Cost of Complying with Federal Income Tax Will Reach $140 Billion in 2001, According to Tax Foundation Testimony

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Washington, DC, July 17, 2001–The complexity of the U.S. income tax is imposing continually higher costs on taxpayers, so high that a substantial "tax cut" could be achieved just by simplifying the code, according to testimony on July 17 by J. Scott Moody, Senior Economist with the Tax Foundation, before the Oversight Subcommittee of the House Ways and Means Committee.

Moody projects that in 2001, the nation will spend 4.6 billion hours on just the paperwork requirements that taxpayers must meet. That is the equivalent of a work force of over 2,235,000 people, more than work in the auto industry, the computer manufacturing industry, the airline manufacturing industry, and the steel industry combined.

Moody also finds that if a simplification of the code could be achieved, the resulting "tax cut" would be progressive in nature because the burden of complying with the tax code falls more heavily on low- and middle-income taxpayers. For taxpayers whose adjusted gross income is less than $20,000, the cost of compliance averages over 4 percent of AGI.

Moody emphasizes that the $140 billion figure for 2001 represents an extremely cautious estimate of the compliance burden – and that many substantial costs that are certainly part of the overall "compliance burden" are nevertheless excluded from this estimate. For example, the productive value that people may have added to the economy if they had been working instead of filling out forms is excluded because estimating this "opportunity cost" is difficult and speculative. The costs of the IRS, the Tax Court and all the litigation that taxpayers pay for when in dispute with these institutions are also excluded.

It is important for the public to have an estimate of compliance costs because the performance of the economy is dramatically affected by the state of tax law. When lawmakers create an Internal Revenue Code that is terribly complex and changes rapidly, taxpayers may not be able to obtain a reasonably certain conclusion about how taxation will affect a business plan or investment. When the tax consequences of a particular economic activity are unpredictable, then tax policy is handicapping the growth and dynamism of the U.S. economy.

Moody's testimony was an expansion of a study he had published in November 2000 as part of the Tax Foundation Background Paper series, titled "The Cost of Complying with the U.S. Federal Income Tax." (See Publications List.)

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.

-- (lars@indy.net), April 05, 2002

Answers

Are we having fun yet? How many hours, how many dollars are you spending merely to prepare your taxes? How much nervous energy, how much of your personal health are you spending?

The magnitude of taxes is one issue. The complexity and cost of preparing tax filings is another. Even high tax advocates should favor tax simplification.

Who would oppose simplification of the tax code? Well let's see. In no special order, I would guess CPAs, tax lawyers, tax preparers (H and R Block, etc), tax software preparers (Intuit, etc), certain paper product and printing firms, The US Postal Dept, the IRS bureaucracy, demagog politicians and ideologs of all stripes.

Off the pig!

-- (lars@indy.net), April 05, 2002.

Are you kidding Lars, I LOVE tax time. But the anticipation of receiving that refund check is pretty tough, I'll give you that. (ducking to avoid flying objects)

-- (cin@cin.cin), April 06, 2002.

Thank god for Turbo Tax!!!!

Countin' toes on four paws... (ARRGH)

The Dog

-- The Dog (dogdesert@hotmail.com), April 06, 2002.

A shame Forbes is so homely. Not that I'd want him for president but if the guy hadn't been so geeky the American electorate might have not so throughly ignored the idea of a flat tax.

-- Carlos (riffraff@cybertime.net), April 06, 2002.

Gee Carlos, I found Forbes kinda appealing, in his geeky sorta way. At least he was honest, IMHO. I like the guy and his ideas. He seemed straight up to me. As for taxes, I guess I better get with it. My accountant is gonna kill me for being so late! Personally, I think the laws in general in this country are so convoluted as to be incomprehensible both to the common citizen, as well as the .gov employees as to be unworkable. Our founding fathers surely shake their heads at the mess we have made of things.

-- Aunt Bee (Aunt__Bee@hotmail.com), April 06, 2002.

I liked Steve Forbes too, but alas knew in my heart he was too homely to be El Presidente.

Flat tax schmat tax, just a new way to disguise the wolf...but Forbes had more than one idea that I found appealing, too bad that we live in the media driven 'looks are king' culture that we do. Lincoln? Abe who?

Oh, yeah, Abe Lincoln...he was that ugly guy who ran for president...what a goony looking fellow!

-- Uncle Deedah (unkeeD@yahoo.com), April 06, 2002.

My initial question was a strawman. There will never be tax simplification because any simpler plan (flat tax, VAT, whatever) would necessarily change who gets taxed and the various affected parties would scream like stuck pigs.

What will most likely happen is that the tax code will grow ever more complex as the pols continue to tinker (all in the name of "fairness"). The Code will become so dense that no one will understand it and only the rich can afford to prepare it. Tax cheating will be rampant. Extended tax evasion trials will sap the economy's vitality. Everyone will blame everyone else.

A glamorous "Young Turk" will ride his white horse onto center stage to save the day. He will propose that the IRS itself prepare everyone's taxes by using their own highly sophisticated tax software that has been calibrated to precisely, quickly and efficiently interpret the constantly expanding and morphing tax code. All that will be needed is that the IRS is continually updated on every single financial transaction in each person's life. This will soon be possible by the application of smart-card technology and personal ID technology. We will not have to spend an ounce of sweat or money to prepare our taxes. The IRS will electronically compute our taxes and continuously deduct them by EFT from our various financial accounts.

-- (lars@indy.net), April 07, 2002.

The scenario you propose would only work in a cashless economy. Watch for DC to phase out cash on an anti-crime rationale.

-- (Roland@hatemail.com), April 07, 2002.

Gotcha!, the AMT

-- (Grover Norquist@tax.reform), April 08, 2002.