Many happy returns: reflections on the 2006 tax year

So just as I was about to leave to give a lecture on taxes (and why high tax Nordic countries are not in economic ruins), my tax return for 2006 arrived in the mail. This is truly good news because I got a big refund. In all, I paid about 20% of my income in taxes last year, which seems pretty good to me, given that I did not even come close to maxing out my RRSPs. My Director, Seth Klein, socked away more in RRSPs and got his rate down to 14.5%. And if I take my family income as the unit of analysis, my rate is closer to 15%. Yes, there are other taxes to be paid, but I certainly do not feel overtaxed, and my effective tax rate is nowhere near the half of my income the Fraser Institute says it is.

When filling out my taxes, it was interesting to note that income taxes actually went up in 2006 and will again in 2007. With the spotlight shining on the GST cut to 6%, not too many made a fuss over the fact that the 15% bottom bracket rate for 2005 (brought in during the 2005 pre-election mini-budget by then-Finance Minister McCallum) was increased in the Tories’ 2006 budget to 15.5% as of July 1, 2006. This made for a rate of 15.25% for 2006 and the full 15.5% for 2007. Sure, there are a bunch of those new tax credits but none of them seem to apply to me, except for this year’s small child credit (value of about $300). My family also got the $100 per month “universal child care” cheque, though my wife had to pay tax on it.

Another thing about filing my taxes this year was that, after all this time, e-filing is not all it is cracked up to be. If I pay a professional to do my taxes, or if I fork out $40 for a tax software package, I can avail myself of this, but not any other way. My finances are not complex; it takes me less than an hour to fill out the paper. So why can I not just file that electronically? After all, tax prep software is just a glorified spreadsheet. I think the reason is that Ottawa got it in its head that it would stimulate e-commerce by letting the private sector sell the software. I would much rather they contracted someone to develop something in the public domain that I and others could use for free, either as downloadable software, or as an online module. Heck, I have widgets on my Mac I got for free that have more code in them. Would this not pay for itself in year one due to substantially less work that needed to be done by hand for the 20 million of us that file returns?

And one more gripe: I’m in the “pay my taxes joyfully” camp, but I have to say I find it annoying that after submitting the paperwork at exactly the same time, my wife, who owed money, had the cheque cashed within 48 hours, while I had to wait for six weeks for my refund. This is part of a bigger issue because due to automatic payroll deductions, I essentially provide the government with an interest-free loan for an average of 11-12 months (14-15 months for excess taxes deducted in January to 5-6 months for December’s deduction). Because of some arcane rule, my payroll company deducts more than it should, and I get squeezed waiting for that sweet return to come back to me. If no tax was deducted at source, and I paid after filing, I would save the interest on my refund. Not tons of money, perhaps, but this “tax seignorage” is something when added over all of us. If I could file for free on-line this issue would also go away.

UPDATE (June 6, 2007): According to a short piece done for the Library of Parliament:

ONE-SIDED SAVINGS?

Like TELEFILE, the corresponding telephone filing service, NETFILE itself is free of charge.  Taxpayers who wish to use it, however, must purchase a Web application or a tax preparation software package marketed by the private sector and certified by the CRA.  So while NETFILE is free, the application or software needed to use it is not.(4)

Thus, the federal government reaps considerable savings in time and money from processing returns electronically, since the data do not have to be entered a second time.  The administrative resources that are freed up as a result could, as in other countries, be assigned to duties with higher value-added for taxpayers, such as fighting tax evasion or the black market economy.  There is no indication, however, that the switch to electronic processing will lead to universal free access to tax preparation software or Web applications.  Should taxpayers not also benefit from the savings the government is enjoying?

FREE ELECTRONIC RETURNS?

Sharing savings are not unheard of outside Canada’s federal government.  Australia, Belgium, Denmark, Spain, France, New Zealand, Norway, the Netherlands, Singapore and Sweden are among the most industrialized and most advanced countries with respect to on-line government services.  They all offer their citizens the option of preparing and submitting their tax return via the Internet free of charge.  Further examples could be cited.

Moreover, France’s tax agency offers taxpayers a tax discount of €20 if they file their return and pay their assessed taxes via the Internet.(5)

In the United States, agreements between software and applications developers and the government have been adjusted in order to attain the objective set by Congress of 80% of tax returns filed electronically by 2007.  In addition, since January 2005, the Internal Revenue Service has required the consortium of companies that develop Web applications or software for tax preparation to offer at least 60% of Americans access to a completely free service for preparing and transmitting their federal tax returns.

In Canada, the Quebec government(6) offers individual taxpayers without a spouse or dependants and whose income sources are limited to employment, retirement, investment or benefits the option of preparing and submitting their provincial tax return electronically at no charge.  The Government of Quebec’s downloadable Web application is designed for individuals whose tax situation is simple, as it does not offer tax planning or optimization or any suggestions to the user.

A BENEFIT IN PERPETUITY?

Among the tax agencies of advanced countries, Canada is part of a small group that still considers it to be in taxpayers’ interest to pay for a Web application or software developed by the private sector in order to file a tax return electronically.

When NETFILE was first introduced, the CRA worked closely with the tax preparation software developers.  According to the CRA, this collaboration has made it possible to develop high-quality tax preparation packages that are offered to the Canadian public at a price the CRA considers to be “reasonable.”(7)  The CRA believes that this public‑private partnership benefits both the public and the Canadian software industry.(8)  Moreover, given the competition in the industry, Canadians can choose among various software brands.  Finally, the many financial and accounting software packages allow clients to use tax preparation packages that are more sophisticated and complex than what the CRA maintains it can achieve.

This partnership has obviously allowed the CRA to reduce its start-up costs and to externalize the risk associated with developing and implementing the electronic filing option for individual taxpayers.  As a result of this partnership, however, taxpayers are now paying what could be termed a “benefit in perpetuity” to the private-sector tax preparation software designers.  In view of what other countries are doing, it is reasonable to question whether this situation is still truly in Canadians’ interest.

Or in the CRA’s interest, for that matter.  As long as taxpayers have to pay to prepare their tax returns and file them via NETFILE, many could be reluctant to do so, reducing the potential cost savings to the government.