Friday, April 15, 2011
"The Economic Burden Caused by Tax Code Complexity"
Happy Tax Day! Don't panic. Taxes don't have to be postmarked until the deadline of Monday, April 18 this year. But, April 15th is the traditional date for your tax return to be due so this is an appropriate day to comment on a newly released policy paper on the high cost of our tax code.
A new study released Thursday by Dr. Arthur Laffer, Dr. Wayne H. Winegarden, and John Childs underscores the importance of simplifying the U.S. tax code as a way to reduce the compliance costs of the tax burden. This would boost growth in the economy.
Visit www.LafferCenter.com and read the 40 page study for yourself. "The Economic Burden Caused by Tax Code Complexity" suggests that a reduction in tax code complexity would help the U.S. reduce its national debt by $1.4 trillion over 10 years.
"U.S. taxpayers pay an estimated $431.1 billion annually, or 30% of total income taxes collected, just to comply with and administer the U.S. income tax system," said Dr. Laffer. "Individuals and businesses spent an estimated 6.1 billion hours complying with the filing requirements of the income tax code." You may recognize his name as a top economic expert during the Reagan Administration and also the 'Laffer Curve' tax revenue model.
Dr. Laffer is establishing The Laffer Center for Supply Sides Economics in partnership with Texas Public Policy Foundation in Austin.
The study estimates that those 6.1 billion hours equal to $377.9 billion, compounded by direct outlays (paying professional tax preparers or purchasing tax software) estimated at $31.5 billion and IRS administrative costs running $12.4 billion. Comprehensive audits impose an additional taxpayer burden of at least $9.3 billion, bringing the total to $431.1 billion in order to comply with the complexity of the federal income tax system. These costs don't account for the lost economic opportunities caused by the uncertainty and confusion of the tax code, nor the pain and suffering for people dealing with the IRS.
Between the last major tax reform in 1986 and 2005, Congress passed 14,400 amendments to the tax code. This study shows evidence of what Americans know - the tax code is confusing for families, businesses, people working for the IRS, and even for professionals in the industry. In 2007, USA Today had five professional tax preparers determine tax liabilities for a hypothetical family. None of their answers were the same.
With a focus on promoting supply side economics, comprehensive tax reform would cause the compliance costs to plummet. A low rate flat tax on income and/or consumption may be the solution. This solution would reduce inefficiencies caused by tax code complexity, overall economic efficiency would increase, capital and labor would flow to more highly valued uses and the growth in income and wealth in the U.S. would increase substantially.
Dr. Laffer said, "In 2002, the IRS help centers provided wrong answers to taxpayers 29% of the time. In each of the last two fiscal years, the IRS received 110 million calls from taxpayers and they were unable to answer 25% of the questions."
The total cost of the tax system amounts to for every $4 in cost to the economy, $1 benefit goes to the economy. Laffer suggests that if the U.S. were to go to a fairer tax the same amount of revenues would be collected with less cost to the taxpayer for filing, thus the taxpayer has the least amount of incentive to avoid paying taxes and there would be less avenues to escape paying. Every time there has been a cut in the highest tax rate - from the top 1% of taxpayers - revenues have gone up dramatically.
All of the statistics used in this new policy paper were taken from the IRS.
Laffer encourages getting rid of all federal taxes - income tax, corporate tax, estate tax, capital gains, federal excise tax, and all tariff. He would keep so-called sin taxes in place. With no use of the Laffer Curve, it would match all federal revenue with a 12% (approximate) tax rate.