Tax Compliance Cost America $409 Billion in 2016 (2.2 Percent of GDP)
According to a report from the Tax Foundation, Americans spent $409 billion (2.2 percent of GDP) on tax compliance in 2016. This works out to 8.9 billion man-hours wasted preparing tax returns, which is the equivalent of roughly 4 million full time jobs.
The Tax Foundation’s figure includes time spent by individuals preparing and filing their taxes, and money spent by individuals and corporations on tax services provided by accountants and lawyers. Essentially, it is wasted money.
The billion dollar question: why does America waste so much money doing taxes? Because of complexity. The US Tax Code is so inordinately convoluted, and mired in ancillary regulations, that most people have no hope of understanding how it all fits together. In fact, some 90 percent of Americans think the tax code is too difficult for an ordinary person to understand.
They’re probably right. In an article on tax complexity, our Editor-in-Chief Spencer P Morrison writes:
The US Tax Code has nearly tripled in length from President Ronald Reagan’s substantive reforms in 1986 (which themselves were inadequate), and as of 2016 the Code is 2,650 pages long. To make matters worse there are a further 70,000 pages of tax forms, instructions, and regulations that taxpayers must also comply with. And on top of all that, there are innumerable court decisions that govern the way tax legislation and regulations are interpreted—ordinary people cannot easily access or understand them.
In all honesty, it is doubtful that any American alive today has read every piece of relevant tax law—including the very best New York tax attorneys. And even if someone has, there is no way that they can remember how everything fits together. The Code is just too long and too complex.
Given the state of the America’s Tax Code, it’s not surprising that Americans waste billions on compliance every year.
Perhaps the biggest problem with complex tax legislation is not the wasted money, but the market distortions and opportunities for corruption it creates. Mr Morrison writes:
The high costs associated with filing taxes also hurts America by favoring big, multinational corporations over local businesses. Think about it. Accountants and tax lawyers are very expensive, and so are the potential consequences for filing an incomplete or incorrect tax return. This puts many small businesses in a bind: either they shell out big money to tax specialists, or risk missing out on the plethora of obscure tax deductions. If unlucky, the tax man may even pay them a visit. Either way, complexity benefits big companies who can afford to deal with said complexity relative to local businesses. Complexity is regressive.
Finally, complexity breeds corruption. The more complex the Tax Code, the more places there are to hide goodies for special interests and donors. For example, you can deduct up to $10,000 in taxable income for repairs to your whaling boat if you have one (and yes, whaling is illegal). Likewise, men are allowed to deduct up to $14,500 in taxable income for sex-change operations—women can probably do the same, although it has not yet been litigated. Deductions like these would not be available if the Code were simpler.
The fact that complexity favors large multinational corporations over small local businesses is concerning, since small businesses are the backbone of America’s economy. Likewise, wasteful government spending, and corruption hurts all Americans.
Tax reform is essential, and reducing complexity should be Congress’ top priority.