Tax Attorney: We Need to Make Tax Compliance Costs More Transparent

WASHINGTON – The Internal Revenue Service (IRS) spends billions of dollars to collect taxes and it costs U.S. taxpayers even a greater amount to fully comply with the complexity of the U.S. tax code.

Lawmakers have long used the tax code for purposes beyond raising revenue to fund the federal government. Through special provisions in the tax code, Congress promotes a broad range of social and economic policy objectives, such as encouraging people to save money for retirement, buy a home, or buy bonds.

According to the IRS, filing taxes takes taxpayers an average of 8 hours and costs $120 for each nonbusiness return.

In total, Americans spent over 3.24 billion hours preparing and filing tax returns in 2012. Taking into consideration individual, business and employment taxes, taxpayers spent $37 billion in compliance costs that year for federal taxes alone, according to an estimate by the Tax Foundation.

Speaking at the Heritage Foundation, a group of tax experts said the complexity of the tax code hampers job creation and stalls economic growth and potential tax revenue by distorting market decisions and the allocation of resources.

Compliance costs include the tax collection costs of the IRS and the money and time individuals and businesses spend submitting tax forms. Jason J. Fichtner, senior research fellow at the Mercatus Center, said an accurate accounting of compliance costs would also include “the costs of the economic growth we’re losing,” the resources spent on lobbying to gain and maintain tax advantages, and the efficiency losses created when individuals and businesses invest in tax-avoidance activities to lower their tax liabilities.

Fichtner and his colleague Jacob Feldman looked at the costs of compliance, including the hidden costs to the U.S. economy.

They found that compliance with the tax code could cost the U.S. economy up to $1 trillion each year, including up to $378 billion in accounting costs and $609 billion in foregone economic growth.

Between 2002 and 2011, lobbyists spent $27.6 billion petitioning federal, state, and local governments, much of which was spent on efforts to protect and expand tax advantages. Although not all of this spending is aimed at carving out tax advantages, research has found that the two are related. A 2009 study found that firms that increased their lobbying expenditures by 1 percent reduced their effective tax rates up to 1.6 percentage points the following year.

Fichtner and Feldman also found out the U.S. Treasury forgoes nearly $450 billion per year in unreported taxes as a large number of people intentionally or unintentionally fail to pay the right amount of taxes.

The complexity of the tax code also creates an uneven playing field for taxpayers. Deductions benefit individuals and companies at the higher end of the income spectrum, partly because they can afford well-paid accountants and lawyers. Higher-income tax filers tend to itemize their deductions more often than those in lower-income brackets.

“We have the best system in this nation that thousands of lobbyists can design, and not the best system that economists can design,” said Dan Mastromarco, a tax attorney who has represented several Fortune 500 companies.