How to fix the tax code
It probably escaped your attention, but the Internal Revenue Service recently piloted a program to help Americans cope with their notoriously complex tax system.
Direct File was meant to help taxpayers in 12 states prepare and submit their returns electronically. Some 19 million people were eligible to use it. Thanks partly to a rollout late in the tax-preparation season, fewer than 1 percent of them actually did.
The IRS was pleased with the results nonetheless: Taxpayers who used the system said they liked it, according to a survey, and the idea all along was to “start small, make sure it works, and then build from there.”
Fine. What about next steps? “No decision has been made about the future of Direct File at this time,” the agency says.
Dull as the topic of tax administration might seem, it demands far more ambition and urgency. Each year Americans spend roughly two billion hours and more than $30 billion on personal tax-preparation fees. This compliance burden falls disproportionately on the less well-off. The system’s complexity also means that credits often go unclaimed; again, in relative terms, the lower-paid suffer the biggest losses.
A working Direct File system would be a start, but it’s the least of what’s required to disentangle the mess Congress has created. Next year, legislators will have to think about tax reform as changes in the 2017 Tax Cuts and Jobs Act expire. They should use the moment to simplify the system and follow the example of many other advanced economies: Spare taxpayers the need to fill out any return at all.
Go one better than Direct File by tasking the IRS to pre-populate the main tax form for most taxpayers. The agency already has much, and in many cases all, of the information it needs.
Second, simplify the code. This is desirable in its own right, because endless accretion of complexities is self-defeating.