The real cost of 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. ation goes beyond the amount that is written on the check to the IRS. Another important cost of taxation is compliance. Compliance is the real cost associated with just calculating and making the payment. These costs can be substantial, especially for businesses.
One way of measuring the compliance costs associated with taxation for businesses is to measure the number of hours it takes a business to calculate and pay its taxes. Taking the time to just figure out what you owe, calculate it, then send it in, requires a business to give up a more productive activity: one hour of tax preparation is one fewer of research and development.
In total, a U.S. business needs to devote 175 hours a year to comply with corporate, labor, and sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es every year. This is about the middle of the pack for the OECD. To put this in perspective, this would take one person more than 4 full-time weeks to comply with these taxes. Now imagine the total cost to the economy when you consider there are more than 20 million active businesses in the United States.
PWC in their Doing Business annual report estimates the time it takes a “case study” business to comply with three taxes: 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. es, labor taxes, and consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. es. These compliance times are calculated by constructing a hypothetical firm. They then make assumptions about what sorts of transactions the business will perform and the amount and type of business it will do during the year.
The table below displays the compliance time results from the 2014 Doing Business report for corporate income taxes, labor taxes, and consumption taxes for OECD countries.
The United States’ worst rank is on its corporate income tax. It takes the case study business 87 hours per year to comply with just the corporate income tax. This is the 6th longest time in the OECD and 35 hours longer than the average OECD country.
The United States is in the middle of the pack in compliance time with labor taxes. It takes the hypothetical business an average of 55 hours a year to comply with the taxes it has to pay to the government on behalf of its workers (for example: employer-side social security tax). This is 20 hours faster than the average OECD country.
The United States ranks best in regard to compliance time with consumption taxes. It takes the business an average of 33 hours a year to comply, which is about 23 hours faster than the OECD average (56.5 hours).
Of course, the “typical” business is not all businesses. Certainly there are businesses—especially large multinational corporations—that have to devote many more hours to comply with taxes.
|
Time it Takes a Case Study Business to Comply with Taxes in the OECD, 2014 (Hours Per Year) |
||||||||
|
OECD Country |
Corporate Tax Compliance |
Labor Taxes Compliance |
Consumption Taxes Compliance |
Total Compliance |
||||
|
Rank |
Time |
Rank |
Time |
Rank |
Time |
Rank |
Time |
|
|
Australia |
20 |
37 |
32 |
18 |
16 |
50 |
28 |
105 |
|
Austria |
13 |
47 |
22 |
52 |
12 |
67 |
18 |
166 |
|
Belgium |
30 |
20 |
26 |
40 |
6 |
100 |
19 |
160 |
|
Canada |
14 |
45 |
30 |
36 |
15 |
50 |
23 |
131 |
|
Chile |
15 |
42 |
6 |
125 |
1 |
124 |
4 |
291 |
|
Czech Republic |
4 |
94 |
1 |
217 |
3 |
102 |
1 |
413 |
|
Denmark |
26 |
25 |
14 |
65 |
20 |
40 |
24 |
130 |
|
Estonia |
31 |
20 |
31 |
34 |
28 |
27 |
31 |
81 |
|
Finland |
29 |
21 |
24 |
48 |
32 |
24 |
29 |
93 |
|
France |
25 |
26 |
13 |
80 |
29 |
26 |
22 |
132 |
|
Germany |
17 |
41 |
5 |
134 |
19 |
43 |
12 |
218 |
|
Greece |
8 |
78 |
25 |
46 |
11 |
69 |
14 |
193 |
|
Hungary |
22 |
35 |
3 |
146 |
8 |
96 |
6 |
277 |
|
Iceland |
18 |
40 |
19 |
60 |
21 |
40 |
21 |
140 |
|
Ireland |
34 |
10 |
28 |
40 |
27 |
30 |
32 |
80 |
|
Israel |
3 |
110 |
18 |
60 |
13 |
65 |
10 |
235 |
|
Italy |
19 |
39 |
2 |
198 |
26 |
32 |
8 |
269 |
|
Japan |
2 |
155 |
4 |
140 |
23 |
35 |
3 |
330 |
|
Korea |
7 |
82 |
11 |
80 |
30 |
25 |
15 |
187 |
|
Luxembourg |
32 |
19 |
34 |
14 |
33 |
22 |
34 |
55 |
|
Mexico |
1 |
170 |
15 |
64 |
5 |
100 |
2 |
334 |
|
Netherlands |
27 |
25 |
16 |
64 |
24 |
34 |
25 |
123 |
|
New Zealand |
23 |
34 |
20 |
59 |
14 |
59 |
20 |
152 |
|
Norway |
28 |
24 |
33 |
15 |
18 |
44 |
30 |
83 |
|
Poland |
10 |
62 |
7 |
124 |
4 |
100 |
5 |
286 |
|
Portugal |
9 |
63 |
8 |
116 |
9 |
96 |
7 |
275 |
|
Slovak Republic |
16 |
42 |
17 |
62 |
2 |
103 |
13 |
207 |
|
Slovenia |
5 |
90 |
9 |
96 |
10 |
74 |
9 |
260 |
|
Spain |
24 |
33 |
10 |
90 |
17 |
44 |
17 |
167 |
|
Sweden |
11 |
50 |
29 |
36 |
22 |
36 |
26 |
122 |
|
Switzerland |
33 |
15 |
27 |
40 |
34 |
8 |
33 |
63 |
|
Turkey |
12 |
49 |
12 |
80 |
7 |
97 |
11 |
226 |
|
United Kingdom |
21 |
37 |
23 |
48 |
31 |
25 |
27 |
110 |
|
United States |
6 |
87 |
21 |
55 |
25 |
33 |
16 |
175 |
|
Average |
52.0 |
75.9 |
56.5 |
184.4 |
For information on how PWC calculates these numbers
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