high cost of tax compliance, The

Human Events, Aug 13, 2001 by Moody, Scott

Individuals and Businesses Will Spend 4.6 Billion

Hours at a Cost of $140 Billion to File 2001 Taxes

Most Americans naturally think of their income tax burden simply as the amount at the bottom line of their 1040 form. Economists, on the other hand, may express Americans' tax burden as a percentage of GDP or even as a date on the calendar, such as Tax Freedom Day.

But such measures fail to register another cost to taxpayers--the cost of complying with the tax system. In 2001 individuals and businesses will spend an estimated 4.6 billion hours complying with the federal income tax, with an estimated cost of compliance of over $140 billion. This amounts to imposing a 12-- cent administrative burden for every dollar the income tax system collects.

Experts complained about the complexity of the federal income tax system as early as 1914, the year immediately following the adoption of the 16th Amendment to the Constitution, which authorized the income tax. Since then, the quest for tax simplification has waxed and waned with generally little progress over the years and the tax code has grown in complexity.

Veteran tax professionals commonly point to the Tax Reform Act of 1969 as the legislation that infused much needless complexity into the income tax code. But they say nothing in that act came anywhere near the bewildering complexities that were introduced by the tax enactments of the 1980s.

Within a three-year period in the first half of the 1980s, the income tax code was subjected to three massive pieces of legislation. First was what became known as "the Reagan tax cut," the Economic Recovery Tax Act of 1981. This was followed immediately by the Tax Equity and Fiscal Responsibility Act of 1982, and soon thereafter came the Deficit Reduction Act of 1984.

However, the tax drama had not yet reached its climax, which occurred in 1986 with the enactment of the Tax Reform Act of 1986 (TRX 86).... Previous research by the Tax Foundation has found that there is near unanimity among senior corporate tax officers that TRA'86 brought tax complexity to an unprecedented level. They point to the alternative minimum tax, inventory capitalization rules, and foreign income rules as the main culprits.

The Problem Of Defining Income

Income tax complexity is almost wholly related to tax base questions-that is, questions or uncertainty about the timing or definition of taxable transactions. The inherent complexity of an income tax results from the difficulty of defining income and determining when and to whom to recognize income and expense for tax purposes. Over time, the political process of give-and-take has made these difficult tax base questions inordinately complex. The definition of taxable income has not only expanded dramatically, but it has undergone chronic change.

Non-Economic Demands On the Tax Code

In addition to the inherent complexities of taxing income, an important political goal of our tax system is to ensure that the income tax code is both fair and equitable. This goal comes into play in two important areas of the tax code that contribute to complexity: (1) determining how much individual taxpayers should owe-the "ability-to-- pay" principle, and (2) providing incentives for socially beneficial activities.

Ability to Pay

From an economic perspective, the most efficient way to levy taxes is with a head tax. In other words, every person would pay an equal lump-sum tax. According to recent Tax Foundation research, if such a head tax were instituted today, every man, woman and child in the nation would have to pay $11,116 to fund the government at current levels. The federal government alone would account for almost 70% ($7,754) of the tax bill, with state and local governments accounting for the remainder ($3,362).

[Such a] head tax is politically troublesome, to put it mildly. Taxation anywhere near the current level would constitute an insuperable burden for low-income citizens. If television stars and day laborers must pool their resources to fund government opera lions that consume roughly one-third of the nation's income, as they now do, then devising a tax system that takes "ability to pay" into account becomes inevitable, even if it does lead to a much more complex tax code.

Today the tax code includes a multitude of provisions to adjust the tax burden according to this "ability-to-pay" principle. The most obvious application of this principle is the graduated rate structure, which increases a taxpayer's liability as a percentage of income as income rises. Other provisions adjust for the number of children in the family, family status (single, married, head of household), and so on.

Promoting Socially Useful Activities

In addition to making allowances for the poor, today's income tax code includes numerous provisions to encourage activities that are deemed "socially beneficial." In the personal code, taxpayers are allowed various credits and deductions such as home mortgage interest, health care expenditures and the child tax credit, to name a few.