As April 15 approaches like an incoming monsoon, millions of Americans brace for the pain of writing checks to the IRS. Even worse, this annual discomfort begins even earlier, as taxpayers generate a cyclone of documents just to calculate their tax liability. America’s excruciatingly complex tax-compliance regime deepens the aggravation of sending hard-earned cash to Washington for virtual incineration by Congress.
Completing tax forms required 7.75 billion hours of human labor in Fiscal Year 2008, according to the latest RegInfo.gov data. That roughly equals 3.7 million people — or everyone in Los Angeles — filling out IRS forms for 40 hours every week, all year, without vacations.
“That involves more workers than those at the Fortune 500’s five biggest employers,” the National Taxpayers Union’s David Keating concludes in a forthcoming report, “more than everybody at Wal-Mart, UPS, McDonald’s, IBM, and Citigroup combined.”
Keating also found that individual taxpayers will devote some 2.43 billion hours grappling with the income tax in 2010 at an equivalent labor cost of $71.4 billion.
Add to this the $31.5 billion that individual taxpayers will cough up for tax software, accounting services, photocopying, and other compliance-related expenses. All told, individual taxpayers will spend $103 billion to determine how much more money they must pump into the Beltway.
Meanwhile, the IRS website now offers 1,909 different documents, up from 1,770 last year. These include the riveting Form 8833: Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b). And don’t miss Form 990-W: Estimated Tax on Unrelated Business Taxable Income for Tax-Exempt Organizations. This year’s basic 1040 tax return includes 76 lines and 174 pages of instructions, up from 68 lines and 52 pages in 1985.
Last year, NTU calculated that U.S. corporations spent $159.4 billion on tax compliance, equal to 54 percent of corporate-income-tax revenue. In 2008, General Electric’s tax return droned on for some 24,000 pages. If only all that energy had brought good things to life.
“America’s rankings in worldwide tax complexity have slipped — from 65th out of 181 last year to 69th out of 183 this year,” says NTU spokesman Pete Sepp. “On total tax rate alone, we dropped from 92nd out of 181 last year to 118th out of 183 today. So, we’ve gone from just barely in the worst half of tax rates to nearly the worst third. In 2009, 45 countries eased corporate taxpaying by cutting rates or streamlining procedures. America was not among them.”
“The biggest problem in terms of unintended consequences is the U.S. Tax Code’s constant changes,” says Alvin Rabushka, a senior fellow with Stanford University’s Hoover Institution on War Revolution and Peace, with which I am a media fellow. “Usually there are features of the Tax Code that change every year, such as the extension or non-extension of the Bush tax cuts. In each of the next few years, the Tax Code may change due to ObamaCare. There may be environmental legislation that provides tax incentives and tax penalties.”
“If we had a good, medium-good, or not-so-good tax code, but it stayed the same, people could adjust to it,” Rabushka adds. “Instead, it’s a Darwinian survival of the fittest with people having to adapt year after year. This non-stop fiddling does nobody any good.”
The path out of this quagmire is an optional version of the flat tax, which Rabushka co-fathered, ideally at a 15 percent rate. Americans who find comfort in the U.S. Tax Code’s stultifying grandeur should be free to savor it and file their taxes accordingly. Everyone else should be free to complete a short, simple form with very few if any deductions.
Imagine combining a straightforward tax law, a single and low tax rate, and the freedom to choose between that approach and the status quo. Talk about a stimulus package! Even better, such a reform would turn April 15 into a relatively pleasant spring date rather than the scariest day of the year.