TurboTax Fights the Fed (2013 May)

by Barry A. Liebling

Free markets have rules, and violating them is a serious offense. If you are in business you do your best to make your products attractive to your customers. You know that at any time a rival could enter the scene and persuade clients to leave you. The rival might come out with a superior product, or a product that is equally good with new appealing features, or one that is not better but much cheaper – even free. Your challenge is to adjust your business so it can flourish in the changing competitive environment. Your legitimate moves are vast. You can fine-tune your deliverables, communicate more effectively with your target customers, and offer very steep discounts.

You scrupulously adhere to the rules knowing that some moves are not legitimate. It is never permissible to use physical force to shut down another business. You cannot order someone to stop providing a product or insist that he raise his prices. Similarly, it is out of bounds to use a surrogate to do your dirty work for you. You cannot hire thugs to intimidate your competitors, and it is equally detestable to beg the government to forbid other businesses from operating.

When you see a private business lobbying the government to prevent a competitor from entering the market you should be alarmed. Seeking this type of favor is almost always wrong. But there are exceptions. Sometimes it is actually the right thing to do.

A recent investigative report by Liz Day jointly produced by ProPublica.org and NPR is a case in point.

Ms Day describes a proposed government service called “Return-Free Filing” that “would be a voluntary alternative to hiring a tax preparer or using commercial tax software… You’d open up a pre-filled return, see what the government thinks you owe, make any needed changes and be done.”

Return-Free Filing has been vigorously opposed by Intuit, the maker of TurboTax software. According to the report, Intuit has spent sizable amounts of money lobbying legislators to prevent the program from operating. So far its efforts have been successful.

Ms Day asserts that Return-Free Filing might make life easier for a large number of taxpayers – especially those with lower incomes and simple or few deductions. It would save them a lot of time, and they would not be charged for the preparation. She mentions that if implemented a taxpayer would not have to accept as final the IRS calculation. There would be procedures for disputing the government-prepared return.

The report suggests that Intuit’s lobbying efforts are tainted by a conflict of interest. Return-Free Filing threatens its business. If tax payers use the proposed government service they would be less likely to consider using TurboTax. Note that TurboTax currently offers a free version of its software for consumers with uncomplicated tax returns.

So is Intuit – the owner of TurboTax – unfairly trying to stop a rival? Is it breaking a rule of free market conduct? In this case Intuit is justified.

Consider the conflict of interest issue. Intuit makes money when consumers buy its software products or trade up from a free version of TurboTax. In both cases its interests are squarely aligned with those of its customers – pay the government the lowest legal amount. TurboTax’s success depends on maintaining a reputation for fulfilling its mission. There is a competitive market already in place to keep the TurboTax team on its toes. For example H&R Block, Liberty Tax, and TaxACT all have free as well as paid versions of tax preparation software. Consumers can shop around for the best deal and might change vendors each year.

What is in the interest of the government? The IRS has the explicit mission of maximizing revenue. It does not gain by showing tax payers how to minimize their liability. Taxpayers who ask the IRS to calculate their taxes would not be acting prudently in their own best interests. If Return-Free Filing were to come into existence tax payers who would use it (instead of depending on a private supplier) would probably be less sophisticated, more compliant, and easy marks for a voracious, grasping IRS.

But the fact that taxpayers would not get the best service from Return-Free Filing is not a sufficient justification to lobby against it. If it were, any leading company could plead to the government that its competitors’ products are inferior and should be curtailed. Notice that Intuit has not lobbied to shut down its private sector competitors.

The essential problem with Return-Free Filing is that it is a government entity. The proper role of government in tax preparation is to be the referee assuring that force and fraud is out of bounds. It is impossible to be an impartial judge and a player at the same time. In a free market the government has no justification for setting up a service that competes with private companies. How do you suppose the IRS would rule if there were a disagreement between Return-Free Filing and TurboTax (or H&R Block, or Liberty Tax, or TaxACT)?

Free markets have rules, and violating the rules is a serious offense. In the case of Return-Free Filing the government itself would be corrupting the system. Intuit should be congratulated if it nips this program in the bud.

*** See other entries at AlertMindPublishing.com in “Monthly Columns.” ***

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