The IRS Threat to Turbo Tax

As a general matter, I think the best reason for government not to go around competing with private industry isn't that doing so inherently diminishes our freedom, but because it's just not worth the effort, and much of the time it isn't going to provide any benefit to consumers. It wouldn't be tyrannical for the federal government to produce its own brand of cola, but it would be pointless, since they're unlikely to make something people will like better than Coke or Pepsi, and consumers seem to be perfectly happy with their current cola options. On the other hand, there are some areas where the market has clearly failed—health insurance for senior citizens, for instance (and, I'd argue, everyone else too, but that's a separate topic)—where it makes sense for the government to step in.

But what about areas where the market in question involves private companies helping consumers interact with the government itself? And where there isn't a particularly egregious market failure, but the government could clearly offer people the same service for which they're now paying, but at a lower price? Like, say, zero? In that case, it would be hard to argue that the government would be outside its rights if it made it easier for people to interact with it, solely on the basis that those private companies might suffer from the competition. Well, according to a story from Pro Publica, that's what's happening in the area of tax preparation:

Imagine filing your income taxes in five minutes — and for free. You'd open up a pre-filled return, see what the government thinks you owe, make any needed changes and be done. The miserable annual IRS shuffle, gone.

It's already a reality in Denmark, Sweden and Spain. The government-prepared return would estimate your taxes using information your employer and bank already send it. Advocates say tens of millions of taxpayers could use such a system each year, saving them a collective $2 billion and 225 million hours in prep costs and time, according to one estimate.

The idea, known as "return-free filing," would be a voluntary alternative to hiring a tax preparer or using commercial tax software. The concept has been around for decades and has been endorsed by both President Ronald Reagan and a campaigning President Obama.

For many people, this wouldn't work. Let's say you have a lot of investment income, which varies from year to year. Or you're a freelancer, and your income comes from multiple sources and your expenses also vary. But many people just have one source of income (their job) and a stable set of deductions, and this kind of thing would work perfectly well, saving them the $40 or so it would cost for Turbo Tax, or the even greater expense of going to a tax preparer. Did I say Turbo Tax? Well what do you know, that's the biggest opponent of return-free filing:

So why hasn't it become a reality?

Well, for one thing, it doesn't help that it's been opposed for years by the company behind the most popular consumer tax software — Intuit, maker of TurboTax. Conservative tax activist Grover Norquist and an influential computer industry group also have fought return-free filing.

Intuit has spent about $11.5 million on federal lobbying in the past five years — more than Apple or Amazon. Although the lobbying spans a range of issues, Intuit's disclosures pointedly note that the company "opposes IRS government tax preparation." The disclosures show that Intuit as recently as 2011 lobbied on two bills, both of which died, that would have allowed many taxpayers to file pre-filled returns for free. The company also lobbied on bills in 2007 and 2011 that would have barred the Treasury Department, which includes the IRS, from initiating return-free filing.

Intuit argues that allowing the IRS to act as a tax preparer could result in taxpayers paying more money. It is also a member of the Computer & Communications Industry Association (CCIA), which sponsors a "STOP IRS TAKEOVER" campaign and a website calling return-free filing a "massive expansion of the U.S. government through a big government program."

Obviously, Intuit doesn't care about whether consumers might miss deductions they'd be able to find by using Turbo Tax, they care about whether they lose customers. Which is understandable, but it's not a basis on which public policy should be made. If the IRS comes up with a way to improve its own tax-processing systems that helps consumers, the fact that it simultaneously hurts Intuit is irrelevant.

I find Grover Norquist's involvement interesting, too. You'd almost think that the anti-tax activist sees it in his interest to make sure paying your taxes is as time-consuming and unpleasant an activity as possible.

Comments

For many people, this wouldn't work. Let's say you have a lot of investment income, which varies from year to year.

I don't see why this would be a problem. My mutual fund company already sends this information to the IRS. Your other example, of a freelancer, is a different story. But millions of people could use this service if the IRS provided it. And you could still opt to do your taxes yourself. I'd be interested in comparing what the IRS came up with vs. TurboTax.

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