New twists in technology and public policy could streamline the process of filing your tax return - but there's usually a cost, and we're not just talking about dollars and cents. One suggestion comes from Barack Obama's presidential campaign: Let the IRS figure your taxes, and then you can check their figures.
By the time the income-tax filing deadline rolls around on April 15, millions of Americans are no doubt asking themselves whether there's an easier way to take care of the yearly financial chore. There are several ways, in fact - but they usually involve eliminating tax loopholes or letting the government process more of your financial information.
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|Frustrated by your tax return? What if the folks at the|
Internal Revenue Service filled it out for you?
"The idea of simplifying the tax system is tremendously appealing," Leonard Burman, director of the Tax Policy Center and a fellow at The Urban Institute, told me on Monday. "The biggest problem is that politicians in both parties have increasingly seen the tax system as a way of giving away goodies to different constituencies."
Over the years, dizzying assortments of tax credits and deductions have sprung up, reined back by an equally dizzying array of limitations. To cite just one example, the tax code allows for a tuition tax deduction as well as two different types of education tax credits - known as the Hope credit Lifetime Learning credit.
"The only thing the politicians left out is the 'Hope to Learn How to Do Your Taxes' credit," Burman quipped.
Let the IRS figure it out?
Eliminating those givebacks would make things simpler, to be sure - but would taxpayers stand for that? One way to keep the deductions in force, but make it easier for filing, would be to put the government rather than the individual taxpayer in charge of managing the books.
That's the way it works for charitable deductions in Britain, where the government basically works with the charities to keep track of the money and supplement a taxpayer's donation with "gift aid." To put it simply: Instead of sending the charity $50 and deducting $10 from your taxes, you would send the charity $40, and the government would kick in the extra $10 from the payroll taxes you've already paid.
"There are a lot of things like that you could do if you really wanted to simplify the tax system in the U.S.," Burman said. "You could go to a system where you actually wouldn't have to file a tax return."
The Internal Revenue Service already knows a fair amount about what you owe, based on your payroll records (Form W-2) as well as your investments (Form 1099). That's what gives rise to Democratic hopeful Barack Obama's proposal that the IRS could send you a filled-in tax return after the end of the year. You could use those figures to prepare your own custom-made return - or just go with the government's figures if you had no quibbles with the accounting.
Such a system could point out tax breaks that people didn't know they had coming, such as the mortgage-interest deduction, said Bob Sullivan, the author of msnbc.com's "Red Tape Chronicles" and the book "Gotcha Capitalism."
"It's demonishly unfair that people who make $40,000 a year don't declare their mortgage interest when people with second homes and vacation homes do," Sullivan told me.
But the system could have a downside as well, depending on how it's structured.
"There are concerns among privacy advocates about having all that information going back and forth electronically," Burman said. Just last week, Treasury Department inspectors reported that disgruntled insiders or a malicious outsider could break into IRS computers and steal taxpayers' confidential information.
And if the front-end reporting requirements become more complex, "you'd have to give a lot more information to your employer than you do now," Burman said.
Burman also wonders whether the IRS could handle the increased computational load. "It's possible, but it requires a level of technical skill that we've never seen at the IRS," he said.
A lot of taxpayers might have qualms about having the IRS gather up all the figures in its computers and do the math. But if human nature is any guide, most people would probably go along with the filled-in tax return, just as they go along with their bank statements.
Millions of Americans already rely on other people - or even software programs - to take care of the tax-preparation details. In fact, Burman noted that there's a "large and growing part of our economy that depends on tax complexity" - and that trend could well end up working against tax reform.
He recalled one dust-up over proposed tax reform that occurred during his time as a Treasury official in the Clinton administration. "The people from the major tax-software companies came in to lobby us, and they were just outraged that we were messing around with the market," he said.
Sharper debates lie ahead
But Burman said some kind of tax shake-up will have to take place, due to a combination of factors: The Bush administration's tax cuts are due to expire at the end of 2010 - and while all the presidential candidates say they'll seek an extension of at least some of those cuts, Congress and the next administration will have to decide which ones make sense and which ones (if any) will have to expire.
Congress has already been patching up tax policy on a year-by-year basis to cushion the blow of the alternative minimum tax - but the annual angst over the AMT will eventually have to be resolved for good. Policymakers will also have to deal with the health-care crunch and the baby-boom retirement issue.
"The best option would be to take a whole new look at the entire tax system," Burman said. "It's not easy. Replacing an irrational tax system with a rational one inevitably means that some people are going to be paying higher taxes."
Burman has his own ideas for shaking things up in the tax department. A couple of months ago, he suggested in The New York Times that the Bush administration's tax cuts should be repealed next year, in order to stimulate a burst of economic activity this year.
The European model
Now Burman is working on a proposal to institute a value-added tax, or VAT, that would go toward funding universal health care. Value-added taxes are usually looked upon as regressive, but that could be balanced out by the progressive effect of offering health-care vouchers for all. In the process, it might turn America's tax system and social safety net into something that looks more like Europe's.
"I can't figure out whether it's brilliant or lunatic," he said.
Daniel Feenberg, a research associate at the National Bureau for Economic Research, has a different vision of the future - not the future as in Election Day, but decades down the line. Feenberg said all the trends indicate that more tax money will be needed to cover an aging population's pensions and medical care.
"One way to think about what's going to happen is to look at other countries," Feenberg told me. He sees European countries as good models for America's future, because they're already having to deal with older populations.
"The conventional answer is that they have a VAT, but in fact most of the money they raise comes from a payroll tax - not an income tax, and not a VAT," he said.
So Feenberg's prediction is that increased payroll taxes, such as the money taken out for Social Security and Medicare, will be the favored solution for America's revenue woes in the decades ahead. "If I had a dollar to bet on this, I would bet on the payroll tax," he said.
Where would you place your bets? Which of these proposals and predictions show some brilliance, and which are sheer lunacy? Feel free to weigh in with your comments below.
For more about tax topics, check out msnbc.com's Tax Tactics section as well as the Tax Policy Center's resource guide and the TaxVox blog. The center's Web site also offers an audio discussion of Republican John McCain's tax and economic plans. And for a detailed look at tax pronouncements from Democrat Hillary Clinton as well as Obama and McCain, check out this guide from On the Issues.