Is Tax Complexity Inevitable?
May 16, 2005
In the Wealth of Nations Adam Smith famously noted that complexity makes taxes “more burdensome to the people than they are beneficial to the sovereign”. The cost of taxes isn’t just what we pay. It’s also the cost of complexity, or what economists call “compliance costs.”
Complexity burns off real wealth from society while providing no offsetting benefit—something economists call a “deadweight loss.” How large is that loss? As a recent Economist story reports (subscription required), the U.S. Treasury estimates the cost of compliance with the federal income tax alone is $125 billion per year—though the Tax Foundation’s own estimate is closer to $194 billion per year according to our comprehensive 2002 study.
Unfortunately, complexity may be here to stay. So long as we insist on using the tax code to achieve social goals beyond raising revenue for necessary government programs, it may be impossible to achieve true tax simplification. From The Economist:
As well as raising revenue, America’s tax code is charged with inspiring charitable giving, promoting homeownership, defending marriage and delivering pork to the favoured constituencies of ambitious congressmen. If America’s tax system asks a lot of its citizens, it may be because they ask a lot of it.
For more on tax compliance costs, check out our “Tax Complexity & Compliance Costs” section.