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Important Enough

To Be Historic:
Considering the Future of Online Tax Filing
In the United States and the United Kingdom
A PROCEEDINGS DOCUMENT OF THE AMERICAN LEGISLATIVE EXCHANGE COUNCIL (ALEC)
INTERNATIONAL RELATIONS POLICY SUMMIT ROME – OCTOBER 2007

A Strategy Guide from the Center for Digital Government
Important Enough To Be Historic:

Moments of history and
a word on context
History matters. Try as individuals and institutions Good Friday Agreement with His Excellency Daithi
may for a fresh start, it is impossible to make a clean O’Ceallaigh, Irish ambassador to the United King-
and complete break from their pasts. Nor is it advis- domii; reviewed U.S. diplomacy in the Mediterranean
able, insofar as our histories remind us of formative with the Honorable Frederick Vreeland, ambassador
moments and foundational principles that were true of the United States to Morocco (retired); and were
then and are true now. briefed on the Vatican’s work with worldwide media
on ethical standards by Most Rev. Archbishop John
History matters in the unfolding of human events — Patrick Foley, just days before the announcement of
ranging from issues of war, peace, and terrorism, and his elevation to Cardinal.
the relationships among church, state and the fourth
estatei — to arcane models of the role of government In the shadow of these encounters with historic ar-
in an open economy. Such a spectrum was on display chitecture and artifacts — not to mention these and
during a gathering by a group of conservative Ameri- other men and women of history — is the matter of
can legislators in Rome in early October, 2007. tax collection, as practiced in the United States and
the United Kingdom. The Policy Summit turned its
The history-laden Italian capitol was the backdrop attention to this arcane but important subject during
for a policy summit convened by the International a session hosted by John Cabot Universityiii featuring
Relations Committee of the American Legislative Baroness Angela Billingham of the British House of
Exchange Council (ALEC). In addition to govern- Lords, also a member of the U.K. All Party Parlia-
ment-to-government meetings with Italian officials, mentary Taxation Group.
delegates also: explored recent history leading to the

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CONSIDERING THE FUTURE OF ONLINE TAX FILING IN THE UNITED STATES AND THE UNITED KINGDOM

Historic tipping points in tax
administration: here and there
The United Kingdom and United States have not Internal Revenue Service (IRS). With the name
always seen taxation the same way. Even a casual change came the decision to stop the practice of
review of history reminds us that taxation without preparing individual tax returns, reflecting, in
representation helped foment the American Revo- part, recognition of the conflict between prepar-
lution, and that the Boston Tea Party of 1773 was ing returns on behalf of taxpayers and enforcing
a catalytic event toward independence. tax rules against taxpayers. In the years since,
employers withhold federal income tax based on
Some 235 years later, taxation remains a politi- the employee’s own estimate of his or her liability
cal issue with important economic and societal — paying the difference, or having it refunded
impacts. More recent history is instructive in un- at year’s end — while the self-employed estimate
derstanding the current dilemma faced by taxing what they owe and pay quarterly.
authorities in both countries.
Some 65 years after PAYE’s introduction, Lady Bill-
Their respective tax administration systems in ingham laments that the U.K. system remains “more
their current form date back at least a half cen- abacus than (a) computer,”v perpetuating a system
tury; both were born of deliberate policy choices, in which employers bear the burden of being the
not historic accidents. In 1944, the United King- tax collector while taxpayers, for their part, do not
dom introduced its Pay as You Earn (PAYE) pro- know how much tax they are paying. That blind
gram under which: spot notwithstanding, PAYE “works great if you are
1. Employers deduct tax from their employees’ on payroll,” says Billingham, because tax calcula-
pay according to PAYE codes which reflect the tion and payment is out of sight and out of mind.
employees’ personal circumstances. Those Britons not on payroll fall into the category
2. The amount withheld by employers and passed of self assessment and are left to figure out the va-
on to HM [Her Majesty’s] Revenue and Cus- garies of the system for themselves. To redress these
toms (HMRC) is designed to match exactly the shortcomings, the Parliamentary Tax Group set as
tax liability for each employee.iv its goal, “a U.K. tax system (that) must approach the
tax system in the USA where … the citizen plays the
In 1953, the United States Congress rechristened central role in their tax affairs, rather than the state
the country’s federal taxation authority as the or the employer.”vi

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Important Enough To Be Historic:

Over there: trans-Atlantic yearnings, or just envy?
Indeed, both countries have demonstrated a ten- to government and taxpayer alike. Whilst flatter-
dency to look abroad for tax policy alternatives, ing it does not match the reality we face.”vii
seeking to possibly adopt something that is work-
ing somewhere else. In the United States, the IRS The reality in both countries is two-fold. Tax au-
National Taxpayer Advocate, Nina E. Olson, con- thorities have administered tax rules that grow
tended that the country needed to adopt the U.K. ever more complex with each change in tax law
tax system because it costs nothing and works or administrative code. Taxpayers have turned to
perfectly. Back in London, the chair of the Parlia- bookkeepers, accountants and others for help —
mentary Tax Group expressed bemused surprise attempting to minimize the total tax bill and es-
at the American perception that the “U.K.’s tax cape the anxiety of running afoul of the tax man.
system was working perfectly at a minimum cost

A disruptive moment births an industry
The need for professional tax help has spawned Storefront tax preparation was the first of two in-
a new industry; private tax bureaus have flour- dustries spawned by the U.S. federal government’s
ished in the United Kingdom and storefront tax deliberate decision to stop filling out tax forms on
preparers in the United States. On January 25, behalf of its taxpayers. The origin of the second
1955, Henry and Richard Bloch scrapped their new industry followed the introduction of the
Kansas City, Mo., based bookkeeping company personal computer and created the opportunity
(United Business) in favor of a new firm that spe- to have software help manage the relationship be-
cialized exclusively in income tax return prepa- tween taxpayers and their government.
ration: H&R Block Inc. Its growth, and that of
their competitors, corresponded with the grow-
ing complexity of the tax code itself. Consider,
for example, that IRS Form 1040 came with 16
pages of instructions in 1955 and ballooned to
191 pages by 2005.

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CONSIDERING THE FUTURE OF ONLINE TAX FILING IN THE UNITED STATES AND THE UNITED KINGDOM

Codification: in law and in software

If the rules are known and codified in statute and Alliance provides free state filings in 20 jurisdic-
administrative code, they can be codified in soft- tions. Moreover, the Alliance was a convergence
ware: The software itself could act as an agent on of public policy need, corporate philanthropy
behalf of individuals. Where personal income tax and enlightened self interest. The policy intended
is concerned, the tax preparation software indus- to extend e-filing to the poor and underserved,
try did the heavy lifting of reverse engineering mapping well with the philanthropic goals of the
the tax code, originally at the federal level and, Alliance’s founders. At the same time, the indus-
in time, the state level. While an increasingly try was concerned about the risk that the IRS
common practice — in the second decade of the would reverse the decision that had created the
commodity Internet — the tax software industry’s tax preparation industry in the first place. The in-
pioneering work demonstrated a new and viable dustry agreed to provide free filing services to ec-
way of doing the public’s business. onomically disadvantaged taxpayers in exchange
for a commitment by the IRS not to enter the tax
These origins illustrate that disruptive moments software industry or create an online portal that
make for historic opportunities; a single policy would phase out commercial offerings.viii Through
decision begat two new industries and the eco- the Alliance, the industry provides free filings for
nomic activity that came with them. Another 70 percent of the population, with the remaining
such moment came in 2003 from the tax software 30 percent constituting the market of paying cus-
industry’s creation of the Free File Alliance. The tomers for the industry. To those ends, Free File is
Alliance is generally known as a partnership be- available through the official IRS Web site to tax-
tween the IRS and about 20 private tax software payers with incomes of $54,000 or less in 2007,ix
companies created to encourage more taxpayers incrementally more than the previous benchmarks
to file taxes electronically, or, to use the favored of $52,000 in 2006 and $50,000 in 2005 when
term, e-file. Through separate agreements, the the income thresholds were introduced.x

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Important Enough To Be Historic:

Revisionist mandates:
seizing failure from the jaws of victory
The 70-30 percent income split and related thresh- extend the model to online tax filing by advocat-
olds were consistent with the Alliance’s purpose ing a government-provided end-to-end tax filing
and origins. Through the Alliance, the industry has and payment service.
provided more than 15 million free filings to eli-
gible taxpayers since the program’s inception.xi The The Consumer Federation of America, Direc-
IRS estimates that approximately 93 million tax- tor of Consumer Protection Jean Ann Fox asked,
payers are eligible to e-file each year. In 2006, the “You don’t have to pay a commercial company to
IRS e-file program handled 77 million returns,xii mail in your paper tax returns, so why should you
3.9 million of which were through Free File.xiii have to pay them to electronically send them?”

Here again, history matters. Measured against its In Congress, U.S. Senator Daniel Kahikina Aka-
original purpose, Free File can reasonably be consid- ka (D-Hawaii) introduced the Free Internet Fil-
ered a success — particularly given the daunting chal- ing Act in which he calls for the IRS “to provide
lenges related to governing and keeping together the universal access to individual taxpayers filing their
Alliance which involves 20 competing software com- tax returns directly through the IRS Web site.”
panies, the federal government and 21 states. It has Akaka recharacterizes Free File’s original constitu-
also materially contributed to meeting the goal set by ency — the poor and underserved — as a “select
Congress in 1998 to have 80 percent of all tax returns group,”xvi stating that they should not be the only
filed electronically by 2007. One IRS estimate sug- taxpayers to have free filing privileges.
gested that the e-file tally approximated 72 percent of
all returns filed.xiv It is also worth noting the intrinsic Sen. Charles Grassley (R-Iowa) views universal free
cost and accuracy benefits of online filing.xv filing as an entitlement under which the govern-
ment “has an obligation to taxpayers to make sure
But the Alliance is not being measured against ‘free’ really means ‘free.’” Sen. Max Baucus (D-
its original purposes. It is now being measured Mont.) calls on the IRS to build a “direct portal
against a new goal: universal service, a policy ob- on the agency’s Web site to allow taxpayers to file
jective that was not in view in 2003 and, in fact, directly and truly for free, regardless of income,”xvii
runs counter to the founding idea behind the Alli- despite the agency’s sustained problems with mod-
ance. To be clear, universal service itself has a long ernizing its core technology systems.xviii
and proud history, particularly with reference to
rural electrification and the extension of phone Having studied the technology practices of tax
service to underserved, remote communities. authorities in both countries, Lady Billingham
cautions against overlooking the risks of the re-
Some in Congress, together with some consumer spective approaches, “In the U.S., the IRS has
activists and state tax authorities, are pushing to chosen to stay out of the software market and has

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CONSIDERING THE FUTURE OF ONLINE TAX FILING IN THE UNITED STATES AND THE UNITED KINGDOM

negotiated with the software industry, for indus-
try to offer free software to low income groups
through the Free File Alliance. However in the
U.K., the revenue authority has taken responsi-
bility for delivering online tax filing on its own
terms. They entered into major contracts to de-
sign and build new government online systems to
provide the service.”xix

A universal service tax portal would almost cer-
tainly force the end of the Free File Alliance. In
doing so, it would recreate the problems that the
Alliance was established to address — undermin-
ing the industries that were created through the
IRS decision to withdraw from preparation of
individual tax returns. The detrimental economic
effects of such a reversal would ripple through
storefront shops in strip malls across the country,
into the software industry and across the Internet.
Ironically, the chief risk to the Free File Alliance is
an ahistoric revisionism under which a new man-
date is retrofitted onto a model that was working
given its original terms of reference.

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Important Enough To Be Historic:

Downwind of failure:
implications for the states
The ALEC delegates also explored the cascading The important policy discussions that necessarily
effects: attend the future of e-filing should take place in
• The move would deny taxpayers the advantages the context of contemporary understandings of
and efficiencies that come with the Web and that government modernization:
they have come to expect in all other parts of • It is not about the portal, it is about transactions,
their lives. such that the official portal is a non-exclusive
• The move puts the Alliance at risk. Should the route into the applications and Web services that
Alliance be forced out, it will have a torrential stand behind it.
effect on the 21 Free File states. • Free Filing is really an architectural component
• States would have to replace, at their cost, some- entirely consistent with where technology itself is
thing that had been provided at no cost to state heading — service-oriented architecture (SOA),
government. shared services, Web services and Web 2.0.
• For government, it would mean assuming the • In this context, remember that the Free File Alli-
risk of software updates to reflect a constantly ance was prototypical of a Web 2.0 environment.
changing tax code. If there were no Alliance, The architecture changes in the general technol-
each legislative change would be an unfunded ogy sector will cause government to reconsider
mandate to the respective tax agencies to make the common understanding of what the World
programming changes. With the Alliance, tax Wide Web is, retaining everything of value as
software companies want to be first, fast and media (the collection of Web sites) but transi-
seamless in incorporating changes to retain cus- tioning to a full-fledged computing platform
tomer loyalty. serving Web applications to end users.
• As competitors, the Alliance members must
compete to serve taxpayers each year. That com- In many ways, these contemporary architectures
petitive aspect is important in that it relies on the pair the disruptive moments that come through
market for self correction. policy and economic developments with disruptive
technologies that allow organizations to seize on
At the risk of oversimplification, policymakers in the game change.
both countries have choices that stand in bold relief
— repeating history, for good or for ill, or building
a digital platform for governing responsibly, securely
and sustainably into the future.

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CONSIDERING THE FUTURE OF ONLINE TAX FILING IN THE UNITED STATES AND THE UNITED KINGDOM

Fresh start or old mistakes:
public service in the balance
For the 2006 fiscal year, the IRS processed HRMC’s own estimate says that 5.7 million of
133,917,068 individual income tax returns and about 35 million taxpayers in the U.K. are paying
collected $1,236,259,000,000 in related revenue, the wrong amount of tax. Compliance costs are
which accounted for 44 percent of its total $2.2 rising disproportionately faster for smaller busi-
trillion in tax receipt net of refunds. Even at that, nesses than larger businesses, making them less
the agency estimates that $300 billion of taxes competitive and therefore less likely to take on
owed are not collected each year, a shortfall that more staff.
informs its current policy slogan, Service Plus En-
forcement Equals Compliance.xx As changes to the U.K. labor market continue
apace, the need for greater decentralization of
Contrast that with the long-held motto of public the tax process and relief for employers and small
service in the U.K., “Public services exist for the businesses arises. The greater empowerment of
patient, the pupil, and the people who are to be the individual for his own financial affairs may
served.”xxi The distinct mottos may reflect different well be the direction we have to take.
positions on the same continuum. In good times,
tax authorities tend to emphasize customer ser- 1. No Fear. Trust is sacred in the relationship between
vice but, during periods of economic downturn, the tax agency and the taxpayer.
they turn their attention to enforcement issues to
preserve fund balances in the public treasury. Law abiding citizens should not have to be afraid
of their government or departments. Not only
In the discussion with Lady Billingham, there is it plainly wrong, but it can lead to intimida-
were a number of hard-learned lessons that should tion and a reluctance to challenge tax authorities
inform policy decisions on both sides of the At- which results in increased tax errors. Unfortu-
lantic. Her verbatim observations are categorized nately, all too often, taxpayers feel that it is bet-
in three areas as follows: ter just to accept what the HMRC says than to
attract attention and further examination. The
1. Serving Mobile and Transient Populations. staff of HMRC must stop treating all taxpayers as
Centralized tax administration crumbles amid chang- if they are trying to defraud the state and accept
ing economic, labor and technology landscapes that the majority of us want to pay the tax that we
genuinely owe.
Administrative and compliance costs rise pro-
foundly as workforce becomes more mobile. The (tax) group’s work pointed towards revelations
made by the national audit conducted earlier this
The economy in the United Kingdom has be- year for self-assessment taxpayers. The HMRC
come far more dynamic. At the same time, the made estimates for people who had underpaid

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Important Enough To Be Historic:

due to unintended errors but did (also) provide The report argues that this disparity was due to
the same assistance to those who had overpaid. the different approaches taken by the two gov-
These figures are vital to understanding the extent ernments in particular around the involvement of
of the problem and as a result the HRMC has re- the private and non-for-profit sectors. The U.K.
sponded accordingly. Clearly, when acting as the needs to look abroad for solutions where govern-
nation’s calculator and tax collector, in order to ment creates incentives for filing online and, in-
maintain the taxpayer’s trust, the HMRC needs deed, to the United States, where the private sec-
to be seen as focused equally on overpayment as tor has been involved with great success.
they are on underpayment — or else people will
question whether their roles are compatible. The move toward compelling — rather persuad-
ing — taxpayers to file online also appears to miss
Unintentional errors where taxpayers completed a fundamental point concerning moving taxpay-
their returns wrongly but had done so in good ers online in the first place. The targets that were
faith led to at least £300M worth of tax errors. put in place to increase the availability and uptake
Clearly, the service currently offered by HRMC of government e-service were not put in place for
is not meeting taxpayers’ needs and the potential their own sake; they were there to drive the inno-
to simplify the process through technology is cer- vation and efficiency that would result in better
tainly not being utilized. service to the public. And one more suited to the
individual needs as a citizen and a consumer. The
3. Seizing the Inevitable. Toward citizen self- group also argued considerable progress needed
assessment and online self-service to be made in order to deliver service suited to
citizens’ needs.
The tax group compared the progress made in
the United States and in the United Kingdom Clearly, there are contextual differences between
in getting taxpayers to file online and reviewed the United Kingdom and the United States, in-
the strategies that were used in the two countries. formed by their respective histories, cultures and
They found that while very similar targets were public policy priorities. But in much of the fore-
set, over a comparative time scale, the percentage going, the letters IRS could be substituted for
of taxpayers filing online in the states was almost HMRC and the observations would hold true.
double the rate in the U.K. In fact, in the U.K., in
2005 when it was envisaged that the majority of
taxpayers would be filing online, only 17 percent
were actually doing so. (Of 10 million self-assess-
ment filers in the U.K., 2.9 million file online.)

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CONSIDERING THE FUTURE OF ONLINE TAX FILING IN THE UNITED STATES AND THE UNITED KINGDOM

Conclusion: A precarious perch
The public policy purposes and practices related to conventional wisdom is to undo the reforms of 1955
electronic tax filing in the United States and the United that separated filing and enforcement out of a tra-
Kingdom face an uncertain future. The two systems ditional sense that “universal” is synonymous with
have notable differences but both are confronting a “government provided.” This adherence to tradition
point of no return where the old ways of doing things without regard to underlying principle has also turned
simply will not do. an industry alliance on its head. The original philan-
thropic purpose of extending free electronic tax filing
The scope and magnitude of this inflection point is to underserved populations has been deemed inad-
captured in, of all things, a musical. In the opening equate by those who call for free filing for all. This
song, the central character Tevye explains how life is as is a newly exerted right that taxpayers should be able
precarious as the perch of a Fiddler on the Roof. The fa- to file and pay electronically directly, without having
ther, milkman and village philosopher draws heavily on the transaction mediated by a private company. A
“tradition” but later concedes that the purpose underly- new model of collaboration in which public, private
ing the customs have been forgotten or forsaken. Only and civic sectors playing to their respective strengths
in the second act does he see the change in the order of in support of a common public purpose may be “the
things. “Love,” Tevye concludes, “it’s the new style.” new style,” but movements in Congress and some
large states risk missing out on its benefits because
Tradition also plays heavily in the institutional prac- they are blinded by the kind of tradition with which
tices around tax filing. In the United States, the new Tevye struggled.

Endnotes
i xi
The fourth estate is a traditional name for the press, referring to it as the “fourth branch” of Fred Pace, “It’s time to start thinking about income taxes,” The Register-Herald, December 30, 2006.
government; the term indicates the role and the importance of the free press in a democratic society. http://www.register-herald.com/archivesearch/local_story_364191448.html
xii
http://nie.brownsvilleherald.com/newspaperterms.htm IRS, May 2007.
ii xiii
The Good Friday Agreement was a political deal aimed to form a lasting settlement following the “Free File: More consumer-friendly, more protections,” Center for Personal Finance, January 2007.
1994 paramilitary ceasefires in Northern Ireland. It was signed on April 10, 1998. http://news.bbc. http://hffo.cuna.org/14953/article/1737/html
xiv
co.uk/2/hi/uk_news/northern_ireland/4079267.stm IRS. “E-File Returns Running at Record Pace” March, 2007. http://apps2.irs.gov/newsroom/
iii
John Cabot University is an American University in Rome. www.johncabot.edu. article/0,,id=169196,00.html
iv xv
The Future of Income Tax Administration in the UK (Preliminary Findings), UK All Party “According to Mr. Bert Dumars, the Director of the IRS Electronic Tax Administration, it costs 55
Parliamentary Taxation Group, London, June 2007: 1. to 75 cents to process an electronic return while it costs about two dollars to process a paper return.
v
Baroness Angela Billingham, Comments to the ALEC International Relations Policy Summit on In addition, the error rate for electronic returns is one percent while the error rate for paper returns
the Preliminary Report of the U.K. All Party Parliamentary Taxation Group, John Cabot University, is 20 percent.” See “Akaka Introduces Free Internet Filing Act: Bill requires IRS to provide universal
Rome, October 4, 2007. access to individual taxpayers filing tax returns directly through IRS Web site,” Floor Statement
vi
Ibid. by U.S. Senator Daniel K. Akaka. March 30, 2007. http://akaka.senate.gov/public/index.
vii
The Future, Op Cite. iv. cfm?FuseAction=speeches.home&month=3&year=2007&release_id=1624.
viii xvi
Economist Joseph Stiglitz used the familiar stop light metaphor of green, yellow and red to parse Ibid.
xvii
the role of government in the digital, networked age. That work was important in helping define Kay Bell, “Free filing in, refund loans out,” Bankrate.com, Jan. 16, 2007
xviii
how government should use the tools of the Internet. In summary form: a green light that public See, for example, an article that dates from the same year during which the Free File Alliance was
agencies should go in all good haste and do good work; a yellow light indicated that government formed. David Clay Johnston, “At IRS, a Systems Update Gone Awry,” New York Times, December
should proceed but do so with caution; and a red light meant stop, do not enter because, while the 11, 2003. http://query.nytimes.com/gst/fullpage.html?res=9C06E6DC173CF932A25751C1A965
task is important, it is already being done by parties outside of government. (See Joseph E. Stiglitz, 9C8B63&scp=5&sq=IRS+technology.
xix
Peter R. Orszag and Jonathon M. Orszag, The Role of Government in a Digital Age, A Report Billingham, Op Cite.
xx
Commissioned by the Computer and Communications Industry Association, October 2000.) Jack Speer, “IRS Commissioner Assailed on ‘Tax Gap,’” National Public Radio Morning Edition,
ix
More information on IRS Free File at www.irs.gov March 21, 2007.
x xxi
“Free File: More consumer-friendly, more protections,” Center for Personal Finance, January 2007. Billingham, Op Cite.
http://hffo.cuna.org/14953/article/1737/html

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Acknowledgements:
Paul W. Taylor, Ph.D., Chief Strategy Officer for the Center for Digital Government and the Center for Digital Education

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