In the computer age, why are people still asked to do their own taxes? | Hacker News Reader

In the computer age, why are people still asked to do their own taxes?

30 pointsamichail51 comments

Isn't it feasible for the government to track all major taxable items by computer so that people don't have to report it themselves?

This is already done to some extent, so why not take it further and get rid of income tax returns altogether?

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A fantastic article by Lessig on this very topic:

http://www.wired.com/wired/archive/14.05/posts.html?pg=7

The teaser: Imagine if tire manufacturers lobbied against filling potholes so they could sell more tires. Or if private emergency services got local agencies to cut funding for fire departments so people would end up calling private services first. And what if private schools pushed to reduce public school money so more families would flee the public system? Or what if taxicab companies managed to get a rail line placed just far enough from an airport to make public transportation prohibitively inconvenient? Pick your favorite of these outrages, and take note of how it makes you feel. You'll experience it again when you read the next story - and this one, unfortunately, is true.

That's pretty much how it works in Finland, at least. You get a "tax proposal" in the mail. If it's missing deductions or you have special reporting duties like foreign capital gains, you can amend it and return the form; otherwise you don't have to file anything. (It seems that the majority is satisfied with the proposal as-is, which presumably is a great relief to the tax office compared to the old days when everyone had to file their own forms.)

On a slightly related note, I saw that when Sweden overhauled their pensions systems a yer or two back they basically defaulted people to joining one of two state-run funds and gave everyone a list of alternatives and an easy 'opt-out' clause (opt out of the state-run fund; you have to pay into some sort of pension by law). This, too, seemed to work well for most people without unfairly restricting the liberty of those who would rather manage their own financial affairs.

Same thing here in Sweden. Since I have nothing to add to the "tax proposal" all I have to do is to SMS in a code as my acceptance.

To some degree I think it has been made this simple so that I shouldn't spend much time thinking about how much of my salary goes away in taxes. :)

same in Spain, you get a tax proposal though a particular computer system called "Padre" ("Father" in Spanish, it always reminds me of Alien 8th main ship computer system), you can then 'fix' or add stuff if you want.

The answer is simple. There is a huge and powerful tax lobby that doesn't want to see this happen.

If we're assuming that the government is evil and sufficiently organized, then it seems much more likely that they would want to calculate taxes themselves. They could make a lot of money just by "accidentally" introducing a few errors.

Only if the aggregate impact of those errors is lower than the aggregate impact of the overpayment mistakes that people make when the file their own taxes. The latter also offers much more in the way of plausible deniability.

I thought Obama doesn't listen to lobbyists. Anyway, I'm sure that the vast majority of the public would be grateful.

This is American politics. The politicians say one thing to please the masses and do exactly the opposite. I'm not trying to be confrontational or rude. That's just the reality of things.

The government already collects the taxes for you through withholding. I fear that if people didn't file their taxes themselves they would lose all respect and recognition of how much they pay for their government, which is bad for democracy.

The easier taxes become, the less people complain about paying them. The government then has an easier job of justifying how they spend that money. Arguably, taxes should be as inconvenient, difficult, and painful as possible.

On the other hand, having to file taxes really sucks and I would rather not do it. So there's an argument both ways.

I have often wondered why Republicans/Libertarians/other-tax-haters have never (as far as I know) made a serious effort to abolish the automated W2-style paycheck withholding.

If everyone was required to write out checks to the IRS manually on a quarterly basis like self-employed people are I think larger scale tax reform would happen very quickly due to grass roots political pressure. Those quarterly checks really sting sometimes!

Ironically, it was actually Milton Friedman who came up with the idea for automatic withholding. He later lamented this after he realized the impact it had on the growth of government.

I think the initial idea may have come from the desire to enforce fairness, which is a great idea, but sadly it also led to tax increases being far easier to implement, as all the IRS needs to do is threaten to shut down a business if it doesn't make the proper withholdings.

As it stands, enforcing withholdings is the primary way that tax money is collected and it's taken extremely seriously by the IRS. There are even massive penalties for paying withheld tax late (something like 25% interest).

Because they recognized that the most efficient way to collect taxes is by automatic withholding, which keeps the size of the IRS smaller than it would otherwise be. Our current system keeps the audit portion the same size as it would be in the non-automatic system, but cuts out most of the collection-side bulk (which would be HUGE in a manual system)..

There are many old-line industries, especially when lots of money is involved, where computers have not been used to their full advantage yet; right now they're just used as electronic filing cabinets with better auditing and retention than paper.

Also, in the United States, the IRS is prohibited by law from competing with commercial tax-preparation services. This is why you have to pay Intuit or TaxACT to file electronically. Presumably, this doesn't help to foster innovation either.

Income is only part of the equation. You also need a mechanism to track all business expenses and various itemized deductions. That basically implies that you can't automate it without having all transactions tracked and categorized. Which would be kind of scary!

Most people don't deduct business expenses, and most people don't have sufficient medical expenses to exceed the 7.5% threshold. For the small number of people who do, they would amend their forms.

As for other deductions, state income tax & property taxes are already known to some governmental agency, just need to pass it on up. My bank sends me a total of my mortgage interest together with my other tax forms, I'm sure they could file that with the IRS too. The only other common deduction I can think of is charitable contributions. It would be a bit of work to set up, but it seems within the realm of reason to have charitable organizations provide that information to a centraal system as well.

Anyone running a small business (well over 10,000,000 people in the USA) will be deducting business expenses. It would be silly (nuts?) to fill out Schedule C but not deduct business expenses.

I suspect an even larger number of people currently itemize deductions. Medical expenses are one of about a million possible deduction types. And if you're keeping records you can often beat the standard deduction.

If you can't solve these two cases and can only solve the simplest cases what's the point really? People with such simple tax situations can do them in an hour or two anyway. The burden it would place on government and industry just does not seem justified.

The "complex" returns still need to be "amended", processed, audited, etc. The very cases which consume the most time and effort today would still be consuming the most time and effort with no savings given a piecemeal simple-case-only automation effort.

Sales taxes could be tracked by credit-card companies, which could provide a year-end report of total sales taxes paid, for use in computing federal income tax liability.

(Sales taxes were deductible this year, but there's always the question whether Congress will renew the deduction or better yet make it permanent.)

I've suggested this to AmEx, but have never gotten a response.

You mean access to your bank accounts? They do that already.

The Mint.com CEO said he was cooking up something revolutionary, last I heard. It's still in the works. I wonder if this is it...

A commercial solution to the IRS's problem? Existing tax preparation software takes past returns into account and just asks the user to enter new information. How would Mint's system be better (aside from having access to your banking history)? The third-party intervention (and profit) doesn't go away.

If you don't file your taxes the IRS will do this for you. But they impose huge penalties for the service.

My understanding is that they don't impose additional penalties, actually. They just don't include a lot of deductions, and so the bill comes out higher. To fix it, you then have to file addendum paperwork, which is more time-consuming than the initial tax filing.

Edit: There will be late filing penalties, however, because they don't file one for you, unless you fail to file for a long period of time. And, those can add up to large additional fees.

They do use the standard deduction. They charge a failure to file penalty plus interest fees.

You could still come out ahead if they don't know about some income.

It's much easier in India too. Basically, if you are a salaried person, You just attach the copy of the taxes that the company has paid on your behalf (after deducting it every month from your salary) with an one-page form and submit it.

After coming to US, I was perplexed to see the complexity of the tax filing, which was incongruent to every other system I've encountered. Getting a driving license and a work permit were so much easier in comparison.

I believe this was discussed in the tax day thread, Japan does it this way.

It's the same here in Slovenia. I didn't need to report anything personally because everything is done by the companies for you. They just sent me a letter at the end saying that I'm getting 50 EUR back.

Yep, same in UK. For the vast majority of people: low-middle income, one employer, the employer works out your tax and deducts it monthly for you. No tax reporting forms, and if a mistake is made over the year, it's repaid at the end.

The only time you do a tax return is if you earn over a preset limit, or if you have multiple substantial income sources.

Or if you're self-employed etc. Technically even if you're renting a spare room and it's all covered under the rent-a-room allowance you have to do one. Still, they're fairly easy and you can do them online etc.

Yep. You wouldn't believe how much trouble I had with that concept when I came here.

"Oh God, boss, I saw on the train taxes were due yesterday."

"Yeah."

"I didn't file!!!"

"Of course you didn't."

"Aren't I going to get thrown in jail and probably deported!?"

"Patrick, are you feeling alright? This is taxes, not something to get worried over."

Is there a privacy issue?

Its especially useful to be able to threaten people with an audit when the tax code has become so complicated that compliance is nearly impossible.

For example, if a president nominated a certain person for a position that you happened not to like, it would be right handy if you were guaranteed to be able to prove that they "broke the law" when it came to filing their taxes if you looked hard enough. You could get a lot of miles out of that one before people realized it works on everyone.

Compliance is easy, unless you're trying to hide your income. Pay X% of your total gross income for the year. Subtract the standard deduction (which is fixed every year). Subtract state income taxes, if any.

Done. What's so hard about that?

The tax code is only complicated for people who choose to make it complicated.

If you paid tax on gross income only this could work. But because the government can't know your deductions it would only work if you disallowed deductions for expenses etc. Businesses might not like that. There are also a lot of decisions to be made on how you handle specific situations, like standard deduction or actual expenses for your auto.

we have that for salary in France. But other gains (rented properties etc.) are not yet accounted for.

Belgium and Germany for example removes the taxes "at the source", which means that when you get your salary you don't have anything else to pay on it, your employer already sent the money to the State. I don't know how they do on other taxable revenues.

Cash. And cash means privacy, so it matters.

tax isn't about raising money. we have fiat money the government can print as much as it wants. taxation is about keeping aggregate demand for fiat dollars high.

kindly point to the factual inaccuracy of my post. our current monetary policy is about controlling aggregate demand for dollars. this is not controversial.

How does taxation keep aggregate demand for fiat dollars high?

On the margin, people work for their after tax income. If taxes went away, employers would pay employees the same amount as their current after-tax income -- why would they pay more than necessary to provoke someone to work?

because if there was no central demand for money denominated in us dollars people would be free to use all sorts of competing economic systems.

That may be but you did not answer my question.

your second question doesn't make sense to me.

Taxation is about funding the government. It doesn't give a rat's ass about "controlling aggregate demand for dollars".

Remember dude, EVERY CIVILIZATION HAS HAD TAXES. Rome had taxes. Ancient Mesopotamia had taxes. TAX PREDATE AMERICA. Tax predate fiat currency. Ergo, taxes are not about controlling the money supply.

specious reasoning. you're assuming that our current economic system is similar to other economic systems. our economy (bretton woods) is an massive experiment with no historical precedent.

Tax isn't about raising money... its purpose is to instill fear and drain your mental energy so you are not equipped to compete with the bureaucratic entity that imposes tax on you.

I'm reminded of the phrase...

"never attribute to malice that which can be explained by stupidity"

Honestly I'd like to believe there's some secret Government cabal out there finding indirect ways to drain people because at least then I'd know Government can do something competently. I mean, even if Government’s doing a bad thing competently we can fight to change that.

But I think the reality is that big bureaucracies end up creating so many rules and regulations that not even they can sort it out. Which is why we have such a complex tax code in the first place and why Government has to force each citizen to do their own taxes.

It's my understanding that the tax code is complicated because we are a loophole abusing people, and we must be handled with kid gloves. It's not just a matter of "chaos and stupidity breeding new bureaucracy." The goal is more noble: create a system that can't be gamed but is flexible enough to account for every exchange of money, as well as many non-monetary exchanges of some value.

Consider this though: Maybe congress thinking it can create a system that accounts for every exchange of money and not have loopholes is the stupidity.

I personally think most bureaucracy starts out with good intentions. The tax code included. But with every well intentioned law to close a loophole they added more and more complexity and therefore more and more possible loopholes.

What's the alternative?

The tax code is only complicated because of the people exploiting the loopholes. Way back in the beginning, it used to be ridiculously simple: you pay X% of your income. But then, people began arguing over what income was. And that's when it started getting complicated.

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