6.6 Billion

April 19, 2005 | 21 comments
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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.

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21 Responses to 6.6 Billion

  1. Kaimi on April 19, 2005 at 10:12 am

    Frank,

    I suspect fuzzy math. Do they really spend all that time filling out 1040′s (or the corporate equivalent)? Or is this counting time spent by corporate tax folk, during the rest of the year — dreaming up new ways to keep revenue offshore; discussing the tax implications of mergers; etc. Are we counting the salaries of every full-time tax department employee at every corporation? Yes, perhap those people’s jobs are a waste. On the other hand, it’s pretty clear that they _don’t_ spend all year filling out 1040′s. Mostly, they figure out the tax consequences of various transactions, and they try to help their employer pay as little tax as possible.

  2. Frank McIntyre on April 19, 2005 at 10:21 am

    1.6 Billion Hours is the 1040 Burden. The rest is other stuff. The hours are based on the paperwork time provisions where Congress requires the IRS to estimate time spent. I think this is still aguess, but I see no reason for the IRS to _overestimate_ time spent on the code.

    If we abolish the corporate tax, all those people, whether filling out forms or dreaming up ways to avoid, can go do something more useful with their lives. Currently what they are doing is useful only because of the complex code. SImplify the code and they will do something else that actually is socially useful.

  3. Shawn Bailey on April 19, 2005 at 10:21 am

    Kaimi: is this a distinction without a difference? Either way, capacity is spent related to taxation that could be saved or deployed elsewhere under a simpler tax code.

  4. Kaimi on April 19, 2005 at 10:27 am

    Frank,

    ” But why not just dump, for example, the corporate income tax and then raise taxes on those who get corporate wealth, like stockholders? ”

    You realize the huge difficulties in realization / gain calculation that would come from this?

  5. Scott Wilkinson on April 19, 2005 at 10:29 am

    Frank: But why not just dump, for example, the corporate income tax and then raise taxes on those who get corporate wealth, like stockholders?

    Kaimi: Are we counting the salaries of every full-time tax department employee at every corporation? Yes, perhap those people’s jobs are a waste.

    Ahem. As an in-house tax attorney I am deeply offended at your suggestions. :)

  6. Frank McIntyre on April 19, 2005 at 10:32 am

    Scott, beet farming. Look into it.

    Kaimi: I am not looking to get the exact same tax scheme back, just one with largely the same distributional properties. Why do you think that would be so hard?

  7. Last lemming on April 19, 2005 at 10:57 am

    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.

    Big leap in logic here. Compliance time is not a function of revenue raised. In fact, you acknowledge as much by pointing out that the corporate tax imposes a disproportionate compliance burden relative to its revenue yield. Compliance with the payroll tax is straightforward and almost certainly has a much lower compliance cost per dollar of revenue than either the individual or corporate income taxes.

    As for simplification—unless you are a small business owner, keeping track of income is relatively simple. It is keeping track of deductible expenses that takes time. So if increasing revenue yield per hour of compliance time is the goal, we should just eliminate a bunch of deductions (charitable contributions being among the most time consuming).

  8. Paul Mortensen on April 19, 2005 at 11:15 am

    Frank:

    Given that you’re an economist I’m surprised that you don’t plan your tax payments such that you owe a small amout every 4/15. After all, why not be in the business of the government loaning you money rather than the other way around.

    I don’t know about your household but I’m not allowed anywhere near a checkbook until tax time comes around. I am only charged with direct financial management obligations at tax time as well– all other times I’m merely a consultant that mostly gets ignored.

  9. Derek on April 19, 2005 at 11:32 am

    I want to be able to deduct all retail taxes I’ve paid throughout the year. Credit card companies could help out with this–after all, they have records of everything I’ve purchased through them.

    Why is it that the IRS can fine you if they withhold too little throughout the year, but if they withhold too much, they won’t pay you interest? It’s like they’re trying to have their cake and eat it, too.

  10. A. Greenwood on April 19, 2005 at 12:11 pm

    Conclusion:
    All the time we spend arguing about how to calculate tithing is self-imposed evil?

  11. Frank McIntyre on April 19, 2005 at 12:22 pm

    Last Lemming, I certainly would not want to assume equal time per dollar for income and payroll taxes. I am saying that the rate on income tax would then be 20 cents on the dollar, since it would have to account for all of the 6.6 billion hours. I am not throwing in another 6.6B hours to the numerator. I am decreasing the denominator to just be revenue from income tax..

    As for getting rid of deductions, undoubtedly this would be the form taken for modifying the code. I don’t know which deductions would go first, certainly the charitable deduction has some really nice features, so we might prefer to start somewhere else. That’s why I suggested the corporate income tax as a possible candidate, since it’s cost per dollar appears to be high.

    Adam, yes.

    Paul, the principal obstacle has been that I have had a constantly changing financial picture since I got married. Now that I hae more income and deducation stability I might look to start paying larger lump sums at the end of the year.

    Derek, you can deduct either sales tax or state income tax on your federal returns. I would think this would encourage states to move to one or the other. I believe there is a simplified federal form to determine how much sales tax one has paid based on income and the rate.

  12. Julie in Austin on April 19, 2005 at 2:22 pm

    I’ve been thinking about a related issue: How will efiling and tax software change things?

    (I normally go the pen-and-paper route with itemized deductions. Usually takes 3-4 hours and lots of stress. Filed online this year, took about 20 minutes and no stress.)

    However, I usually had a feel for what was affecting our tax obligation when doing the pen and paper trick. This year, with efiling, I was just pounding in numbers with no idea of how that number would affect our refund (or, how my behavior over the next year could affect next year’s return). I wonder what this will do to our habit of using tax incentives to shape behavior.

  13. lyle on April 19, 2005 at 4:02 pm

    Frank:

    I’m with you. Colossal waste. I spent about 20 hours doing my taxes this year; and 10-15 hours spread out over 4 months in order to quantify my deductions for my small business. While I enjoy sticking it to the government by taking advantage of every tax loopholde, deduction and credit available…

    I’m still with you and would enjoy a simplified tax system; whether “flat” or something approximate. I think Lemming mentioned that…his willingness to forego deducting his tithing in order to get a flat tax? ;)

  14. Dan Richards on April 19, 2005 at 6:49 pm

    I read the article, and I think the “taxpayer advocates” are inflating the numbers. Drastically. The stats are probably based on the estimates provided in compliance with the Paperwork Reduction Act, and the I suspect the IRS errs on the side of slow, slow filers. Take Form 8812, the “Additional Child Tax Credit.” (I wonder how many Mormons fill this one out…) At the bottom of the form is the estimated average time to fill out the form: Recordkeeping, 6 min; Learning about the law or the form, 9 min; Preparing the form, 29 min; Copying, assembling, and sending the form to the IRS, 20 min. That’s a total of 64 minutes, if I’m not mistaken, and it took me and my wife 5 minutes. Tops. There are, at most, 13 lines, some adding and subtracting, all with numbers that are easy to find, either on the 1040 or on a W-2. The sum of the Paperwork Reduction Act estimates for all forms I filed is at least 4 times the actual amount of time I spent.

  15. Jordan on April 19, 2005 at 7:06 pm

    Yeah, but Dan, you are a certified tax guru as we fellow Michigan law students know, in addition to being a math geek. It took me drastically (and embarrassingly) longer than it took you to finish MY taxes…

  16. greenfrog on April 20, 2005 at 10:15 am

    …unless you are a small business owner, keeping track of income is relatively simple

    Um – mine wasn’t, as my wife, my tax preparer, and I spent days trying to figure out how to come up with a basis for company stock of a thrice-merged–and-now-gone corporation acquired over the course of years through an employee stock ownership plan so we could figure out income associated with those shares when we sold them last year.

    I whole-heartedly agree that the current US tax system is wacky.

    As reform is often so fraught with political overtones that it is dead on arrival, perhaps the goal of reform should be simply to devise and implement a better taxation system while preserving all of the subsidies, oddities, benefits and burdens embedded in the current regime — think of it as remodeling the infrastructure of a building while leaving the external appearance the same.

    Then we could agree to fight later over which of the then-explicit subsidies and burdens should be fixed politically.

  17. Frank McIntyre on April 20, 2005 at 10:38 am

    Dan,

    I am also curious about how they compute the paperwork numbers. Are they for the first time users or for average users? Aren’t there economies of scale in doing all the forms together? Of course, for every quick and nimble filing like yours, there really are lots of other people who agonize over this stuff. And the real burdens are not on personal filings, but corporate and small business filings, so the question is how accurate are those numbers.

    Also, the hours are reported by the IRS to Congress. So no use blaming “tax-payer advocates” for those.

  18. Mark N. on April 20, 2005 at 10:58 pm

    Corporations don’t pay taxes, they just collect it from their customers and forward it to the government; they’re just a different arm of the IRS.

  19. Frank McIntyre on April 21, 2005 at 12:03 pm

    There is a corporate income tax paid by corporations. It collects about 200 billion in revenue each year. Now, if you are saying that the cost of this tax must be born by its customers, that is not clear. It could also fall upon the stockholders or to some extent, the workers at the firm. It depends on a bunch of elasticities. It seems likely that everyone invovled will pay some of the cost.

  20. Scott Butler on May 11, 2005 at 4:17 am

    Frank,

    Do i have your permission to go back in time 15 years and quote you saying “I kind of like doing my taxes”?

    Actually I completely agree with you in regards to the issue. While taxes are a needed part of our society, the complications involved in what makes a valid deduction has balloned to the point of idiocy.

    I tend to think that the filers who enjoy doing thier own taxes, like Frank, Dan, and myself are greatly in the minority, so its hard to see what actual times are on such a macro scale of however many personal tax forms are turned in each year. I fear that the amount of time “wasted” paying taxes could inspire an overreaction to a sales tax set up which is the ultimate in apparent simplicity to the casual observer. But just think about trying to account for “acceptable” deductions in regards to tithing and charitable giving then.

    good day

  21. Frank McIntyre on May 11, 2005 at 7:32 am

    Scott!

    It is good to see you are alive. And I think I could enjoy doing my taxes just as much if the bottom line were that I paid less money. I just like playing with numbers. Where are you now, anyway? Still in Ohio?

    If you have the abiliity to go back in time 15 years, I’ve got a whole list of things you should tell me back then…