According to the IRS, the federal tax code uses up 6.6 billion hours of time for people and businesses to fill out their tax forms. Now, to tell the truth, I sort of like doing my taxes. The numbers are easy to deal with, I often get money back, and it convinces my wife that I am still a net benefit to the household.
But that sure is a lot of filing time. And the time and effort to file is a tax just as real as the check sent to the Treasury. Except the money leaves your account and disappears into oblivion, because it does not, on its own, actually help anyone else.
The value of all that time and accountancy rings up to over $200 billion, which we’ll take as our estimate. So about $200 billion dollars worth of our collective national productivity is being used in filing taxes. Since we collect about 2 trillion in revenue, this comes out to about 10 cents on the dollar collected. Now almost half of that 2 trillion is payroll taxation, which I don’t think is included in the 6.6 billion hours. And if it isn’t, then that raises the rate to close to 20 cents on the dollar. And that’s starting to sound obnoxious. Essentially there is a 20% tax on filing taxes!
And then one notes that 5 billion of the hours are not on the standard 1040 tax form and one becomes suspicious. Are many of those costs perchance on corporate income tax? Apparently about half the hours are. Revenue from the corporate income tax is about $200 billion, but the “filing tax” in paperwork is another $100 billion. So if these number are right, we (as a country) spend an extra 50 cents for every dollar collected in corporate income tax. That is just nutty.
I should note that this cost is in addition to the tax actually causing people to change their behavior in any way, thus creating efficiency loss in the economy. The $200 billion is just the costs of submitting the paperwork. Seeing numbers like this makes me wonder if we couldn’t benefit from hacking away at the tax code. I pay tithing, for example, and most of the paperwork time I spend on tithing is actually getting the tithing to be tax deductible! I also am quite happy that the Church pretty much refuses to create a tithing code that carefully delineates appropriate tithing accountancy. That means, for those with complicated income situations, they are free to pick something that is about right, but is not a nightmare to compute!
Now the IRS is aware of this problem, they have actually set up an office, with seven employees, to figure out ways to chop down the burden. And never forget the increasingly well-designed tax software option, which pretty much exists as a response to tax code complexity. To really chop at this implicit tax, though, would require actual changes in the tax code. And those changes would undoubtedly make some people very grumpy, since somebody always loses something on these deals. But why not just dump, for example, the corporate income tax and then raise taxes on those who get corporate wealth, like stockholders? One could presumably get much the same income tax progressivity and yet save billions of dollars by eliminating a horrendous, expensive, paperwork jungle.
There are down sides to simplifying the code, since some provisions encourage good behavior; but I am betting that a lot of the potential benefits get swamped in the morass of legislative pork. Would a simpler tax code be worth it? I don’t know. But with over $200 billion dollars as a lower bound on the current waste, it sure seems worth looking in to. To put it another way. If simplifying the tax code could drop the filing burden in half, we could increase the tax rates enough to take back the gain people get in time savings, and then have 100 billion dollars to do with as we wished, with no net increase in the real tax burden people face. It would be like getting a free lunch!* With that money. we could massively increase foreign aid or welfare spending, or build a new bomber! We could even just lower tax rates, to the tune of about $1000/family. Of course, a bunch of tax accountants would have to retrain themselves to do something else. Perhaps they could go into beet farming. Those guys never lose their jobs…
* In other words, it would be a Pareto improvement.