Saturday, February 27, 2010

Tax simplification

Yglesias claims that:

... It would be fairly simple for the IRS to mail people “pre-completed” forms, subject to the taxpayers’ review and correction. Rich people would still want to hand their documents over to an account for analysis, but for normal people you’d just read the thing over and sign. ...

I believe that this is wrong, it would not be in fact "fairly simple". To complete even a simple return correctly you need to know the taxpayer's marital status and number of dependents. I don't believe the IRS currently has a reliable independent way of determining these facts. For a slightly more complicated return you need to know the amount of property tax paid which again I don't think the IRS knows.

Even for things like wage, interest and dividend income which the IRS theoretically knows as it receives W2 and 1099 forms things are not so simple. At one time the IRS was not matching many such reports with actual returns filed. Perhaps things are better now but I suspect the mismatch rate is still too high for the IRS to reliably fill out returns.

And of course to mail you your return the IRS would have to know your current address. Considering the periodic stories about unclaimed refunds for taxpayers the IRS is unable to locate this seems dubious.

If Yglesias wants to make the income tax less annoying he should concentrate on simplifying the rules, many of which make no economic sense.

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