Putting Numbers on Tax Complexity
April 18, 2011
Happy tax day! We hope you remembered to file your federal income taxes. If not, you have a few more hours.
Think it’s complicated? You’re right. The Taxpayer Advocate Service (TAS) estimates that U.S. taxpayers and businesses spend about 6.1 billion hours filing their taxes each year. Here are a few stats from the TAS 2010 Annual Report to Congress:
- If tax compliance were an industry, it would be one of the largest in the United States. To consume 6.1 billion hours, the “tax industry” requires the equivalent of more than three million full-time workers.
- Compliance costs are huge both in absolute terms and relative to the amount of tax revenue collected. Based on Bureau of Labor Statistics data on the hourly cost of an employee, TA S estimates that the costs of complying with the individual and corporate income tax requirements for 2008 amounted to $163 billion – or a staggering 11 percent of aggregate income tax receipts.
- According to a tally compiled by a leading publisher of tax information, there have been approximately 4,428 changes to the tax code over the past 10 years, an average of more than one a day, including an estimated 579 changes in 2010 alone.
- The tax code has grown so long that it has become challenging even to figure out how long it is. A search of the code conducted for this report turned up 3.8 million words. A 2001 study published by the Joint Committee on Taxation put the number of words in the Code at that time at 1,395,000. A 2005 report by a tax research organization put the number of words at 2.1 million, and notably, found that the number had almost tripled since 1975.
- The income tax regulations issued by the Treasury Department to provide guidance on the meaning of the Internal Revenue Code now stand about a foot tall. The CCH Standard Federal Tax Reporter, a leading publication for tax professionals that summarizes administrative guidance and judicial decisions issued under each section of the Code, now comprises 25 volumes and takes up nine feet of shelf space. Two companies publish newsletters daily that report on new developments in the field of taxation; the print editions often run 50-100 pages and the electronic databases contain substantially more detailed information.
What is the result of all this complexity? Sixty percent of filers pay someone else to prepare their forms for them, and another 29% buy software that will do the job. The IRS estimates that the monetary compliance burden of the median individual taxpayer was $258 in 2007. The TAS notes that complexity has other consequences:
The complexity of the Code leads to perverse results. On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them to either overpay their tax or become subject to IRS enforcement action for mistaken underpayments. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities.
What is the solution to tax complexity? The TAS, the Tax Foundation, and most other tax experts agree: fundamental tax reform. This means getting rid of special deductions, credits, and exemptions and lowering tax rates to keep revenue constant. While such a reform would not result in a net tax increase, different taxpayers would be affected differently. For some who know about and are able to take good advantage of the current tax benefits, the loss of those benefits may outweigh the benefit of reduced rates. However, others whose personal choices do not qualify them for special tax breaks (or who are unaware of the tax breaks for which they qualify, or cannot afford to pay for the right tax advice) would be much better off with a simpler system.
P.S. If tax day has left you feeling angry and frustrated about the tax code, don’t blame the IRS. Congress created the laws, and they’re the only ones who can fix them.