A nudge for tax day

The most innovative tax-filing nudge is California’s Ready Return, a free, voluntary service that allows people to download a pre-filled tax return using information from their W-2s and previous year’s filing. Ready Return began as a small pilot program three years ago, but was halted because of business lobbying pressure. Now, Ready Return is back. Unfortunately, thanks to paltry publicity, few Californians, let alone other Americans, know about it. In the interest of tax filing headaches everywhere, we hope that this will soon change.

By nearly any metric, Ready Return has been a giant success. In the pilot group, median filing times fell by 80 percent, and its beneficiaries saved, on average, $30 (the median tax filing expenditure). Ready Return users also made far fewer errors. Only three-tenths of a percent received an error notice compared with 3.1 percent of other filers. With these kind of results, it is not surprising the plan won a 98 percent satisfaction rate. (There are some restrictions for using Ready Return: You must be single, have no dependents, take the standard deduction, and have lived in California last year.)

Currently, California is the only state that has adopted a pre-filled tax form system, although a number of other nations use it as well. Denmark pioneered the idea the early 1980s, and the other Nordic countries soon followed. Today, pre-filled systems of varying levels have been adopted in Australia, Belgium, Chile, Portugal, Spain, and France, with the Netherlands planning to implement one in 2009.

The strongest opposition to Ready Return has come from businesses. Stanford Law professor Joseph Bankman says Intuit, the California company that sells the popular TurboTax software, spent more than $1 million lobbying Republican lawmakers against the plan. Opponents relied on advertisements that played up fears of government abuse: “You wouldn’t send a dog to the butcher to pick up your steak. Why would you trust the state to pay your taxes?” read one ad.

Our University of Chicago colleague Austan Goolsbee has proposed a national version of the Ready Return called “Simple Return.” Since about two-thirds of taxpayers take only the standard deduction and do not itemize, and since frequently their entire income is drawn from wages from one employer and interest income from one bank, Goolsbee estimates that as many as 40 percent of all Americans could be covered by the plan. The average American spends a bit less than 14 hours on the standard 1040 form. Goolsbee thinks the Simple Return could save 225 million hours of tax preparation time per year and $2 billion in spending on tax preparers. Democratic presidential candidate Barack Obama, whom Goolsbee advises on economic policy, supports the idea.

The IRS has not taken an official position on Ready Return on on Goolsbee’s Simple Return idea. University of Michigan professor Joel Slemrod, quoted in the Pittsburgh Post-Gazette, said the Treasury Department endorsed a simple-return approach in a 1984 study conducted at the behest of Ronald Reagan, saying it would cover 66 percent of taxpayers and save $1.9 billion in tax preparation fees.

2 Responses to “A nudge for tax day”

  1. Tom Says:

    I believe you have a typo in the sentence:

    The strongest opposition to Ready Return has come from businesses. Stanford Law professor Joseph Bankman says Intuit, the California company that sells the popular TurboTax software, spent more than $1 lobbying Republican lawmakers against the plan.

    More than $1 whole dollar!

  2. Jeff Eisenach Says:

    Can you explain what exactly is being “nudged” here? That is, what desirable behavior is encouraged by Ready Return (or would be encouraged by the “Simple Return”)? Isn’t it even possible — as some have suggested — that Ready Return would nudge people in the direction of paying even less attention to their finances?

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