Sunday, January 2, 2011

Private Sector v. Public Sector

CNN is reporting that the IRS won't be ready to accept tax returns from those claiming itemized deductions for several weeks:
The IRS said that it needs until mid- to late-February to reprogram its processing systems because Congress acted so late this year cleaning up the tax code. The bill, which includes deductions for state and local sales taxes, college tuition and teacher expenses, wasn't signed into law until Dec. 17.
Of course, the IRS isn't the only one who has to deal with last minute changes in the tax code.  Private tax preparation companies like H&R Block and Turbo Tax need to have their products up to date to reflect current law also.  Don't worry, though, these guys have you covered:
Meanwhile, Turbo Tax said its customers can e-file with the company as early as Jan. 6, and it will hold onto the filings until the IRS is ready to process them.
It's unfair to overgeneralize about the efficiency of the private and the public sector from a single incident, of course.  There are some incredibly effective government operations, like the Marine Corps, that haven't, probably couldn't, and perhaps shouldn't) be duplicated by the private sector on a similar scale.  It would be equally foolish, though, to dismiss out-of-hand the idea that some government functions could be improved by permitting private firms to handle some public business, even if they are just contracted to manage the internal operations of a public agency.

Take the IRS.  Employers report data on wages and withholding to the IRS, lenders report data on qualified interest payments, and so on.  All of those reports are indexed by Social Security Numbers.  Surely, a large, but fairly simple database could collect the various pieces of reported data for Social Security Number, cross-reference them, and automate most of the tax return preparation and processing.  Individuals could then submit additional data, on charitable contributions or contributions to tax-deferred accounts, electronically, updating their tax file as they went.

Private companies do this sort of thing all of the time.  Think of the electronic banking features available at even modestly sized financial institutions.  Account balances are recorded, debits processed, deposits credited, interest computed, transfers recorded, fees assessed,and so on and so on---and all of it visible to customers through online interfaces that essentially update in real time.  The IRS has to processes a finite set of similar financial transactions for each tax-payer only once a year, and it has nothing comparable to offer the public.  It seems reasonably obvious that part of the difference is that banks are private organizations operating in a very competitive marketplace in which customers and potential customers place a premium on accuracy in managing transactions and the availability of information.  Banks that didn't manage their customers' financial transactions reliably or couldn't provide customers with information about their account activity would quickly find themselves out of business.  The IRS has no similar competitive incentives and can, therefore, afford, so to speak, to offer an inefficient and opaque service to the public.

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