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Should the IRS Calculate Your Taxes?

Now that everyone is past the various due dates for filing their 2020 income taxes, is there an easier way for Americans to do their taxes?

A lot of people apparently think so. In the days before the tax deadlines, there was a lot of traffic on social media criticizing Intuit, the makers of TurboTax, about profiteering from the legal requirement to file taxes, especially since the IRS makes it possible for many Americans to file their taxes for free.

Predictably, some of the critics touted proposals for a “return-free” system where the IRS would calculate your tax obligation and simply ask for your signature. This proposal has been around for years, sometimes called “Ready Return” or “pre-filled” tax forms. And it’s a terrible idea.

The return-free system (and thus the virtual elimination of voluntary tax compliance) is the ultimate goal of the revenue establishment. Austan Goolsbee described the “benefits” of a return-free system as far back as a 2006 op-ed in The New York Times, and President Obama endorsed return-free taxes.

But the problem is that the interests of the government are diametrically opposed to the interests of taxpayers. As we’ve repeatedly emphasized, what’s good for the government is not necessarily good for the country, because the government and the country are not the same thing.

In this case, the best interest of the government is to maximize revenue, while the best interest of taxpayers is to minimize taxes. And the exact amount of your tax liability is in a grey zone, not an absolute number. For many years Money magazine sent the same tax information to 50 different professional tax preparers, and year after year they would get 40 to 45 different tax liability calculations.

By biasing your tax liability in favor of higher revenue, in one fell swoop the IRS could increase revenues, and shift the burden of proof to you to prove that the government made an error in preparing your taxes.

And how many taxpayers would have the confidence and resources to challenge the IRS’s calculation?

Further, if the IRS is calculating your taxes, the IRS is going to need to automatically capture even more of your personal information. This moves the tax system toward less privacy rather than more privacy. Especially given the recent leak of personal tax data for several wealthy Americans, should we trust the IRS with even more personal information?

Our voluntary tax compliance system is an asset, not a liability. The liability is our over-complicated tax code, which contains multiple and conflicting definitions of income, saddling the U.S. economy with an incredible compliance burden resulting in deadweight losses to the economy and our global competitiveness.

If there is consensus that tax compliance is still too difficult, the answer is to further simplify the tax code, not let the federal government calculate your taxes for you.