WHY TELL THE IRS WHAT IT ALREADY KNOWS?

Long Beach Press-Telegram (CA) - Tuesday, April 11, 2006 Author: Austan Goolsbee

The Internal Revenue Service filing deadline is almost upon us, forcing us once again to fill out exasperating tax forms. Spurred on by the grumbling, Congress will most likely make noises about introducing tax reforms that never come about. Experts will again bemoan the deductions and loopholes of the system and the complexity of the alternative minimum tax .

Rather than rehash the same old debates, though, we would do better to aim at the middle and ask why most Americans have to do their taxes at all.

You see, many people do not have a complex tax situation. They don't itemize. They get income only from simple places -- like wages from their job and interest from their bank. And here's the kicker: this information is already sent directly to the Internal Revenue Service by taxpayers' employers and banks.

Indeed, for many Americans, literally every line they fill out on their tax return is information the IRS already has. (If you don't believe it, try not filling out the ``wages'' line on your tax return next year and see what happens. You'll receive a notice that states your wages -- and assesses a penalty for not reporting them.)

And yet these same people are forced to spend hundreds of millions of hours and several billion dollars each year preparing and filing their taxes .

That expense in time and money is as much a part of the tax burden on Americans as the check that goes to the federal government. And unlike the tax payment, this part of the tax burden doesn't generate any revenue for the government, though part of it goes into H&R Block's pocket. It is, in the words of the econo- mists, pure deadweight loss.

Which is why the IRS should eliminate it. With a small adjustment in processing procedures, the revenue service could send you a tax form already filled out with the information it has for you -- a Simple Return -- rather than a blank tax form.

You would simply check the numbers against your W-2 and 1099 and then sign it. That would be it. If you didn't want to participate, you could just throw the Simple Return away and do your own taxes the old-fashioned way.

A system like this is already used in Denmark and Sweden. Last year, California tried a version for its state income tax . According to the California Franchise Tax Board, the system reduced the time people spent doing their state taxes as much as tenfold; around 95 percent of the people who participated in the pilot project said they would use it again.

Even without fundamentally changing the tax code, plenty of Americans -- as many as 40 percent of taxpayers -- would be able to qualify for a Simple Return.

According to research I did for the Hamilton Project at the Brookings Institution, this could save middle-class Americans up to $2 billion per year in tax preparation fees and 250 million hours of time. At the very least, the program would represent a triumph of common sense over bureaucracy for millions of people. Here's another way to think about it: A Simple Return would be the equivalent of giving a tax cut to the middle class but at little cost. Indeed, when the Government Accountability Office analyzed this type of tax system in 1996, it claimed that it would save the IRS money because it would reduce the error rate on the tax returns that people file. (California found this to be true in its pilot project.)

For the cost of modernizing the computer matching system within the IRS and the Social Security Administration, we could eliminate the compliance burden for more than one-third of American taxpayers.

Many experts say we should tackle complexity where it is most obvious -- the top income brackets. After all, they argue, nearly 40 percent of taxpayers use the easier forms like the 1040EZ.

But the instruction manual for even the 1040EZ form is 36 pages long. Is it any wonder that almost half of the people filling out the simpler forms still pay a tax preparer to do it for them? Our system is driving people to tax preparers who then get paid for filling out information that the IRS already has.

As we contemplate tax reform in the coming year and beyond, many will ponder grand changes to the tax system like moving us from an income to a consumption tax or eliminating the mortgage interest deduction. But tax revolutions are a tough sell these days.

And we could do a lot worse than relieving Americans of the burden of doing busywork for the IRS.

Austan Goolsbee is a professor of economics at the University of Chicago Graduate School of Business.