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Geithner’s Tax Problems Shine a Bright Light on Tax Complexity

2 min readBy: Robert Carroll

The stated explanation for Treasury Secretary nominee Timothy Geithner’s taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. problems is the complexity of the tax code. Whether that will be a sufficient explanation is up to the U.S. Senate, but it does yet again point to the increasing complexity of the U.S. tax system.

It is worth pointing out that President-elect Obama put forward a fairly extensive tax program during his campaign that would expand or add a number of new tax provisions carefully targeted to low- and moderate-income Americans and the elderly. Each of these proposals would layer on yet more complexity to a tax code that is beginning to fall under its own weight. Despite Geithner’s problems with his own tax returns, hopefully he is up to the task of simplifying the tax code (as well as dealing with the financial crisis and the economic turmoil).

Just to put some skin on the bones of the tax system’s complexity, consider the following:

  • According to the U.S. Treasury Department, the compliance costs of the income tax system amounts to about $140 billion each year—$100 billion for individuals and another $40 billion for businesses.
    • This is roughly 10 percent of individual and corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. revenues.
    • The compliance burden also works out to about $1,000 per family every year.
  • On average, Americans spent more than half a work week—26 hours—on their taxes each year.
  • About 60 percent of taxpayers don’t even prepare returns themselves, but pay tax preparers to complete returns on their behalf. Another roughly 15 percent of taxpayers use tax preparation software. That is, only about a quarter of taxpayers do their own taxes.
  • According to the IRS, individual taxpayers (including sole proprietors) spent roughly 3.5 billion hours to comply with the tax system. This is equivalent to hiring almost two and one-half million “hidden” IRS employees and 20 times the agency’s current work force.
  • Businesses spent over 3 billion hours complying with the tax system at a total cost of roughly $40 billion annually.