Pethokoukis

Tax code complexity costs 3x more than Obama tax hikes

The fiscal cliff deal is likely, according to Washington bean counters, to raise roughly $620 billion in new upper-income taxes over the next decade. In 2013, that works out to be about $50 billion. For comparison, the sheer complexity of the US tax code will cost taxpayers more than three times that amount. The WSJ:

The federal Taxpayer Advocate ranks complexity as the No. 1 problem facing the tax system and offers an eye-opening estimate of Americans’ cost of complying – $168 billion in 2010, or about 15% of total income-tax receipts.

In her 2012 annual report to Congress, Taxpayer Advocate Nina Olson says it takes U.S. taxpayers more than 6.1 billion hours to complete all the filings required by the tax system, making tax compliance “one of the largest industries in the United States.” That is the equivalent of more than 3 million full-time employees.

So not only does our complex tax code hurt economic growth by distorting decision making, its complexity is a tax in and of itself. Time for a tax cut via simplification?

6 thoughts on “Tax code complexity costs 3x more than Obama tax hikes

  1. All of this simply underlines the fact that the principal objective of the tax code is not to raise revenue. It is to punish and reward the people that Congress chooses to. Apparently they think these transaction costs are worth it. Or more likely, they just pretend they don’t exist, since they’re not, for the most part, paid directly by the government.
    It’s a bit like people who will travel 10 miles to a store to save $1 on something (and there are such people).

  2. $168 billion is a low cost estimate. It works out to about $28 per hour of compliance time, or an employee total cost of $55,000 per year. The cost of private consultants to prepare taxes is vastly higher.

    Those who claim the cost of compliance is $300 billion are closer to the truth, and even that might be low. The absurd complexity of the tax code is a pure waste of 2% of GDP year after year.

  3. Ah, the good old “seen and the unseen”.

    Seen:

    $50 billion in increased government revenue

    Unseen:

    6.1 billion hours of lost productivity.

    The bad economist only looks at the seen and says “See? This is why we need to raise taxes!”

    The good economist looks at both the seen and the unseen and says “if this costs us 6.1 billion hours of productivity, is the extra revenue worth it?”

    • @Jon Murphy: there’s no necessary or linear relationship between increasing the amount of taxes the government collects and the complexity (and thus compliance and productivity costs) of the tax code, so the math you’re suggesting here doesn’t work. Indeed, the report from the Taxpayer Advocate says clearly that the main driver of complexity (and thus compliance and productivity costs) is tax *deductions* , which *decrease* the amount of revenue raised: “To reduce taxpayer burden and enhance public confidence in the integrity of the tax system, the report urges Congress to greatly simplify the tax code. In general, this means Congress should reassess the need for existing income exclusions, exemptions, deductions, and credits (generally known as “tax expenditures”). For fiscal year (FY) 2013, the Joint Committee on Taxation has projected that tax expenditures will come to about $1.09 trillion, while individual income tax revenue is projected to be about $1.36 trillion. To put these numbers in perspective, if Congress were to eliminate all tax expenditures, straight math indicates it could cut individual income tax rates by 44 percent and still generate the same amount of revenue it collects under current rules.”

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