The Cost of Tax Complexity

Article excerpt

According to Scott Moody of the Tax Foundation, a Washington think tank, the cost of complying with the federal income tax will reach $140 billion in 2001.

That's about 12 cents for every dollar collected. Moody argues that the only way to reduce these high compliance costs is for Congress to reduce the complexity of the current tax system.

Moody, senior economist at the Tax Foundation, presented his research in recent testimony before the U.S. House Ways and Means Committee. He told lawmakers that tax complexity is largely due to congressional changes and expansions of the Internal Revenue Code.

In 1954, there were 103 code sections that dealt with the income tax, but now there are 725 sections -- a 604 percent increase. Indeed, the federal income tax code and regulations have grown to a staggering 6,929,000 words -- an increase of 831 percent since 1955. (The full text of Moody's testimony can be found at www.taxfoundation.org.)

Moody noted that Congress has passed 32 major tax laws since 1954. That's about one new tax law every 1.4 years. In particular, Moody lamented the "bewildering complexities that were introduced by the tax enactments of the 1980s."

For example, the so-called Tax Reform Act of 1986 brought unprecedented complexities via the alternative minimum tax, inventory capitalization rules, and foreign income rules.

The growth and instability of the tax code create three kinds of costs for taxpayers. The first type of cost is for tax planning -- for all the economic decisions that people and firms make to minimize their tax liabilities. The second type of cost is for compliance -- for all the record-keeping, education, and form preparation that is required to file income tax returns. The third type of cost is for litigation -- for the cost of the Internal Revenue Service, the Tax Court, and the legal costs that taxpayers incur while dealing with these two government institutions.

Of these three costs, Moody estimated only the second -- the cost of tax compliance. All in all, Moody estimated that it will take Americans some 4.6 billion hours this year to comply with the federal income tax laws, and that translates into a tax compliance cost of roughly $140 billion in lost taxpayer effort. That's "more than work in the auto industry, the computer manufacturing industry, the airline manufacturing industry, and the steel industry combined," he said. …