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The High Cost of Tax Compliance for U.S. Business

2 min readBy: Arthur P. Hall, Ph.D.

Download Special Report No. 25

Executive Summary

The 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. compliance costs—the “paperwork burdens”—of the U .S. business community consistently account for about two-thirds or more of the total compliance costs for all taxpayers. The Tax Reform Act of 1986, in part, sought to reduce this cost. The Act’s proponents billed it as, among other things, tax simplification.

The evidence shows, however, that the simplification effort failed to reduce compliance costs. An Arthur D. Little study—commissioned by the Internal Revenue Service and using IRS data—showed that simplification failed to reduce costs for small businesses; and for big business, a new Tax Foundation study conducted by Professors Joel Slemrod and Marsha Blumenthal reports that “there is near unanimity among senior corporate tax officers that the Tax Reform Act of 1986 added complexity to the tax system, resulting in a combination of higher compliance costs and less accurate information transmission [to the IRS].”

Despite efforts by the IRS to reduce the cost of tax compliance, the Tax Reform Act of 1986 and subsequent legislation has generally thwarted these efforts. For example, the tax provisions of the Omnibus Reconciliation Act of 1993 created six new tax forms and caused a revision of more than 50 existing forms.’ The IRS is making progress in reducing the cost of compliance. The hours of business paperwork remains relatively flat despite the upward trend in the number of business returns filed. The continuous flow of new tax legislation accounts for the lack of progress in reducing compliance costs.