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645: Doing Taxes

There are listeners in dozens of countries who are probably wondering why this is even a topic. After all, from Sweden to The Netherlands, New Zealand to Japan, paying your taxes is as simple as logging in to a system or reading through a postcard and confirming that all of the information that the government has on file about your taxes is correct. Doing your taxes is practically a non-event, no more complicated than verifying your phone number.

But – in some countries like the US – that is far from the case. To quote author T.R. Reid, who spoke to PBS about the US tax system:

Americans spend about six billion hours a year collecting the data and filling out the forms. We spend $10 billion to H&R Block and other preparers and, on top of that, $2 billion in tax preparation software, which still takes hours of work.

And why do we spend all this time? Well, as the Washington Post found when discussing the tax code with MIT’s Andrea Campbell and the Brookings Institution’s Vanessa Williamson.

[…]two reasons tax filing is so complicated in the U.S. are (1) we do a great deal of social policy through “tax expenditures” and (2) we tax households rather than individuals.

A “tax expenditure” is basically a form of government spending, but one delivered through the tax code. We use the income tax code to encourage and discourage a lot of different social and economic behaviors. So, for instance, let’s say that the government wants to encourage home ownership or employment or child care. They could set up a program to do those things — or they can just give homeowners, workers and parents a special break in the tax code.

Unlike many other countries, we make people administer their own benefits through the tax code. One example involves the cost of raising children. Some countries have directly administered benefits, like universal preschool or family allowances. In the U.S., eligible households with children receive subsidies as well — the child credit, the child care tax credit, the Earned Income Tax Credit — but only if they fill out their tax return correctly. If you fill out your return wrong, you can be fined. That’s one reason that the majority of even low-income Americans use paid tax preparation services.