Do You Trust The IRS To Do Your Taxes?

I just learned something from David Freddoso’s article about Barak Obama’s IRS simplification plan. In “Obama’s 1040 — 2 EZ 4 Me” he talks about Obama’s plan to have the IRS prepare tax returns, instead of making taxpayers do it. The IRS would simply send you a bill or a refund. Taxpayers could challenge the IRS decision. It would begin with 1040EZ filers and then be expanded. That does sound attractive, but the problem is that too many people might not notice if they are overcharged or be willing to challenge the IRS if they think it’s wrong.

On the upside, Obama’s website claims that this plan would save Americans $2 billion in tax-preparation fees. That sounds great. But if you’re like most people, you get your property tax bill, you groan, and you file it away. A challenge is probably more trouble than it’s worth. And many people will do the same when the IRS overcharges them or sends a smaller refund than they had expected.

By scrapping the adversarial relationship between the taxpayer and the government, the Goolsbee-Obama plan reduces the taxpayer’s incentive to reduce his tax burden and increases his chances to overpay. This means that Obama will soon have the government overbilling millions of taxpayers — some by a lot, some by a little. Many will overpay rather than taking the time to counter-file. After all, is it worth the hassle just to retrieve a few hundred dollars?

“At first, when they only apply it to the simplest returns, they probably wouldn’t have that much more money coming in,” says Ryan Ellis of Americans for Tax Reform. “But when they expand it — oh yeah, then they would have a lot more money coming in. People have better things to do than to fight the IRS, and they figure they’ll lose even if they do.”

The problem with the Goolsbee plan is that it simplifies tax preparation, but it does not simplify taxes. It maximizes the government’s role in collecting taxes while minimizing its visibility to the taxpayer. It will make a few taxpayers’ lives genuinely easier, but its true effect will be to narrow the so-called “tax gap” — the estimated $290 billion the IRS claims it under-collects each year (how they arrive at this number, they do not say).

Simplifying the tax code would be a very good thing in my opinion. I also like the idea of not having to fill out a tax return. But if this plan did come to fruition and it did end up collecting more revenue from the taxpayers who use he system then it would if they filed their own tax returns, it really amounts to a backdoor tax increase. It would also be a regressive tax, because wealthier people are the ones sure to still use professional tax preparers to minimize the taxes they pay.