Just in time for Tax Day, the for-profit tax preparation industry is about to realize one of its long-sought goals. Congressional Democrats and Republicans are moving to permanently bar the [Internal Revenue Service] from creating a free electronic tax filing system.Last week, the House Ways and Means Committee, led by Rep. Richard Neal, D-Mass., passed the Taxpayer First Act, a wide-ranging bill making several administrative changes to the IRS that is sponsored by Reps. John Lewis, D-Ga., and Mike Kelly, R-Pa.In one of its provisions, the bill makes it illegal for the IRS to create its own online system of tax filing. Companies like Intuit, the maker of TurboTax, and H&R Block have lobbied for years to block the IRS from creating such a system. If the tax agency created its own program, which would be similar to programs other developed countries have, it would threaten the industry’s profits.
You’re damn right it would. This is classic rent-seeking, where companies manipulate the political system to enhance their own interests at the expense of the public interest.
Let me give a bit of context here. While some people have complicated financial lives, most Americans don’t. They have jobs in which their taxes are withheld, and they take the standard deduction so they don’t itemize. The government already knows all that about them, and their taxes should be simple.
Which is why in many countries, there’s a system in which, at tax time, the government sends everyone a letter saying, “This is what our records showed you earned and paid in taxes this year.” If it’s correct, you do nothing (or just sign it and send it back); if there’s a mistake or something missing, then you file a return that fixes it. Which means that for most people, doing your taxes is as simple as reading the letter and saying, “Yep, seems fine.”
Why don’t we have something like that here? Therein lies a tale of greed and political cowardice, my friends. If you want to learn more you can read about it here, or listen to this episode of the NPR podcast “Planet Money.” The short version is that, back in 2005, a Stanford professor convinced the state of California to run a pilot program testing a version of return-free filing called ReadyReturn, and the people who used it were so enthusiastic that its advocates figured it would be a no-brainer to expand it statewide. Until Intuit, a company that sells tax-preparation software, stepped in with a huge lobbying push and killed the idea.
ReadyReturn survived on a small scale, and California has a free filing option called CalFile, but it’s nothing like the broad return-free filing system some were hoping for. And on the federal level, the tax-preparation companies have spent millions of dollars lobbying Congress to make sure that return-free filing never sees the light of day in the United States. The bill now being considered is the result of that lobbying.
But since they have to claim that there’s an easy alternative, the companies worked with the IRS to create something called Free File, which allows people who earn less than $66,000 a year to file their taxes for free — using software created by TurboTax and the other tax-prep companies. In exchange, the IRS promises not to develop its own software — which, given the data the IRS has, could potentially be built as an electronic version of return-free filing, allowing you to confirm that all your information is correct, click a button, and be done with your taxes.
Never heard of Free File? Of course you haven't. Only a tiny portion of the population uses it, because they barely publicize it. So the companies get to claim they're helping low-income people while ensuring that we lock in the current system and guarantee their profits.
And as it happens, they’ve gotten help from conservatives anti-tax advocates such as Grover Norquist of Americans for Tax Reform, who has fought return-free filing. Why would someone who hates taxes be against making them easier to file? Because the more onerous everything about the tax system is, the more likely the public will be to sign off on tax cuts. Make doing your taxes too easy, and people might start thinking the system is fair and works well.
So what we have here is a situation where a small group of corporations uses their lobbying power to prevent competition from the government, earning them huge profits but harming consumers. You might think this is the kind of thing Sen. Elizabeth Warren (D-Mass.) is always talking about, which is why it’s no surprise that she has a bill that would provide for return-free filing and make it unlawful for the IRS to enter into agreements with tax-prep companies such as the one now in place. But in the Republican-controlled Senate, it has gone nowhere.
Because I’m inclined to think the best of a genuine American hero like Rep. John Lewis (D-Ga.), I assume that he didn’t pay much attention to this provision of the bill he is co-sponsoring. So maybe if it gets some more attention, the Democrats involved — and who knows, maybe the Republicans too! — will realize that Congress shouldn’t be in the business of guaranteeing profits for companies such as Intuit and H&R Block when there’s a much easier way we could do things.