- The growing complexity of the U.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. code has led to large compliance costs for households and businesses.
- Using data from the Office of Information and Regulatory Affairs and the Bureau of Labor Statistics, it is possible to estimate the total cost of tax compliance on the U.S. economy.
- Americans will spend more than 8.9 billion hours complying with IRS tax filing requirements in 2016.
- All in all, tax compliance will cost the U.S. economy $409 billion this year.
There are many reasons to reform the U.S. tax code. The United States has a high marginal corporate tax rate, a poorly defined tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , and an out-of-date international tax system. However, one often overlooked issue in tax reform is complexity. For decades, the tax code has become more and more detailed, with thousands of additional pages of statutes, regulations, and case law. This added complexity imposes a real cost on the U.S. economy. Tackling the cost of tax complexity to our nation’s economy should be a priority for lawmakers.
The Expanding Size of the Tax Code
Over the last century, the federal tax code has expanded dramatically in size and scope. In 1955, the Internal Revenue Code stood at 409,000 words. Since then, it has grown to a total of 2.4 million words: almost six times as long as it was in 1955 and almost twice as long as in 1985.
However, the tax statutes passed by Congress are only the tip of the iceberg when it comes to tax complexity. There are roughly 7.7 million words of tax regulations, promulgated by the IRS over the last century, which clarify how the U.S. tax statutes work in practice. On top of that, there are almost 60,000 pages of tax-related case law, which are indispensable for accountants and tax lawyers trying to figure out how much their clients actually owe.
It Takes America 8.9 Billion Hours to Comply with IRS Paperwork.
Tax complexity creates real costs for American households and businesses, starting with just the time it takes us to comply with the tax code.
According to the latest estimates from the Office of Information and Regulatory Affairs, Americans will spend more than 8.9 billion hours complying with IRS tax filing requirements in 2016. This is equal to nearly 4.3 million full-time workers doing nothing but tax return paperwork. The majority of the 8.9 billion hours will be spent complying with U.S. business (2.8 billion hours) and individual income (2.6 billion hours) tax returns (Table 1, below).
It wasn’t long ago that official estimates put the annual IRS paperwork burden at 6.1 billion hours. However, the IRS recently revised its estimate of the hours required to comply with business tax returns from 363 million to 2.8 billion, which increased the total time estimate by nearly 50 percent.
The Tax Complexity Will Cost the U.S. Economy $409 Billion This Year.
The time it takes to comply with the tax code imposes a real cost on the economy. Individuals and businesses need to devote resources to complying with the tax code instead of doing other productive activities. For example, a business owner who needs to file a complex tax return each year may hire an accountant or tax lawyer to do it. This tax professional may cost $70,000 a year or more. This is $70,000 that this business owner cannot devote to purchasing equipment or hiring workers. Economists refer to this as an opportunity cost, and it results in lost productivity.
Put in dollar terms, the 8.9 billion hours needed to comply with the tax code computes to $409 billion each year in lost productivity, or greater than the gross product of 36 states (Table 1).
|Form/Title of Top 50 Most-Costly Code Provisions||Total Annual Hours Burden||Total Annual Cost In Dollars|
|Source: Reginfo.gov and author calculations based on BLS December 2015 estimate of hourly compensation costs. (1) For large business forms and complex forms such as estates, we used an hourly compensation cost of $52.05 for professional and related workers. For all other forms, we used $37.28, the average compensation for all full-time private sector workers,http://www.bls.gov/news.release/ecec.t11.htm|
|U.S. Business Income Tax Returns (1)||2,832,500,000||$147,431,625,000|
|U.S. Individual Income Tax Returns||2,647,000,000||$98,680,160,000|
|Income Tax Returns for an S Corporation (1)||889,393,518||$46,292,932,612|
|Form 4562–Depreciation and Amortization (1)||448,368,447||$23,337,577,666|
|Employer’s Quarterly Federal Tax Return (1||388,256,964||$20,208,774,976|
|Income Tax Returns for Estates and Trusts (1)||375,796,476||$19,560,206,576|
|Form 940, FUTA Tax Return (1)||105,295,370||$5,480,624,009|
|Form 4797–Sales of Business Property (1)||100,633,248||$5,237,960,558|
|Schedule C: Profit and Loss from Business||71,701,693||$2,673,039,115|
|Form 1099-INT, Interest Income||63,059,438||$2,350,855,849|
|Proceeds from Broker and Barter Exchange Transactions (1)||49,396,988||$2,571,113,225|
|IRA Contribution Information||48,731,780||$1,816,720,758|
|Short Form Return of Exempt Organizations||43,656,636||$1,627,519,390|
|TD 8864 Taxation of Fringe Benefits (1)||37,922,688||$1,973,875,910|
|Distributions from Pensions, Annuities, IRAs||37,519,860||$1,398,740,381|
|Form 8941 – Credit for Small Employer Health Insurance Premiums||34,278,346||$1,277,896,739|
|Form 1099-DIV–Dividends and Distributions||34,115,874||$1,271,839,783|
|26 CFR 31.6001-1 Records in general; 26 CFR 31.6001-2 Additional Records under FICA||30,273,950||$1,128,612,856|
|Heavy Highway Vehicle Use Tax Return||27,120,040||$1,011,035,091|
|Foreign Tax Credit (Individual, Estate, or Trust)||25,066,693||$934,486,315|
|W-8 BEN, W-8BEN-E, W-8EIC, W-8EXP, W-8IMY, W-8 MOU Program||25,003,304||$932,123,173|
|Return of Organization Exempt From Income Tax Under Section 501(c), 527, or 4947(a)(1)||24,951,529||$930,193,001|
|1099-G Certain Government Payments||24,709,380||$921,165,686|
|Form 8948, Preparer Explanation for Not Filing Electronically||18,270,900||$681,139,152|
|Paid Preparer’s Earned Income Credit Checklist (Form 8867)||17,824,793||$664,508,283|
|Reg-111583-07(TD 9405)(Final) — Employment Tax Adjustments; REG-130074-11 – Rules Relating to Additional Medicare Tax||16,900,000||$630,032,000|
|Employer’s Annual Employment Tax Return||15,702,300||$585,381,744|
|Split-Interest Trust Information Return||15,152,550||$564,887,064|
|Form 2678 – Employer/Payer Appointment of Agent||13,731,200||$511,899,136|
|REG-113572-99 (Final) Qualified Transportation Fringe Benefits||12,968,728||$483,474,180|
|Employer’s Annual Tax Return for Agricultural Employees||10,880,812||$405,636,671|
|Form 3800, General Business Credit||8,345,000||$311,101,600|
|Mortgage Interest Statement||8,038,699||$299,682,699|
|Profit or Loss From Farming||7,845,596||$292,483,819|
|Form 8282, Donee Information Return; Form 8283, Noncash Charitable Contributions||7,806,097||$291,011,296|
|Domestic Production Activities Deduction||7,398,000||$275,797,440|
|Form 5300, Application for Determination for Employee Benefit Plan||7,201,200||$268,460,736|
|Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan||7,005,000||$261,146,400|
|Form 8825–Rental Real Estate Income and Expenses of a Partnership or an S Corporation||6,288,600||$234,439,008|
|Publication 1345, Handbook for Authorized IRS e-file Providers||6,023,762||$224,565,847|
|Exempt Organization Business Income Tax Return||5,262,319||$196,179,252|
|Application for Determination for Adopters of Master or Prototype or Volume Submitter Plans||5,139,000||$191,581,920|
|Tuition Payments Statement||4,848,090||$180,736,795|
|Quarterly Federal Excise Tax Return||4,478,956||$166,975,480|
|Form 8957 – Foreign Account Tax Compliance Act (FATCA)||4,446,476||$165,764,625|
|Form W-2G–Certain Gambling Winnings||4,304,877||$160,485,815|
|Information Return of U.S. Persons With Respect To Certain Foreign Corporations||4,280,244||$159,567,496|
|All remaining IRS regulations (1)||285,801,030||$10,654,662,398|
The cost of complying with U.S. business income taxes accounts for 36 percent of the total cost of the entire tax code, at $147 billion. Complying with the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. costs another $99 billion annually.
Many businesses choose to become S corporationAn S corporation is a business entity which elects to pass business income and losses through to its shareholders. The shareholders are then responsible for paying individual income taxes on this income. Unlike subchapter C corporations, an S corporation (S corp) is not subject to the corporate income tax (CIT). s in order to avoid the second layer of tax that is applied to traditional C corporations. This, too, apparently comes with a high compliance cost. The compliance costs for America’s 4 million S corporations now total more than $46 billion annually, nearly $12,000 per firm.
The estate and gift taxA gift tax is a tax on the transfer of property by a living individual, without payment or a valuable exchange in return. The donor, not the recipient of the gift, is typically liable for the tax. , which will only collect approximately $20 billion in federal revenues this year, has a compliance cost of $19.6 billion.
Time is precious, and Americans should not be forced to waste it complying with IRS tax forms. On other occasions, the Tax Foundation has used macroeconomic modeling to show that a well-designed tax reform plan can improve economic growth, boost wages, and encourage new investment throughout the economy. However, the Tax Foundation’s model results generally do not factor in how much time Americans will save complying with a simpler tax code.
The latest official estimates of the eye-popping amount of time and money that Americans lose each year in complying with IRS paperwork—8.9 billion hours and $409 billion in lost productivity—indicate that the most important benefit of tax simplification may be the gift of time.
In order to calculate the compliance cost of the total tax form, we used data from the Office of Information and Regulatory Affairs (accessed at Reginfo.gov) and the Bureau of Labor Statistics.
Reginfo.gov provides the aggregate amount of time taxpayers need to comply with each tax form.
These hourly aggregates were then translated into compliance costs by multiplying them by one of two different hourly compensation numbers. For individual income tax provisions, we used the average full-time private sector worker compensation of $37.28 per hour. These forms include the individual income tax return, schedule C, Form 1099, IRA contribution information, and all other non-business provisions.
For a select number of business-related returns and more complex provisions—such as returns for estates and trusts, or depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. schedules—we used an hourly compensation cost of $52.05, BLS’ estimate for professional and related workers, which better approximates the cost of hiring accountants and tax lawyers for business and trust purposes.
 The raw data behind these estimates can be found at Office of Information and Regulatory Affairs, “Information Collection Review,” http://www.reginfo.gov/public/do/PRAMain.
 National Taxpayer Advocate, 2012 Annual Report to Congress, December 31, 2012, http://taxpayeradvocate.irs.gov/2012-annual-report/downloads/2012-Annual-Report-to-Congress-Executive-Summary.pdf
 Dan Goldbeck, “The IRS’s New Year’s Resolution,” Insight, American Action Forum, January 4, 2016. http://www.americanactionforum.org/insight/the-irss-new-years-resolution/
 Author’s calculations: See the appendix for details.
 Bureau of Labor Statistics, “Table 11. Private industry, by occupational group and full-time and part-time status,” December 2015, http://www.bls.gov/news.release/archives/ecec_03102016.htm.