Duopoly Rules: Why Americans Can’t File Their Taxes for Free
We live in a second Gilded Age. The industries involved may have changed–tech titans are the figures which dominate our cultural and economic landscape, rather than the oil oligarchs and railroad robber barons of old–but the outcome remains the same: concentrated market share gives rise to abuses of real-world power.
Don’t believe us? Consider the case of TurboTax and H&RBlock.
For tax year 2022, roughly 94% of taxpayers chose to file electronically; simultaneously, over 90% of all returns were filed through either TurboTax or H&RBlock. Combined, these statistics leave no room for doubt: when it comes to our taxes, we’re living in a duopoly. As we’ll unpack over the course of this blog, the average filer is worse off for it.
The IRS has attempted to make tax filing more accessible for those with low to moderate incomes while acquiescing to this status quo, implementing the Free File Program in 2003 in conjunction with the major corporate players in the tax filing space. This scheme was intended to be a compromise; filing companies could attract more business by advertising the potential for free tax return services, and taxpayers which meet certain conditions wouldn’t have to pay. Unfortunately, these same companies have manipulated the system to the point where less than 3% of eligible filers have ever used it, rendering the program functionally useless.
It would be one thing if this was simply an instance of tax filers not availing themselves of available resources. In that case, we could lay the blame at policymakers’ feet for designing a poor program, or on the IRS for not bankrolling sufficient PR to get the message out. However, the real culprit behind this drastic underutilization of a well-intentioned program is not the government but filing companies themselves acting as self-interested gatekeepers. Out of a desire to maintain their (extremely) profitable market share, these entities have taken a page out of the Silicon Valley playbook with echoes of predatory lending and Big Tobacco, engaging in sophisticated PR campaigns, making bad-faith appeals to consumer empowerment, and burying relevant information.
TurboTax and H&RBlock’s current dominance is all the more shocking in light of the fact that, prior to 2008, a minority of Americans filed their taxes electronically. Reaching their current market share in just 16 years took a level of foresight and business savvy which in different circumstances we might applaud. In this context, however, the ends do not justify the means. From the beginning, these companies have embraced the techno-utilitarianism spouted by social media firms and other figures of the tech world, depicting their business model as “liberating” citizens and business owners alike from the tyranny of tedious government paperwork. The goal was to appear “not only good at what they do, but good for the world at large.” This conflation of technical skill and moral goodness–a cornerstone of the Silicon Valley ethos–obfuscated a cutthroat strategy behind the scenes.
Out of public view, TurboTax and H&RBlock have aggressively hired former IRS officials and lobbied lawmakers, all with the intent of stifling tax innovations and reforms in DC. Even as other wealthy countries have moved toward free and simple tax filing processes, tools to accomplish the same here in the US have either never passed in Congress or been undermined after their creation, as with the Free File Program. The latter presents a very representative case study: after agreeing to the IRS’ conditions for the program, corporate actors essentially conducted reverse search engine optimization, adding code to the Free File pages they created to hide them from all major search engines. On top of that, these entities also created and promoted their own proprietary version that closely resembled Free File offerings but with multiple hidden fees, meaning that tax filers would start the filing process assuming they wouldn’t be charged, only to receive a bill at the end.
In a particularly cruel (some might say dystopian) twist, these companies have also developed extensive advertising campaigns, particularly in lower-income Latino and African American communities, framing the development of new, free IRS filing tools as “taking away” the right of consumers to choose how they want their taxes prepared. On its own, this argument is disingenuous, but it reaches epic levels of irony when one remembers that, in reality, prior to the advent of these efiling firms, consumers had more choices for tax preparation in the form of CPAs. While the current impending shortage of accountants goes beyond the influence of TurboTax and H&RBlock, these firms have still contributed to the decimation of the profession overall.
All of this is to say: these companies do not have our collective best interest at heart. But an alternative is looming on the horizon.
For the 2023 tax year, the IRS has rolled out a pilot program known as Direct File in which taxpayers can (you guessed it) file their own returns directly with the IRS, rather than going through a third party. There are valid criticisms of the pilot program; only 12 states are included in this initial launch, and while the states chosen cover roughly half of the US population, the IRS estimates that only a third of residents will be able to use the program in its current iteration. Only very standard returns can be processed through Direct File–W2s for hourly and salaried workers, with no ability to itemize deductions or claim other sources of income, and offering just the three most-used tax credits.
Even so, there is a case to be made for the way the IRS is handling things, and for the IRS’ involvement in the first place. After the debacle that was healthcare.gov and the ongoing saga of the new FAFSA rollout, IRS officials are keen to avoid any crashes or errors that would delegitimize their efforts. As with many successful software efforts, their development team has embraced an Agile methodology which has yet to permeate other aspects of government work, allowing them to test their product and build onto it over time, rather than unleashing a fully-formed yet error-ridden site upon the public.
For those who question why the IRS is building its own site rather than contracting out to the private sector as other agencies do, it’s worth asking: what is the software optimized for? Clearly, private alternatives exist, and some states already use this straight-off-the-shelf approach. But these private alternatives are engineered with the developing companies’ bottom lines in mind, catering to certain demographics in the never-ending quest for profit, whereas the IRS is aiming to develop a product that will eventually be available to all taxpayers, a much larger and more complicated user base. Even setting aside the concerns of giving companies our sensitive financial and personal information, we’ve already tried private sector solutions at the federal level, the Free File Program, and clearly that hasn’t gone well.
In our post-Reagan, post-Tea Party era, the public may be wary of government “meddling” in private affairs, but we think this particular venture is worthy of popular support, or at least public patience. During the first Gilded Age, it took an active federal government passing seismic legislative packages to overthrow the original monopolists and improve the lives of average citizens. Breaking the TurboTax/H&RBlock duopoly may not be quite as dramatic, and it’ll take time to see the benefits, but the Direct File program is a start.
