Why Does It Cost $409 Billion To Figure Out What We Owe In Taxes?

* 4/17/2017

*Tax Reform:* If President Trump wants to drain the swamp, the best place to start is with the tax code, which is so complicated that Americans spend billions of hours and hundreds of billions of dollars just trying to figure out how much they owe.

The IRS instructions for filing out the 1040 form include a box near the back that estimates how much time it takes to fill that one form out. This year, it's 15 hours. That's a 67% increase from 1988. This year, the instruction booklet runs 241 pages. In 1988 it was fewer than 80.

The tax code has become so complicated that even the IRS complains about it. In its annual report to Congress, the IRS' national taxpayer advocate, Nina E. Olson, writes that the tax code imposes a "significant, even unconscionable, burden on taxpayers."

This is the hidden tax.

Olson figures that individuals and businesses spend 6.1 billion hours - the equivalent of more than three million full-time workers - complying with the tax code.

Almost no one can figure it out on their own anymore. IRS data show that 90% of individual taxpayers either hire companies like *H&R Block * (HRB ) to do their taxes, or buy software to help them navigate the forms.

Various groups have tried to calculate the total cost of tax compliance, and the numbers are staggering. The National Taxpayers Union puts the bill at $262 billion, when you count direct costs and lost productivity. The Tax Foundation says it's more like $409 billion.

Either way, "if tax compliance were an industry, it would be one of the largest in the United States," Olson notes.

Looked at another way, we spend around $1 in compliance costs for every $10 paid in federal taxes.

Here's the rub: This money buys /nothing/. It doesn't help the poor. It doesn't improve the nation's security. It doesn't go to education, the environment, roads or parks.

Yes, tax complexity provides steady business for tax lawyers and accountants - H&R Block's average fee has nearly tripled since 1980, after adjusting for inflation, according to the National Taxpayers Union report out last month - and for tax software companies. But is there anyone who thinks this is the most productive use of these vast sums of money?

There are other hidden costs. The massive complexity of the code makes it easier to cheat, which the IRS says results in a tax gap of more than $400 billion a year. (That also means a simpler tax code could raise as much money as today with far lower rates.)

As if this weren't bad enough, the current tax code distorts economic activity and hampers startup companies, thereby slowing the economy.

The problem is that Congress keeps adding to the complexity problem, while rarely pruning. The IRS says that Congress has made 5,000 changes to the tax code since 2001 - an average of more than one a day. ObamaCare added mightily to tax complexity, since it put the IRS in charge of handling insurance subsidies. That one law resulted in thousands of pages of new IRS regulations.

This is madness.

Yet there is little hope for relief, because lawmakers insist on using the tax code to achieve public policy goals, whether it's to make the code more "fair" or to encourage certain types of behaviors, investments and the like. Every time Congress tries to enlist the tax code to do something other than raise revenue, it ramps up complexity.

The solution - which we have advocated for years in this space - is a simple flat tax with few or no deductions that can be filled out on a postcard. The flat tax always rankles the left, which calls it a giveaway to the rich. But imagine how much the welfare of the nation would improve if we could put the $406 billion wasted on tax compliance to better use.

/Note: This editorial had misstated the tax compliance cost figure calculated by the Tax Foundation. The correct number is $409 billion./


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