The Turbo Tax Paradox

By :: April 17th, 2012

Like many of you, I just finished my 2011 tax return. Counting worksheets, it was 59 pages long.

It occurs to me that our current insanely complex tax rules are made possible by technology. Yes, computer software makes filing easier (both for professionals and civilians). But that may be the problem.

The relative ease of filing, made possible by programs such as Intuit’s Turbo Tax, also makes it easier for Congress to write incomprehensible tax law.

Have you ever read, for example, Form 6251, the paperwork millions of middle-class households must complete just to figure out whether or not they owe the dreaded Alternative Minimum Tax? The IRS instructions for the form are 12 pages long.

Here, in part, are the instructions for Line 11:

Your ATNOL for a loss year is the excess of the deductions allowed for figuring the AMTI (excluding the ATNOLD) over the income included in the AMTI. Figure this excess with the modifications in section 172(d), taking into account your AMT adjustments and preferences (that is, the section 172(d) modifications must be separately figured for the ATNOL).

Seriously.  

In truth, if voters actually had to navigate this gibberish, we’d have a revolution that would make the tea party look like the League of Women Voters. But we don’t. In 2009, 92 percent of us got help, either from a third-party preparer or tax software, the IRS estimates.

We spend $59.95 for software, mindlessly answer questions that often seem entirely disconnected from the specifics of the law, and assume the answer that comes out the other end is correct.

Or we just bundle up of our W2s and 1099s and send them to a professional preparer, who does even more opaque stuff and presents us with a return to sign. Sure, the record keeping is annoying, but we miss the real fun.

In this way, technology both inoculates us from much of the complexity of tax filing and reduces compliance costs. But, more importantly, it immunizes the politicians from the consequences of their decisions that lead to this madness.

Tax complexity isn’t just about the number of forms and their incomprehensible instructions (btw, no criticism intended towards the folks at the IRS who write them. They do the best they can, given the loony law Congress hands them).

The real price of complexity is the very opaqueness of the Tax Code itself. Because we don’t understand the law, we are convinced we are paying more than we owe and that everyone else is paying less.

Yet, tax software allows politicians to add ever more complexity, which we accept with little complaint. Think about the Buffett Rule endorsed by President Obama. The version debated in the Senate this week would create yet another minimum tax that would result in even more complex forms. But, of course, the households making $1 million or more who’d owe this tax would likely never see the forms. They’d just pay the accountant.

Often, critics of tax complexity say the pols themselves should have to fill out their own returns. I disagree. It would be much more effective if the rest of us had to do it. If we did, I predict tax simplification would be more popular than Dancing with the Stars.

So I’m starting a new movement: Ban tax software and professional preparers for just one year. And see what happens.         

Happy tax day.

 

15Comments

  1. AMTbuff  ::  2:41 pm on April 17th, 2012:

    The title should be “Turbo Tax Moral Hazard”. I’ve read this observation several times over recent years, particularly regarding the AMT and the ever-multiplying phase-outs. Even the 1986 Tax Reform itself exhibited symptoms of increased tolerance for complexity. If you’ve ever attempted the two-step add-back of Social Security benefits enacted in 1993, the computation specified in the tax forms is virtually inscrutable and the IRS made no effort to explain it.

    Unfortunately this is old news. Even more unfortunately, the trend continues. The Buffett Rule as tax reform? No, it’s more of the same tax deform.

    In the end we might be willing to accept the half-serious suggestion by some scholars that our income tax liability be randomized. There would be very little lost in comprehensibility and it would certainly simplify filing!

  2. phr3dly  ::  3:10 pm on April 17th, 2012:

    I just finished my taxes with turbotax, and have a couple thoughts…

    First, TurboTax is collapsing under the weight of the tax code. It fails to properly process some perfectly legitimate tax deductions (miscellaneous deductions not subject to 2% floor). It fails to adequately explain confusing topics. It shifts the support burden onto its “live communities”, who are the unpaid and uninformed masses. The online version does not allow you to manually modify form values, making the bugs in the software impossible to work around.

    As far as I can tell, Turbotax is nothing but a way for Intuit to pepper us with ads for its other products.

    Now, my other thought, on AMT. AMT is portrayed as complex: Figure out your tax liability, then add in a bunch of deductions you took out, subtract your regular liability from AMT, and pay the difference. But to me, AMT seems refreshingly simple. I _know_ that I’ll have to pay AMT (I live in a high tax state. So in principle AMT should make my life easier. I shouldn’t have to calculate my regular liability, I should just be able to calculate my AMT liability, and pay that amount. I think AMT is a nice backdoor way to a simpler flat tax.

  3. Diana M  ::  4:05 pm on April 17th, 2012:

    Supposedly every little twist of the tax code is influencing my economic incentives to work more, work less, donate more, donate less, invest more, invest less, buy mohair futures instead of racehorses — or it it vice versa — and so on. I am one of the zillions who plug my answers into Turbo Tax and hope for the best. Does the economic literature on tax policy ever adjust for the likelihood that the incentive efffects of a particular tax provision will just get lost in the noise and confusion?

  4. rjs  ::  4:20 pm on April 17th, 2012:

    its also why me & the millions of others who cant afford an accountant or something like turbo tax are just getting around to filing the 2009 return…

  5. Michael Bindner  ::  6:25 pm on April 17th, 2012:

    The vast majority of taxpayers are too poor to worry about all the deductions, although the refundable credits for most of the poor are also too complex and require assistance, since the poorer you are, the less likely you can even follow simple preparation instructions. Of course, instead of getting Intuit adds, they are offered refund anticipation loans at interest rates that are too high for what they are getting. Because they consider it found money, they don’t complain. It would be much better to offload most tax benefits to the business side – with anyone who wishes to run a small business knowing that they will likely be using more complex assistance, either in-house, electronic or contracted. My tax plan is designed so that the vast majority of households do not have to file, instead receiving their refundable credits with pay from their employers.

  6. Should We Blame TurboTax for Tax Code Complexity? « Donald Marron  ::  6:57 pm on April 17th, 2012:

    […] another grueling tax season, my colleague Howard Gleckman is understandably frustrated with America’s complex tax code. And with instructions like this, who can blame him?: Your […]

  7. Len  ::  10:13 pm on April 17th, 2012:

    Great post, Howard. For years, I did my returns by hand (with the help of an Excel spreadsheet to avoid arithmetic errors). Eventually, I gave up, because it got too time consuming. And I pretty much understand what the law is supposed to be in most cases.

  8. Vivian Darkbloom  ::  11:56 am on April 18th, 2012:

    While I agree with the basic premise of this post and most of the comments, the issue must be raised as to why, if TurboTax and other preparation programs are able to deal with the complexity, the complexity is a problem. That is the real issue lurking behind this post and these comments.

    Decades ago, cars were much less complex and many people were able to service their own cars. Yet, cars are unquestionably better today. One could compile a long list of situations in which technology allows complexity to increase and be dealt with and yet we are all better off because of it.

    There are, I think, two questions fundamental to this issue. First, is the complexity contributing to a more efficient and equitable tax code and do the costs of this, taking into account technology, outweigh those benefits? That point might be debatable.

    Second, what does this complexity mean for democracy and citizen awareness and input on how and from whom we raise revenues? I think that is the biggest problem, but it is left unstated here. Even though TurboTax might be able to (more or less) accurately compute one’s tax (given the proper inputs) most users of that program don’t, as a result, have any idea of how the tax code works and how the benefits and burdens of our tax system are being allocated among the citizenry. Those decisions are then inevitably made by a few politicians aided and abetted by a few tax and tax policy experts and imposed on an unwitting and unsuspecting populace. And the benefits of the system can also then be maximized by those with the greatest resources and technical expertise. Those are the real problems created by complexity.

  9. Laurie  ::  12:37 pm on April 18th, 2012:

    I’m a retired CPA and use tax software. The complexity of the Tax Code combined with its stunning lack of common sense (backed up by a remorseless IRS) make fools of all Americans. Put that together with the poor (i.e., non-existent) financial skills of the American populace and the need for everyone to take more responsibility for financial support in retirement and old age and we’ve got a perfect mess on our hands. Also this: the minute the politicians and bureaucrats agree to simplify the Tax Code, grab your wallet and make sure that someone in your family is a trained tax accountant. The result will not be cheap and it won’t be simple.

  10. AMTbuff  ::  2:09 pm on April 18th, 2012:

    what does this complexity mean for democracy and citizen awareness and input on how and from whom we raise revenues?

    Exactly. Why do politicians believe that they can make the income tax indecipherable or even deceptive, yet still retain public support and full compliance?

    Unlike Len I still have an Excel tax spreadsheet that can accurately project my current year tax liability, including state income taxes, AMT and credits. Every year I have to change some calculation, and some of the phase-outs are quite tricky to code in Excel. This tool enables me to see high marginal rate traps such as the phaseout range for child credits, deductible IRA contributions, education credits, and the AMT exemption.

    Everything is parametrized, so for example I can see the approximately 100% marginal rate that would result with 4 children in college. The rate jump when the AMT kicks in is also easy to see. When the marginal rate is very high, avoiding it can be as simple as taking unpaid days off. This in effect buys extra vacation time at low after-tax cost. Another approach is to accelerate income to move well above the range of high marginal rates.

    Most people can approximate this analysis by running their current year’s numbers using last year’s tax software. The brackets will be slightly inaccurate, but one can identify any surprising tax consequences from adding $10k to or subtracting $10k from one’s income. I recommend this approach for anyone who may owe AMT or who claims any means-tested tax benefits.

    Papers have been written on marginal rates, but my Excel tool has showed me for many years that the true marginal rates are approximately flat across middle class incomes and that they are much higher than the advertised rates. Phase-outs have produced a flat tax of sorts, just not one that anyone would want or that anyone would admit to designing.

  11. Leota  ::  10:23 pm on April 18th, 2012:

    A lot of the complexity in the tax code arises because the legislature is trying to provide incentives or disincentives for particular behaviours. Tax reform/simplification should get all social engineering out of the tax code and limit taxation to raising money. Then perhaps we could have a reasonable discussion about how to structure the tax code in a “fair” way.

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  14. Scott  ::  1:59 pm on September 10th, 2012:

    Simple thoughts do not equal simple solutions. AMT is portrayed as complex because it is complex. I would bet my preferential deduction savings that you have never simply calculated your AMT and paid based on that alone.

  15. news  ::  5:37 am on January 26th, 2013:

    our income tax liability be randomized ?? :)