if they prosper into complicated personal finances and make enough money to itemize deductions.
Simplify the corporate tax code
The second option would be simplifying the corporate tax code. But there is little enthusiasm among big businesses to do so.
That makes perfect sense to those of us who delve deeply into how the tax system actually works, which only occasionally bears a resemblance to what politicians and pundits say and what the news media report.
For the 2,800 largest American corporations, which own more than 80 percent of all business assets, the corporate income tax is not a burden, but a profit center. Here’s how it works:
When Congress started taxing corporate profits in 1909 it imposed penalties to prevent companies from hoarding cash. If it weren’t for these penalties, profitable companies would become bloated tax shelters and avoid taking the risks of reinvesting profits, which is essential to economic growth.
In 1986, a tiny change was made to Section 531 of the Internal Revenue Code creating an exception to the limits on holding cash and other liquid assets. Congress decreed that unlimited amounts of cash could be held provided that the money was owned by subsidiaries located offshore.
Since then, multinational companies have moved their intellectual property — including many patents on manufacturing processes — to subsidiaries in Bermuda, the Cayman Islands, Singapore, Switzerland and other distant places. Other companies, notably Apple, entered into cost-sharing arrangements for research and development with subsidiaries in countries like Ireland. A Senate subcommittee
For example, if a company holds $1 billion outside of the United States and then buys Treasury bonds that net a four percent return, after three decades the compound interest will total $2.4 billion.
After paying its tax the company still has the $2.4 billion in interest. That will be worth about $1 billion in 2044 dollars proving that under American tax law multinational companies can eat their cake and have it, too.
Meanwhile, other taxpayers have lost out on the interest the government paid the company on the Treasury bills, and are net losers by the exact amount that the multinationals turned into profits.
Stopping this system will not make taxes easier for anyone, but it would ease the burden you bear by stopping multinationals from shifting their burdens onto you.
