Kristoffer Tripplaar/Sipa USA via AP Images
The Internal Revenue Service confirmed on Tuesday that it is working on an online system whereby Americans would be able to file their taxes directly to the agency, for free. The agency released a report on the feasibility and cost of free-file, showing that costs would be relatively minimal and taxpayers are interested in using it. The Washington Post reports that the system “will be available through a pilot program for a small group of taxpayers by January, when the 2024 filing season begins.” (If the agency needs volunteers, let me know.)
It’s long since time that the IRS stopped enabling bloodsucking economic parasites like Intuit and H&R Block, and started putting them out of business. But this development also signals how far American tax policy has to go in terms of logic and convenience for the citizenry. Free direct filing is a good step forward, but it only gets to where peer nations were in about 1970. To join the Faroe Islands at the cutting edge of tax efficiency, major reforms of much of the economy are needed.
In terms of abstract principles, it’s nuts that there is a multibillion-dollar industry for individual tax preparation. In other countries, tax prep is for businesses, the self-employed, investors, or other people with lots of complex sources of income. Ordinary working stiffs, with either hourly wages or a salary, should have no need for that. Not only is their tax calculation simple, the tax authority already knows their income and tax liability, because employers have sent relevant data to the agency, along with the estimated tax owed.
This is true even in the U.S., with our labyrinthine nightmare of tax credits, deductions, exclusions, and exemptions. For a professional American tax expert—like the kind who work for the IRS—it’s fairly easy to figure out what most individuals and families with traditional jobs and no major side hustles owe, or are owed. (The real challenge is when it comes to rich people like Donald Trump, who not only have lots of complicated income streams, but also will fight yearslong legal battles to avoid paying what the IRS says they owe.)
In countries like Spain or Finland, if you’ve got a normal job, the government typically files your taxes for you. The tax authority knows how much you’ve made and what you owe, so they send you a report (along with a bill or payment if necessary), and that’s the end of it.
As my colleague Jarod Facundo reported for the Prospect, the IRS has hitherto set up neither a direct-filing system nor an automatic one, because of lobbying and conservative ideology. Intuit and its ilk have pressured both Congress and the IRS to head off such systems, and then taken the resulting profits to lobby for the tax code to be made more complicated, so ordinary Americans are even more tempted to pay to avoid the headache. One particularly evil objective in this area has been to make claiming the Earned Income Tax Credit as complex as possible, to prey on poor people who tend not to have the skill or time to fill out difficult forms. Roughly between 13 and 22 percent of EITC benefits are gulped down by tax prep companies.
On the other hand, Republicans systematically starved the IRS of resources over the 2010s, cutting its budget while its burden of tax filings increased. The result in the 2022 tax season was a near-total breakdown in the agency, with remaining staff crushed with work, tax return processing falling months or years behind, and average wait times for customer service reaching multiple hours.
That decade of austerity is why Democrats gave the agency an extra $80 billion in the Inflation Reduction Act. Sure enough, customer service and throughput drastically improved during the recent tax season—and it seems the agency is putting the $15 million earmarked for studying a direct-filing system, which was also shoved into the IRA, to good use.
But tax authorities can do even better than automatic tax filing. As I reported for the Prospect last year, at the Faroe Islands, the tax authority oversees all wage payments through a central registry—serving essentially as the payroll processor for the entire economy. That way, the government knows exactly what each person has been making in labor income, no matter how many jobs they may have, and can monitor their income on the fly so tax withholdings are almost always right on the mark. Government economic statistics can be produced from actual earnings data in real time, collected automatically.
What’s more, because the system requires a bank account to operate, and all Faroese workers have one, benefit payments are largely automated. Child allowances, old-age pensions, and so on just appear in the bank account automatically. Even businesses love this tax system because it means they don’t have to hire a payroll processor or pay attention to tax withholdings—the government does it all for them.
Don’t get me wrong: I welcome this step from the IRS. Getting to a Faroes-style utopia will be a long journey, and we’ve gotta start somewhere. Conversely, conservatives are spitting mad about the extra $80 billion for the agency, not only because enabling rich people to cheat on their taxes is one of their primary political objectives, but also because they fear the American people losing their traditional distrust of the taxman. If paying taxes is simple and easy, they might start asking not for reduced taxes but for a better use of what they pay—and for the rich to start pitching in their fair share.
