New US bill spikes free tax software alternative
For years, US campaigners have called for a free, government-led software alternative for American taxpayers. Now, after aggressive lobbying by the software industry, a new bill will make this alternative illegal. Is this a worrying sign of things to come in the UK?
You might wonder why tech businesses like Uber get heavy investment and hype, despite haemorrhaging money.
There’s two reasons, really. One: there’s a lot more money floating around than there are good investments, so investors will just take a punt. You only need to be correct once. The other reason is that these companies are attempted monopolies.
Once the competitors are defeated, the company can simply do as it pleases. If Uber monopolises the taxi industry, for example, it could use algorithms to charge each rider a unique price tailored to be the absolute most that person can afford. No rate cutting, no competition, and in cities and towns with non-existent or crumbling public transport, this would be an incredibly lucrative racket.
There’s a step further than this, however: you could even enjoy a government-mandated monopoly.
Take a look at the US tax system. Over there, everyone files -- whether you work in a 7/11 or at Goldman Sachs. For most taxpayers, the filing is a simple procedure. The IRS already has taxpayers’ income information, it just needs confirmation and gives taxpayers a chance to take off any deductions and allowances.
The process is completed electronically and controlled entirely by for-profit companies. With one exception: taxpayers who make less than $66,000 can use Free File, a free tax software provided by a coalition of industry-leading tax software companies.
The Free File Alliance, as this coalition is called, offers a free tax-prep service to millions of Americans and, in return, the IRS pledged to “not compete with the consortium in providing free, online tax return preparation and filing services to taxpayers”.
And yet, the take-up of the free software is surprisingly anaemic. Just 3% of eligible U.S. taxpayers use the free program each year. If you can believe it, the Free File Alliance does very little to promote their software and the vendors use cross-marketing to upsell to paid products.
The user experience of the Free File alternative is another sticking point. In that it, by all accounts, sucks. In a congressional testimony in 2006, the American taxpayer advocate Nina Olson said navigating Free File “was a bit like living in the Wild, Wild West”.
To any common sense person, the answer would seem to be that the IRS should create a simple, free software for the American public. But the system has endured and now, after years of aggressive lobbying by the tax software companies, a new bill will make this alternative illegal.
ProPublica reported that congress is set to pass a bill that bars the IRS from ever developing its free tax prep alternative, casting the status quo in stone. Instead of a real alternative, especially for low earners, American taxpayers will have to live with Free File.
The software companies have long feared a legitimate government alternative. In an SEC filing, Blucora, which is a member of the Free File Alliance, explicitly labelled “governmental encroachment” as “a continued competitive threat”. This bill would eliminate that threat.
This provides an enormous captive market for the software companies. American taxpayers have Free File -- for the time being at least -- but the Free File Alliance’s good faith commitment to promoting the software and making it actually good is highly questionable.
As the journalist Tom Scocca lamented, “There is a decades-long ideological commitment to the notion that the nimble private sector can outcompete the government, but it is mostly expressed by taking away government functions and outsourcing them for profit, not by letting corporations actually try to compete”.
Back in the UK, we might recognise certain elements of this story. Making Tax Digital is remarkably similar to how filing is completed in the US. Taxes are prepared in an authorised commercial software, which interfaces with the tax authority’s system and files digitally.
Indeed, when MTD for income tax finally rolls around, the government has promised that software will be made available to those with the most straightforward affairs. Again, eerily similar to the US, this work won’t be undertaken by HMRC itself. Rather, the tax authority will work with the software industry to develop free software products.
It’s worrying, perhaps, that the government has maintained an unclear position on who can precisely can benefit from free filing software. And how this software would be put together. If the US is anything to go by, then taxpayers in the UK have every reason to be concerned.