Does Tax Software Make Is Easier for the Government to Tax Us More?

For about 15 years I've been using TurboTax to prepare my state and federal income taxes. It was recommended to me by a former boss of mine, and since I prefer doing stuff on the computer to doing it by hand, I found it a pretty easy way to go.

If you have a tax return that doesn't require an accountant to sort it all out, it's pretty easy to use. The program guides you along the way with questions about your income and prompts you to complete the appropriate forms. One nice thing about using it year after year is it remembers your data from last year and prefills a lot of forms for you based on last year's return. That saves a lot of time and energy. If you want to try it, you can buy it through the link at the left.

I came across a Cato Institute article written back in 2002 about the productivity which is saved using these programs, but also some downsides:

Computer programmers have done what lawmakers would not do and what activists could not do: radically reduce the costs of paying income taxes. Programmers have not lowered our tax rates, of course. But they have written software that makes it stupendously cheaper and easier for us to file our income taxes. We can thus thank those heroic geeks for saving us millions of dollars worth of time, effort and anguish. Paradoxically, though, the growing use of tax preparation software threatens to influence public policy for the worst, saddling us with an increasingly meddlesome and inefficient income tax system.

To the injury of taking our money, income taxes add the insult of forcing us to calculate how much we owe. Americans spent 4.6 billion hours trying to make accurate and timely federal income filings (to say nothing of state income taxes) in 2001. Because lost time equals lost money, that busywork imposed a deadweight loss on our economy of over $140 billion. That same year, 57 percent of individual federal taxpayers effectively gave up trying to understand their filing obligations, instead punting to paid professionals. Complying with income taxes has plainly grown too costly and difficult.

Thankfully, clever entrepreneurs and programmers have rushed to our aid. Software like Intuit's TurboTax, H & R Block's TaxCut, and Second Story's TaxAct, offer fast, cheap, and accurate help with federal and state income taxes. Such tax preparation programs will guide you step-by-step through the maze of tax rules, complete your federal and state returns, and electronically file them with the appropriate authorities. Some programs even offer videos of tax experts explaining arcane topics, loans against expected refunds, and insurance against audits. None cost more than $40; some versions cost nothing.

Unsurprisingly, given those evident benefits, the use of tax preparation software has exploded. IRS statistics reveal that in the last year the number of returns individuals prepared on their own computers and filed electronically increased by 39.6 percent. The year before it increased by 36.7 percent. Already this filing season, 9.5 percent of individual filers have taken the high-tech do-it-yourself route. Even that understates the popularity of tax preparation software, as untold numbers of users no doubt print out their forms and mail them in via snailmail. If current trends continue, as seems likely, most Americans may soon regard filing income taxes no more burdensome than, say, spending an afternoon online planning a vacation.

I'm sure the growth rate has continued at a significant pace since this article was written. The writer warns that these programs, while increasing productivity, could also increase our apathy toward ever higher taxes:

First and most obviously, tax preparation software stands to reduce citizens' dissatisfaction with income taxes. No computer program will make us enjoy giving our money to the government. But by making it considerably less painful to prepare and file our returns, tax preparation software largely mitigates one universal and heartfelt complaint about income taxes.

As a consequence, second, tax preparation software will hamper efforts to simplify or eliminate income taxes. Although they can cite other arguments for instituting flat or value-added taxes, reformers will find it increasingly hard to rouse voter outrage over the incomprehensibility of the income tax code and the burdens of preparing tax returns. Programmers, for better or worse, will have solved that problem.

Third and most disturbingly, lawmakers may feel fewer inhibitions about using income taxes to micromanage citizens' behavior. Special interests have already loaded the tax code with carrots and sticks. Because tax preparation software reduces voters' costs of complying with such meddlesome details, it makes them more politically attractive. Preparation software may thus encourage greater tax complexity in the same way that withholding, a similar anesthetic, encouraged higher tax rates.

The program certainly doesn't make me any happier about filing taxes, but it does give the user some input toward the final result, rather than dropping your information off at an accountant's office and hoping for the best. You don't have to be terribly computer proficient to use them, and for most tax returns, I think this is a pretty easy and not too expensive way to go.

And for Costco members, if you don't order it through the link above, they have a coupon running this week for the Turbo Tax software that will save you a little more money.