TurboTax Rent-Seeking

While not a monopoly, TurboTax still has the largest corner of the internet-based tax filing programs by far, with about 40 million users in 2019 alone. Recently, ProPublica has done a series of articles and a podcast examining how Inuit (the company selling TurboTax) used rent-seeking to create an opportunity to amass profit. In 2003, the IRS made a deal with 17 companies, allowing online tax filing services. Due to millions of dollars spent in rent-seeking lobbying, the IRS promised to not offer a competing software (which effectively acts as a license for these online tax filing companies). In exchange, the majority of Americans should be able to file their taxes for free. However, this poses a principal-agent problem, as the agent (Inuit) is not incentivized to make tax filing simpler for the principal (taxpayers), and they also do not face any sanctions if they shirk. This is an interesting case, as the agent works within the private system but also as a necessary actor appointed for government processes, and therefore similar to an autonomous bureaucrat. 

Rational ignorance increases as the tax system becomes more complex, and many Americans were unaware that 70% of people qualified for free tax filing. In 2005, when the program was just starting, 5.1 million people used the free version, with only 2.7 mil accessing it by 2019. This decrease in usership was intentional. Inuit created a program called “TurboTax Free Edition”, a misnomer which led most people to pay for services that the IRS deemed should be free. Their other program, TurboTax Free File (also called TurboTax Freedom Edition), is really free but was nearly impossible to find. At one point, Inuit had even manipulated the website’s source code such that it would not appear on Google searches. This is a problem many other countries cannot understand, as most have a government-based efficient tax system (e.g. Mexico, South Africa, Philippines). However, every time the agreement comes back into Congress, Inuit is able to use more of their profit to continue rent-seeking and ensure the government does not compete. 

Recently, a Taxpayer First Act passed in the House, which would have made it illegal for the IRS to pass its own tax filing system. However, due to articles written by ProPublica, the Senate was pressured to remove the permanent banning of IRS software from the bill. Now there is a state of limbo, as the IRS will still likely not make their own competing website. While increased information has reduced some slack, Inuit still has no binding incentive or sanction to sway them to act in the best interest of their principals.