April 15, 2014

Designing a Better Tax Experience in the USA

I've spent enough time living and working among impoverished and struggling communities, from Detroit to Addis, to know the wonderful benefits of public services and infrastructure. I've also seen the depths of corrupt systems, having spent nearly 3 years in Afghanistan, and so I also know what can happen with tax dollars are abused - and the damage can be severe. But from these experience, I fully believe that taxes are awesome. Thanks to taxes, I have enjoyed luxuries such as clean water, paved roads, and breathable air.  I've been able to acquire student loans to access otherwise unreachable opportunities. I have enjoyed the deep knowledge and entertainment of libraries, bike trails, and the internet.  Taxes are good.

Then why is it is so painful and frustrating to pay to taxes?  

For many years I've been engrossed in a never ending flow of  interrelated IRS documents to sort out taxes owed to my own government. I have also paid much in taxes to other governments, which was equally frustrating from the lack of information and structure. Then of course there is the act of watching your personal balance suddenly diminish while media outlets continually cover abuses of federal spending. When you pay your taxes in America, you feel like you have been beaten by a complex system.  You do not feel like a winner.

I propose that the rate of tax payment and frustrations with federal spending are not really the problem. The US already has a low tax requirement. Out of the richest 114 countries in the world, the USA is way down at number 55 in tax expense upon the population. So the frustration is not an indicator of too much paid in taxes, but it is merely a symptom of something else. 

The poor Service Design of US taxation.

Historically the US government has had very poor service design for many of its service systems, but in the last 5 years, great improvements have happened. Regardless of what you might think about Barack Obama, his administration has made massive strides in creating information systems and interfaces for the American public so as to improve the service design of governance with platforms such as the following:

These websites are impressive. They provide the means for anyone to acquire comprehensive information, engage the federal government in a personal manner, and even go so far as to directly petition the executive branch of government to address specific issues (We the People). None of these tools are perfect. The biggest flaw is that most American's don't realize these tools exist, and thus continue to rely on popular news media for information about their government rather than investigate information directly at the source.  

So things are looking good regarding user-integration in governance... until you look at the IRS website. Suddenly the interface between citizens and government breaks down to a grinding slow-motion act of torture at the very moment that this interface is of greatest importance. As US citizens we are left feeling abandoned and dismayed, handing our money to an impersonal force while under duress.

The USA has one of the most complex tax codes in the world.  In fact, deconstructing and comparing our tax system across 16 different categories to the 220+ countries in the world, the USA is number 94 on the Tax Attractiveness Index.  Who is number 93?  Zimbabwe.  

Unless you work a standard 9-5 job for a standard wage and have a limited income, it is difficult to calculate the amount of tax owed to the US government. Add an additional variable, such as living abroad or having multiple investments, and you will find it gets quickly complicated.  Since millions of Americans do not live in the USA and yet are faced with with this really difficult tax structure, it is no surprise that many have been giving up their US citizenship. But we do not need to necessarily simplify the tax code.  We need to change the way we engage with the tax code and our government.

Creating a New Experience

Lets think about the tax payment process differently.  How can we structure this for the sake of the user?  How can we simply the process and how can we make the relationship between the citizen and the government feel more personal?  How can the payment of tax feel like a meaningful contribution to society and not a point of frustration?  Lets redesign the process.

The IRS does not offer an online site to determine or pay taxes.  This is a serious flaw.  Instead, tax payers must find a 3rd party site (such as HRblock) to determine the rate of taxation.  These sites vary in their user friendliness and in their ability to provide the customer with the proper guidance.  These 3rd parties also frequently charge fees and if the user has special needs, such as a side business of freelance work, then the fee can jump into hundreds of dollars.  I happily used one such site for about 6 years, but once I moved abroad, I found it didn't offer the services I needed and it took a lot of research to find the right tool.  Even finding a qualified accountant to work with the needs of a non-resident citizen was super difficult.

So once you find a tool to determine tax, then the act of payment is painful.  The IRS does not have a simple online payment portal.  Rather debit or credit card payments are available via 3rd party online services who charge a fee for the processing (often about 3 dollars + 3% of the payment).  Lame.

If you choose to pay via check, then you write the check (typically for a hefty sum), put in in the mail, and never have any continued relationship with your earned money.  It is no longer yours, and you don't know what came of it.  Then you turn on CNN and some politician or reporter says that millions of dollars was wasted on some pointless initiative... I'm thinking of the classic "Bridge to Nowhere" in Alaska.  How can you feel good about this?

Imagine for a minute how all this could be different..
  • Imagine, if instead of a 3rd party website, you simply go to the IRS website.
  • Imagine scanning your thumbprint and being connected to your personal account.
  • You input your income, are guided through a series of questions and your rate of tax is determined.  Much of the information passes across years and you only need to apply updates. Unused credits from the following year are automatically transferred and advice is given freely on the website regarding deductions.
  • You click "continue" and your final tax rate is explained to you in simple English, such as how that amount was determined and you are shown some data visualizations of how much other people are paying in your state and nationally, across different kinds of jobs, and at different incomes or with similar households (3 kids and a private business).  See this page at Brookings for an example... I was interested this morning to see how different counties take advantage of deductions.
  • After it is explained to you, you approve the processing of your tax fee, or the reimbursement if one is owed.  Perhaps it could even make a suggestion on how to improve your deductions for the next fiscal year to lower your tax rate.
  • After the tax is paid, your deposit is assigned a tracking number.  I'm thinking of a large-scale version of "Wheres George" in which individual US dollars are mapped on their movements around America. I'm not certain of the intricacies, but imagine if you could say "oh yeah, last year I paid for a road, or the year before I paid for a school."  Perhaps you can login at any time and see updates to the spending of your contribution.

Connecting your tax to its use would entirely transform our political system, reduce poor spending decisions, and make people feel better about paying their taxes. It might even shift voting patterns.

When you imagine what taxes can do to change the quality of life, and when you think of your personal ability to make a dramatic impact on your community, paying taxes can be a pleasant and rewarding experience.  

I am happy to share 2/3 of my income with everyone because we all benefit by working together.  But I also know the pain and frustration that comes from the tax process. Yet if I've learned anything from my last 10 years of working in economic development, design, education, science, and governance, it is that all problems can be managed.  

We must accept that there is no ideal tax system.  Debating over flat tax vs. sliding scales vs. VAT vs. income tax and so on is not only redundant, but the arguments lose relevance when we shift our perception on tax delivery and the interface of citizen engagement. Consequently, we can  even drop all the self-importance and egocentrism that are connected to the suffering of taxation. We can move onward, and to do that, we don't necessarily need to change the structure of taxes, but rather, we need to change the way in which we undertake the experience of taxation.  It needs to be more personal, more simple, and more rewarding.  It needs to be re-approached as a service. Better yet, it needs to be revisited to become an opportunity.

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