Special Report No. 39
Executive Summary For roughly the past half century Americans have witnessed frequent and dramatic changes in the federal government’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. system. Most of this change has taken place in the federal income tax. A permanent federal income tax was introduced after ratification of the 16th Amendment to the U.S. Constitution on February 3, 1913, and the tax played an important role in financing America’s involvement in two world wars. Yet the substantial role the income tax plays today in the overall federal tax system can be traced to legislative efforts 40 years ago, when Congress undertook to make the income tax a cohesive and logical scheme through the Income Revenue Code of 1954.
Ever since the 1954 legislation, the federal income tax code has steadily grown in size and complexity. This growth has increased the cost of the federal tax system in two fundamental ways. First, taxpayers have had to earmark an ever-larger amount of tax dollars to the financing of the federal government tax “industry” (legislative, administrative, and judicial) that amends, administers, and adjudicates the federal tax system. Second, the growth of the federal tax system, particularly the growth in the income tax code, has forced the private economy to dedicate a substantial (and increasing) amount of resources to tax planning and the economically sterile exercise of tax compliance and litigation.
Based on previously published Tax Foundation calculations, the total cost of complying with federal taxes for U.S. business will amount to an estimated $127 billion in 1994. The cost of this activity for individuals may be as high as $65 billion, bringing the total 1994 private sector cost of federal tax compliance to $192 billion.Share