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PaperclipPerfector  1mo ago (text post)   2892 thread views

Small-Scale Question Sunday for October 12, 2025

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Can someone please steel-man the American system of making individual citizens responsible for filing their taxes in a hopelessly complex tax code, then punishing them for making mistakes? From where I stand, it all just feels like racketeering by H&R Block et al. to extort fees year after year.

From where I stand, it all just feels like racketeering by H&R Block et al. to extort fees year after year.

Now that's mostly the case, but the roots of this system were actually in minimizing governmental intrusion into private life. In order to calculate your taxes for you, the government has to be aware of a lot of things you are doing. Now, you would say this is true anyway, and you'd be right. But the way the system was designed initially, that wasn't the case - the government was supposed to know what you report to them, and no more. That, of course, went out of the window long ago, but the system remained. Thus the idiotic situation where the government has all the data about you and your business (unless you take special steps to hide it, which are mostly illegal by now) but they are now allowed to use this data to calculate your taxes, so you have to do it by yourself. Then they will be allowed to use the same data to catch you if you're cheating. For me, as a software developer often dealing with, by now, decades-old code, this is a common situation - the system started with one set of assumptions in mind, they changed, but rebuilding the whole system from scratch is too inconvenient, so now everything works in weirdest ways that make no sense anymore.

The government shouldn't have any idea how you spend your money, but wants to incentivize certain spending. The only way that can be reported is with a citizen provided form. That's the original reason.

Do the filing prep firms lobby to keep it that way, long after the government collects a lot of this information elsewhere. Absolutely.

From a revenue maximizing perspective: It's essentially the same as using coupons and discounts for price discrimination at a grocery store. You capture additional transactions from customers willing to put in the work/inconvenience of shopping from the discount rack or using coupons, and broadly speaking these are mostly transactions that otherwise wouldn't have occurred because those customers would not have been getting enough consumer surplus from the transaction at the original price. You offer different prices to people with different willingness to pay by placing slight inconveniences in the way, people who really want to pay less will go through the inconveniences while people who don't care about paying more won't. With taxes, people who really don't want to pay those taxes (or people sufficiently sophisticated that their objections to having to pay those taxes would actually matter to the system) avoid paying those taxes in various ways, through complex deductions and schemes to funnel money one way or the other. People who don't really care about their tax bill (or people who are low-class enough that their complaints won't matter to anyone but their bartender) just pay the taxes because they don't care enough to figure out all the ways to avoid them.

From a freedom maximizing perspective: At the time it was put in place, this method minimized the degree to which the IRS surveilled individual Americans. This is mostly negligible today, when privacy has been so thoroughly compromised under law and custom that it feels irrelevant. But at the time this was an important consideration.

Intertia: But mostly, I think the best steelman is that changing the system would have unpredictable effects on the economy. Between two thirds and three quarters of Americans get a tax refund. The average refund (I couldn't find the median where I looked) is around $3,000. This is essentially a forced savings program by the IRS, in which Americans are forced to save a small amount from each paycheck and then given the money back in a lump sum later. This might have systemically important functions at this point which lead to significant switching costs nationally. For example, it's pretty well known that the best time to sell a cheap used car is around tax refund season, as lots of poor people who otherwise spend as fast as they get it suddenly have a pile of cash and need a car. People also often spend that money on home repairs or security deposits to move houses. Though they also often, of course, blow it on vacations or poor decisions. While the system that leads to a tax refund might be inefficient in and of itself, at this point if we got rid of this system we don't know what impact it might have. Poor people might stop being able to buy used cars, as they go back to saving nothing. Cheap flights to Florida from northern cities might dry up as middle class folks stop getting a tax return in the colder months and eyeing up tickets. Plus, regardless of the total taxes paid, once you get rid of the refund, people won't notice the extra few bucks every week, but they will notice the lack of a big lump sum every year, and will feel worse about it. The tax filing system is a way to trick children into feeling like they're paying less.

Intertia: But mostly, I think the best steelman is that changing the system would have unpredictable effects on the economy. Between two thirds and three quarters of Americans get a tax refund. The average refund (I couldn't find the median where I looked) is around $3,000. This is essentially a forced savings program by the IRS, in which Americans are forced to save a small amount from each paycheck and then given the money back in a lump sum later. This might have systemically important functions at this point which lead to significant switching costs nationally

I am going to reply to this post but I wonder if you people have some misapprehension what it is like in countries with pre-filled forms.

In countries where the tax authority pre-fills your forms, they still have tax refunds if employer withheld too much (and back taxes, if your income changed in other direction). You still get a document that shows how much money the state collected from you and what is your confirmed final tax. You usually get clear instructions when and how you can get credits/deductibles and what to change in your form to claim then.

Only difference that there is no need to pay for a 3rd party software do the latter part.

How do those countries handle cases of "odd jobs" and stuff like that? If you're a farmer that makes money by, I dunno, selling grain, how does the government know how much was sold? Or if you sell goods/services direct to consumers? I suppose the tip income is somewhat US-specific and doesn't matter quite as much any more, but there are a bunch of less-easily-trackable income sources that would seem to make this a bit hard in the general case.

How do those countries handle cases of "odd jobs" and stuff like that? If you're a farmer that makes money by, I dunno, selling grain, how does the government know how much was sold? Or if you sell goods/services direct to consumers?

A farmer already has a business, so those would be handled the same way as any other business transactions. Selling small scale goods / services requires reporting the income if it exceeds a small threshold, but that's still fairly easy and can be done online. If it's more substantial, you may want to start a business. There are also services for people who do occasionally freelancing gigs that charge a small percentage fee to act as their official employers, so the client doesn't have to deal with paperwork and the person doesn't have to deal with the extra complexity of starting up a business.

I have zero real interface to farming and consumer-facing business, but I think if your income comes from selling stuff to people and not payroll, you are then taxed like a small business, and most entrepreneurs pay for accountant services handle that shit. I know that "farmers markets" type of businesses have lessened reporting requirements as long as their business is small-scale.

tip income: no idea how it would be handled when it does not go through cash register.

Any other variable income (say, bonuses of salaried employee) is easier but inexact. Every year the tax authority sets a preliminary withholding rate based on your previous reported income and rate (which they obviously know of), and you have a chance to correct their estimate. If you have same employer, employer is informed directly and you have to do nothing if you agree with the estimate. Your employer withholds accordingly, reports the amount withheld to government and you, at end of tax year authority calculates true total reported income and sends you the pre-filled form. Standard deductions are automatically applied, you tick a box and report a number if you think they missed something. If your income income is super variable, withholding rate was probably not correct, and you usually get a refund or back taxes. (People usually set their rate same so that they get refunds.) If you are doing odd jobs as hourly paid wage labor or you as a salaried employee switch jobs, you provide your taxation information to every new employer.

In case of Russia, they don't. That's why they introduced a new "self-employed" status a few years ago with much lower taxes on income to incentivize people to report their cake baking and pipe fixing and dunce tutoring. (It's different with the farmers since they don't really sell grain to individuals and mill that buy it from them provide the record of buying it.) But the self-employed are small fish and it's not worth it to personally hunt down every single one of them.

The next set of carrot and stick that will be used to ensure compliance is probably government-run crypto. It's easy to inject it into the economy: social security of every kind. All transactions using them will be 100% transparent to the government.

dunce tutoring

I assume this is a typo for "dance", but I find it rather amusing.

ETA: This dumb brought to you by not being fully awake.

No, it seems pretty clear ESOL for teaching kids that don’t live up to their potential- despite how low that potential is.

A 'dunce' is an idiot or a slow learner. See also the 'dunce's cap' which was used to shame and humiliate children who were disruptive or did not learn.

It's not a typo.

You know, you're right I didn't know that.

But there is a significant difference. On a quick look, only between 15% and 35% of taxpayers in UK, France, Germany get a tax refund at the end of the year. So it's a pretty large difference in scale.

Some Benefits:

  1. People can be guilty of two crimes when they don't pay taxes: not paying the taxes, and lying about the amount of taxes owed. Which also makes it easier to catch criminals who are making lots of money illegally. (Al Capone Argument)
  2. Its only hard to pay taxes if you are trying to maximize the amount you are not paying. You can very easily give the maximum amount you suspect you owe, and if you are wrong the government will send you a reimbursement for taxes you overpaid. (Kennedy, do your part argument)
  3. Special interests can be given special and hard to follow exemptions that are only meant for them, and require a bunch of hoops to claim. You can then write off those estimated tax costs as something you did for the consumer while not having those full costs get reflected in the actual budget. (Cynical jack ass argument)

There are more special interests that benefit from complex tax systems than just H&R block.

I think he was referring to a system they have in places like Sweden, where if you're a normal W-2 employee the government would look at your W-2 income and take the standard deductions and do all the stuff that they will correct anyway if you did it differently and didn't get the maximum refund. The first time you claim a child they could keep track of the age and take the deduction every year until 18. If you wanted to take more deductions than they were offering, then you'd file your own return. But most people wouldn't have the need to do that. The predatory thing comes with H&R Block and Jackson Hewitt opening up places in the 'hood where they'll offer to do poor people's taxes so they can charge a percentage of the EITC they recover.

I don't know how it is in Sweden, but in the US I am not a big entrepreneur but I have to take into account, beyond my salary:

  • Freelancing income - plus expenses, plus SEP IRA linked to that income
  • Income from bank deposits
  • Income from stock (is taxed differently from above and has a myriad rules like short/long term, wash sales, etc.)
  • HSA
  • IRA
  • Local tax deductions
  • Mortgage deductions
  • Charity deductions

It became a bit simpler recently when standard deduction had been raised so most of these deductions aren't worth itemizing anymore, but before that I had to deal with it all. Obviously my workplace has no idea about any of it and can't deal with it. Some of them (like taxing income from bank deposits) can be done by the banks, but other stuff can only be properly calculated by somebody having the full picture, i.e. the IRS. Oh yes, and for many of those the actual tax level depends on my income. And not just plain income, but modified adjusted income (real term) - to calculate which you need to check a couple of dozens of rules on which parts are "modified" and which are "adjusted", and all of it depends on all of everything else, pretty much.

And it's not pocket change either - if it's not done right, the difference can easily be hundreds and sometimes thousands of dollars even for mid-tier income like mine. IRS could calculate it all (well, except state taxes which is different rules in every single one of them) - but nobody else, realistically, could do it without me giving them all the data and them recreating what IRS has from scratch. Which is what H&R, Intuit and such are charging the money for.

And to be clear here - my taxes are very simple, comparatively. People have massively more complicated tax situations that I do. I'm still in the DIY zone, people with more complex taxes just hire somebody to do it for them, because there's no way a layman can figure it out.

Bank reports mortgage, interest paid on deposits, mutual fund trades and such directly. Reporting stocks can require more manual work depending on broker / exchange. Arrangements exactly like HSA and IRA don't exist here, but if they did, I presume the service provider would report the details to tax authority.

National tax authority keeps track of applicable local tax code arrangements, but I suppose it must more complicated in a true federal state like the US.

I presume freelancing income, other expenses and stuff like charitable donations you have to declare yourself everywhere.

nobody else, realistically, could do it without me giving them all the data and them recreating what IRS has from scratch. Which is what H&R, Intuit and such are charging the money for.

So why citizen needs to recreate the IRS calculation to submit the paperwork?

I addressed this in another comment - because when the system had been initially created, IRS wasn't supposed to have most of the information - at least not routinely, they could get a court order or such if they have reasonable suspicion you're cheating, but otherwise they wouldn't have the full picture. Since then, a lot changed, and now pretty much everything is reported to the IRS. But the system is still arranged as if IRS doesn't have the full picture, even though it does, and since now there are massive companies built essentially on tracking what IRS has and re-implementing it in a user-friendly way - and the IRS itself does not implement any user-facing interface to it - we have barriers to change. IRS would have to budget some investment (not large on the scale of federal government, but not insignificant in absolute numbers, probably tens of millions of dollars at least, maybe more) to implement a user-facing system that could be efficiently used by taxpayers, and the incumbents would lobby very hard against it, claiming this already exists as a private solution (which is true) and the feds squeezing out private business is unacceptable (which is usually true in general, but in this particular case is not, but they can make it look true).

Can someone please steel-man the American system of making individual citizens responsible for filing their taxes

MODE OF STEEL ON

In a free democratic republic, citizens should be aware about the true cost of state, and if they think it is too high, they should organize and vote for smaller and leaner government.

MODE OF STEEL OFF

Yea, it looks, walks and talks like mob extortion, but, unlike most parts of the system, can be steel manned. Not that it was ever deliberately designed for this reason.

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