Measuring Tax Compliance Costs in Canada
April 26, 2007
A 2006 Tax Foundation study estimated that Americans spent a staggering 6 billion hours in 2005 complying with the federal income tax code—filling out forms, gathering documentation, and hiring tax professionals—with an estimated compliance cost of over $265.1 billion. That’s the equivalent of imposing a 22-cent tax compliance surcharge for every dollar the income tax system collects.
A new study from the Fraser Institute shows that out neighbors to the north face a similarly high cost of tax compliance. From Compliance and Administrative Costs of Taxation in Canada:
In total, tax compliance costs range from $16.2 billion to $25.0 billion depending on the methodology employed. Administrative costs in Canada in 2005 were estimated at between $2.7 billion and $5.8 billion. Thus, total compliance and administrative costs in Canada for 2005 range between $18.9 billion and $30.8 billion. This represents between 3.5% and 5.8% of total federal, provincial and local revenues and between 1.4% and 2.3% of GDP in 2005. Put differently, each Canadian incurred compliance and administrative costs associated with the country’s tax system in 2005 of between $585 and $955.
The results throughout this paper show that individuals and businesses incur significant costs to comply with the tax system and that governments expend significant resources administering the tax system. It is, therefore, important that better research be undertaken regarding tax compliance and administrative costs.
Although improving the compliance and administrative costs was not a central goal of this study, a number of specific measures that could be taken to reduce such costs are available. The most obvious and perhaps important of these are any measures that reduce or eliminate tax policies that add complexity to the tax system such as special preferences, multiple tax rates, and the number of taxes collected, to name a few.
Clearly, tax compliance and complexity problems are not a uniquely American issue. High compliance costs—and the resulting confusion and productivity losses—are the inevitable result of any tax system that includes numerous rates, deductions, credits and exemptions.
Click here for more on tax compliance costs and complexity.