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January 11, 2006
Tax Foundation on The Rising Cost of Tax Compliance
The Tax Foundation has released a new study on The Rising Cost of Complying with the Federal Income Tax. The study estimates that complying with the federal income tax code during 2005 cost U.S. taxpayers $265.1 billion (up from $134.2 billion in 1995 (in inflation-adjusted dollars)), or 22 cents per dollar of tax revenues collected (up from 15 cents per dollar of tax revenues collected in 1995). By 2015, compliance costs are projected to grow to $482.7 billion.
Compliance costs are highly regressive, taking a larger toll on low-income taxpayers as a percentage of income than high-income taxpayers. On the low end, taxpayers with AG) under $20,000 incur a compliance cost equal to 5.9% of income while the compliance cost incurred by taxpayers with AGI over $200,000 amounts to just 0.5% percent of income.
One of the factors contributing to rising tax complexity in recent years is the sheer growth of the Internal Revenue Code:
January 11, 2006 in Think Tank Reports | Permalink
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» Cost of Complying with Tax Laws from Myopic Zeal
The TaxProf reports on the new study by the Tax Foundation on The Rising Cost of Complying with the Federal Income Tax.
The study estimates that complying with the federal income tax code during 2005 cost U.S. taxpayers $265.1 billion (up from $134.2... [Read More]
Tracked on Jan 11, 2006 10:42:35 PM
» Study: Annual Cost to Comply with Federal Tax Code is over $265 Billion from The New Editor
The Tax Foundation estimates that it cost US taxpayers more than $265 billion to comply with the US tax code last year: (via Tax Prof Blog)
In 2005 individuals, businesses and nonprofits will spend an estimated 6 billion hours complying with the federal [Read More]
Tracked on Jan 12, 2006 12:38:41 PM
» The Collateral Damage Of Confusing Tax Code from Say Anything
Good grief
The Tax Foundation has released a new study on The Rising Cost of Complying with the Federal Income Tax. The study estimates that complying with the federal income tax code during 2005 cost U.S. taxpayers $265.1 billion (up from $1... [Read More]
Tracked on Jan 12, 2006 12:44:06 PM
Comments
Fair Tax
Posted by: gordon | Jan 11, 2006 7:11:00 PM
How can a person making 20,000 spend almost $1,200 to comply? What does that money go? And if a person making 200,000 spends only 0.05%, then that means they only spend $1,000 complying. There's something wrong with these numbers.
Posted by: George Bailey | Jan 11, 2006 10:23:17 PM
George.
In looking through the tables in the study, it appears that the primary cost is coming not from "how much did they actually spend" but on the estimated hours spent. Without reading the entire study in detail, I don't know the exact amount, but just doing a quick calculation on the charts around page 7, it appears they're close to $40 per hour on the economic cost of the time spent preparing the forms.
And the $20,000 range is $20,000 and under, so if you earning $500 at McDonalds and do a 1040 EZ, they estimate that takes you 3.8 hours to complete, which is something like $160, or 32% of your income spent on tax compliance. That certainly will skew the numbers.
Interesting study though TaxProf! Thanks for the info.
Posted by: Eric | Jan 11, 2006 11:02:00 PM
I wonder if they meant it was a percentage of the tax, instead of total income?
Posted by: Pete | Jan 12, 2006 12:58:28 AM
This article is so brief it's impossible to know what they figured in, but the cost of any tax includes EVERYTHING you have to do that you wouldn't have to do if that tax didn't exist. There's a lot more to it than paying H&R Block to do your income tax.
Most of the compliance costs are hidden in the prices of everything we buy. Businesses have to do the accounting for their own corporate income taxes, deduct taxes from their employees pay, and administer such things as 401K programs that exist only because of income tax. Larger companies have entire departments dedicated to taxation. Like any other overhead, these costs are included in the price of every product. Poorer people pay this overhead at a higher rate because they generally have to spend their entire income on living expenses, while wealthier people spend a much smaller percentage of their income.
Besides the IRS, with over 100,000 employees and a $10 billion budget last year, there's a veritable army of clerks, accountants, computer programmers, managers, lawyers, consultants, lobbyists, etc. whose careers revolve entirely around income tax compliance. You're paying all those people's salaries every time you buy anything.
Posted by: Doug Leary | Jan 12, 2006 2:28:45 AM
Read the report; the money's not real cash. It's more of an estimate of complexity, using a standard wage for hours spent filing taxes. In other words, the lower your income, the more it will cost you (in terms of time spent) to prepare your taxes. This can be caused by at least a couple of factors:
1. Higher-income filers can afford professional help, which minimizes their personal labor costs (while incurring a different financial burden); and,
2. There is a correlation between income and education level. Low income filers MAY not have the necessary education to quickly complete the tax forms (higher income filers may not either, but they have the capital to seek help; see point 1). Of course, this is offset by the fact that many low-income filers typically have fewer deductions and can use the simpler version of the 1040.
Posted by: stu | Jan 12, 2006 6:47:52 AM
If I didn't know better, I'd think the authors knew what conclusion they wanted, and then tweaked the numbers in their calculations to get that conclusion.
Posted by: Engineer23 | Jan 12, 2006 12:12:47 PM
The tax laws create an indsutry for accountants. Flat tax or federal sales tax could eliminate a large, overpowered section of government.
Posted by: duh | Jan 12, 2006 1:02:33 PM
www.fairtax.org (quick and dirty)
Posted by: mikep | Jan 12, 2006 7:46:44 PM
