Paul L. Caron

Wednesday, April 30, 2008

Zelenak: The Civic Virtues of a Tax Return Filing Requirement

Lawrence A. Zelenak (Duke) has published Justice Holmes, Ralph Kramden, and the Civic Virtues of a Tax Return Filing Requirement, 61 Tax L. Rev. 53 (2007).  Here is the Conclusion:

Given the overwhelming complexity of the income tax return preparation process today, it is difficult to imagine (or remember) that a tax filing obligation might have civic virtues. A system of inexact withholding and return-based reconciliation can serve as an attractive compromise between small government proponents who would like to make the taxpaying process as visible and painful as possible, and big *88 government proponents who would like to make the process invisible and painless. And if the tax system is not so complicated as to make return preparation a miserable experience (in terms of the taxpayer's own time and effort, money paid to a preparer, or both), the return preparation and filing process can serve as civic ceremony of equal dignity and importance to voting. All these benefits would be lost under a national sales tax or value-added tax, or under an income tax with exact withholding and no return filing. Although the President's Panel did not explain its implicit rejection of a return-free system, in the context of its simplification proposals it was right to retain a filing requirement. On the other hand, the preparation of tentative tax returns by a governmental agency (as in the case of California's ReadyReturn) is not really a return-free system. Such a system, made available to taxpayers in simple income tax circumstances, would be consistent with--and might even enhance--the civic virtues of a tax return filing requirement.

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Thanks to Zelenak for amusing commentary on sitcom depictions of tax compliance over the years.

He gets it absolutely wrong, however, with the following assertion:

"There are indications, then, that the civic virtues of a return filing requirement might be reclaimed under a simplified income tax. But what sort of simplification would be needed? In attempting to answer that question, it is useful to distinguish two sorts of return preparation complexity. First, there is the complexity faced by the taxpayer when he sits down to prepare his return; the proliferation of phaseout provisions and the growing impact of the alternative minimum tax (AMT) have greatly increased this sort of complexity in recent years. Second, there is the planning and recordkeeping complexity that taxpayers face throughout the year in anticipation of the eventual preparation of their returns. This second sort of complexity has also significantly increased in recent years, due to the impressive growth of narrowly targeted tax benefits for particular types of expenditures. Phaseouts and the AMT have had an impact here as well, because it is often difficult for a taxpayer to determine whether he will actually receive a benefit if he makes a putatively tax-favored expenditure, after the phaseouts and the AMT have done their work.

Both types of complexity can and should be reduced, but reduction of the second sort of complexity is the more important goal."

To suggest that Congress could reduce planning and recordkeeping complexity, while doing nothing about phaseouts and the AMT, is utter nonsense.

Posted by: Jake | Apr 30, 2008 6:10:29 PM

Way back in time when quarterly estimated tax reporting and payments became a requirement, a comedian on TV (possibly Jack Carter?) riffed on the requirements, saying that he filed the required returns with the IRS without not only payments but also not disclosing his name and address: "If I have to guess how much I make, let them guess who I am."

Posted by: Shag from Brookline | May 1, 2008 3:32:18 AM