In 2005 the cost of complying with the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. —the cost of filling out paperwork, hiring accountants, and gathering documentation—rose to over $265 billion. And that’s just at the federal level; state income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es add a significant compliance cost of their own.
California, in an attempt to make paying state income taxes easier for residents, has launched a pilot program called ReadyReturn, in which the California Franchise Tax Board prepared 50,000 of the simplest tax returns—for single, childless, low-income taxpayers with no special deductions or credits—and mailed them to the taxpayers, giving them the option of signing the returns or redoing them.
As we’ve written before, the ReadyReturn plan would not accomplish its goal (most of the 50,000 prepared returns were thrown away), and the costs—financial and otherwise—would be high. Now, a coalition of concerned citizens and groups, including the California Chamber of Commerce, has launched a web site to stop ReadyReturn and ask the legislature not to approve an extension of the program, which is scheduled to expire after this tax season.
The Small Business & Entrepreneurship Council, a member of the coalition, stated in its Weekly Briefing (not available online):
“ReadyReturn” is risky and represents an inherent conflict of interest with tax collector also acting as tax preparer. … In addition to the concern over conflict of interest, there are serious concerns regarding taxpayer privacy. Identity theft is the fastest growing crime in America and a software glitch or bureaucratic error involving “ReadyReturn” could be catastrophic for taxpayers. With the added substantial technology infrastructure and government bureaucracy needed to run “ReadyReturn,” the program will end up costing taxpayers untold amounts as well.
The best way to reduce the staggering costs of tax compliance—at the state or federal level—is to simplify the income tax code to the point where taxpayers can easily and quickly calculate their own tax liabilities. Fundamental tax reform in the form of a consumption or flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. could also dramatically reduce tax complexity and compliance costs.
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