The Greatest Tax System in the World

Why can’t America be as great as the Faroe Islands?

A tax form which is ripped to reveal the flag of the Faroe Islands.
Getty; The Atlantic

If one thing unites all Americans, it’s the conviction that paying taxes is a pain. Even those like myself who don’t mind contributing their fair share to keep seniors off the street hate having to fill out all of the paperwork, especially if our taxes are complicated. The Tax Foundation estimates that filling out tax forms eats up 6.5 billion hours of work a year, for an economic cost of something like $313 billion. There’s a better way—but for depressing reasons, the United States probably won’t take it.

I recently traveled to the Faroe Islands, a small, semi-autonomous part of Denmark out in the North Atlantic, for a joint reporting project for The American Prospect and the People’s Policy Project. The idea was to investigate the country’s tax authority, which is called TAKS. I’d heard it is the cleanest and most efficient in the world.

Even with those expectations, what I found impressed me. The Faroes haven’t just set up a centralized system that automatically collects tax revenue and disburses welfare payments; they also continuously monitor all of your labor income and adjust your withholding as necessary if you lose a job or get a new one. Ordinary businesses and employees never have to even think about TAKS—no tax return is required.

What’s more, the system almost automatically produces the best possible economic statistics—virtually an identical and contemporaneous picture of the whole economy, down to the last krone—instead of relying on the kinds of laborious and inaccurate surveys used in the U.S. That automation, in turn, has allowed TAKS to cut its budget and staffing while increasing audits on large, rich companies. As an American, I was pretty humiliated to see our clock getting not just cleaned but polished to a mirror finish by a tiny archipelago of just 54,000 people.

It was also humiliating to acknowledge that the U.S. is unlikely to learn anything from the Faroes, let alone copy-paste their TAKS system. Any such effort would have to overcome barriers of corruption and ideological bias.

Before I get to that, let me swat down a common reaction that pops up whenever people compare America with the Nordic countries. Those countries are small and supposedly homogeneous, the argument goes, so we can’t really compare them with a huge country like the U.S. That size point, however, actually runs in the opposite direction: It is easier, not harder, for a big, wealthy country to set up a streamlined bureaucracy, because of efficiencies of scale. A bigger tax database requires less money per person than a smaller one, and America has the world’s greatest supply of computer scientists. There’s no technical reason we can’t borrow the Faroese tax system.

On the diversity point, racial bias can indeed impede the kind of class solidarity and labor movements that backstop Nordic institutions. But that just means we must battle racism, not that we have to give up on economic equality and efficient government. Besides, racial animus is not even close to the biggest barrier to tax reform. Franklin Roosevelt’s Democrats raised the top marginal tax rate to 94 percent in a country that was dramatically more racist than it is today.

Vested interests and ideology are the real obstacles to fixing the IRS. Numerous attempts to streamline the American tax system have run into a wall of money from the tax-prep industry. As Justin Elliott and Paul Kiel reported for ProPublica in 2019, for more than two decades, these companies, led by Intuit and H&R Block, have aggressively mobilized to stave off attempts to create a government system for free tax filing online. They swatted down an attempt from the George W. Bush administration to move in this direction and also blocked the Obama administration from pushing the idea.

In California, a Stanford professor named Joseph Bankman (amusingly, the father of the disgraced crypto kingpin Sam Bankman-Fried) set up a “ReadyReturn” system that would have automated most state filing; according to him, he spent $30,000 out of his own pocket lobbying to make it permanent. Intuit spent far more lobbying state legislators and blocked the system by one vote.

The end result of these lobbying battles was a supposed compromise where private firms would offer free tax filing for anyone making less than $73,000 and the IRS would, in return, not set up its own system. But by employing a lot of deceptive language and advertising trickery, the companies ensured that almost nobody took advantage of the free service.

Intuit added code to their website to hide their free product from Google searches, instead pushing consumers toward a “Free Edition” product that had lots of traps requiring payment. This worked like a charm—less than 3 percent of tax returns were submitted through the free-file service as of 2019. (That year, the IRS disallowed the search blocking and some other tricks; it also rescinded its promise to never build a competing free-file system.)

Worse, one of the most profitable demographics for Intuit and its ilk is Earned Income Tax Credit recipients who may lack the education or time to file their own taxes. Tax-prep fees eat up roughly 13 to 22 percent of the benefit dollars intended to help the working poor.

In a staggering example of economic parasitism, these companies trick people into paying for a service that a civilized government should provide for free, and then take that money and block any proposals to set up a free service.

That brings me to ideology. Almost as remarkable as TAKS itself is the fact that the Faroese tax code has no income-tax deductions of any kind. This greatly enables the automation of the system, because all of the calculations are much simpler.

This is frankly impossible to imagine in the U.S., even if we were to replace the numerous tax-code handouts (165 of them at the Treasury Department’s last count, although that also includes business benefits) with direct payments. It would require a bone-deep acceptance of taxation that is directly at odds with centuries of American history. We are raised on “the idea that wealth is privately produced and then appropriated by a quasi-illegitimate state, through taxation,” as the economist Yanis Varoufakis writes. Tax deductions encourage the recipients of government largesse to believe that they are rugged individualists clawing more of their own money back.

By the same token, hatred of taxation is a central pillar of the American conservative movement. Intuit has a major ally in the anti-tax activist Grover Norquist, who has lobbied for years to make filing taxes as annoying and burdensome as possible in order to build support for cutting rates.

On a more positive note, both H&R Block and Intuit recently pulled out of the free-file program, breaking the compromise and freeing the IRS to act. And fortuitously, the IRS has received an infusion of $80 billion to upgrade and modernize its systems. Some kind of government-run free-filing system or partial tax automation may arise in the coming years. But realistically, Americans aren’t going to follow the example of the Faroes and make taxes something the majority of people never even have to think about.