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Nothing is certain but death and …

October is almost here. The last quarter. This is the time of year I start thinking of next April 15th and what I can do this year to reduce my taxes via by recognizing some capital losses, making charitable contributions, etc. It also makes me think about taxes in general and how much the tax filing process has changed over the years.

I’ve been a taxpayer in Massachusetts since 1988 or so. At first I filled via paper returns. This invariably involved started with a trip to the Post Office or Library to pick through the stacks of forms to find the ones I needed, and then to make a return trip the next day when I found out that I missed a schedule. I would typically get two copies of everything: one to do the draft work in, and one to file. Quantum Electrodynamics, the music of Arnold Schoenberg, James Joyce’s Ulysses — these were all easy and made sense compared to doing taxes.

Sure, I could have just carted my paperwork off to an accountant and let him deal with the mess. But I’m opposed to that in principle. Taxes are paid by everyone and everyone should be able to do their taxes. Something is wrong with the tax system, democracy, or both if a Harvard grad is not able to figure out his own taxes. But sometimes it was a struggle.

Eventually, in the mid 1990’s (my recollection) the Massachusetts Department of Revenue (DOR) started to support online filing. Initially this was via a proprietary, state-issued, Windows-only client that worked with a dial-up modem connection. It was advanced for the time, but still bare bones, and clunky. I actually still did most of the form by hand, and entered in the numbers into the UI for the final calculations and submission.

Things got interesting a few years ago when the DOR stopped issuing their own client. Instead they promulgated standards for on-line tax submission, issued developer guidelines, a compliance test suite and started certifying vendors who wished to write compatible tax filing software. You can see the software guidelines here.

Now, there are some that say that government mandated standards are evil, that they stifle innovation, remove choice, hurt the consumer, etc.

[G]overnments should not freeze innovation by mandating use of specific technology standards
— Policy statement from Microsoft’s “Freedom to Innovate” network

So it is interesting to see what happened in Massachusetts after they issued standards in this area.

Today, Massachusetts residents have a choice of 11 applications for filing their state income taxes, at all price points. These range from free filing for qualified low-income residents, to low-cost web-based applications for simple returns, to rich client-side solutions for more complicated filings. The full list of compliant filing software is here.

So, in this case, the state-mandated standard did not lead to lack of competition or innovation, but rather led to a thriving market of filing solutions, at a variety of price points and feature sets. The tax-paying public benefited with increased choice of products and feature sets. The DOR benefited with returns that could be processed at lower cost and lower error rates. And software vendors benefited by the creation of a new market in tax preparation software.

This lesson is something to bring to mind the next time you hear the contrary FUD about standards and innovation.

{ 2 comments… add one }
  • C. T. Rambler 2006/10/02, 08:53

    This reminds me about a mental exercise I had been asking myself for years: If the government mandate online tax return for citizens, can it mandate the use of certain software to file the tax return, and if it choose to mandate the use of certain software, must it provide alternative, at no extra cost?

    The arguement here is that taxpayers have no choice but to deal with Inland Revenue. Thus, if Inland Revenue says you must file online and can only use this and that software, you do not really have a choice but to buy them. Is this fair?

    Your post add an interesting dimension: By publishing the standard for filing, can the government claims that it satisfied its responsibility of providing alternative methods of filing, eventhough the taxpayer is forced to fork out money to buy filing softwares, any software for that matter? (Not to mention the necessity to purchase a computer)

    I know of some countries tried or contemplating trying to encourage online filing by impose additional fee on paper-based filing on the grounds that it is simply passing the additional cost of processing to the people that incurs it (with exception for disabled taxpayers of course).

    Personally, I think it will be necessary for Inland Revenue to provide a free (as in money) way of filing tax return. It can be a free (as in money) software but must work on all platforms. Ditto for online-filing website. Otherwise, they must allow me to file by paper at no extra cost.

  • Rob 2006/10/02, 18:15

    For what it is worth, the price paid for tax preparation software and filing fees is a tax deductible expense here.

    You make some interesting points. There is a progression, from Hammurabi making his law code fixed and public, to the Protestant founders pushing for the Bible to be translated into the vernacular, to Section 508 of the Rehabilitation Act of 1973 which requires Federal web sites and other electronic technologies be accessible to members of the public with disabilities.

    These are all part of the 4,000 year push to ensure that what the state demands of its citizens be understandable by its citizens. But in the case of taxes, I think the complexity of the laws, more than the technology required to file, is the thing that presents the greater problem. Normal life events, like getting married, buying a house, having a child, retiring, etc., cause a fearsome increase in tax preparation complexity.

    I take it as axiomatic that any tax code which is complex enough to hide an Enron in it is too complex for the average citizen.

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