Economy & Budget

Tax Code Complexity Costs Americans Millions of Dollars

The federal tax system dips far too deeply into the pockets of Americans. The U.S. government now costs the average family in excess of $20,000 per year. In 2007, the federal government will exact about $1 trillion more from Americans than it did a decade ago. (That’s, of course, still not enough for California Democratic House Speaker Nancy Pelosi.)

But the amount collected is only one part of the total price tag of the tax code. Tax preferences and excessive marginal rates depress economic growth. And then there are the staggering costs imposed by the endless complexities of the nation’s tax system. The really bad news is that according to the ninth annual tax complexity study just published by the National Taxpayers Union, our tax system is as complex as it has ever been and is likely to get worse.

Getting Worse

In 2006, individual and business taxpayers spent 6.65 billion hours complying with the income tax laws. The cost in 2006 to just individual taxpayers for their time and out-of pocket expenses exceeded $100 billion. Despite practically annual pledges by almost every member of Congress that they want a simpler tax system, things have been getting worse. Today, taxpayers face 143 pages of instructions for Form 1040. That’s almost triple the number in 1985, the year before the landmark tax simplification of 1986.
At the corporate level, consider the plight of General Electric. GE’s 2006 taxes were filed electronically, but if the return had been printed on paper, it would have come to an estimated 24,000 pages. This is believed to be the nation’s longest tax return ever. With this type of breathtaking complexity, is it any wonder that the Treasury faces a large “tax gap” between what should be collected and what is collected?

Overall, the corporate income tax is costing businesses $156.5 billion in employee time. In other words, for every tax dollar collected from corporations, companies are losing another 27 cents in lost employee time.

Looming AMT Threat

And for as bad as the income tax system has gotten, it likely will be getting worse. The biggest threat comes in the form of the Alternative Minimum Tax, which within three years could ensnare more than 30 million taxpayers. These unlucky souls not only have to work their way through a second tax system, but also pay higher taxes to boot.

As complexity rises year after year, Congress at some point will be forced to act to remake our tax code. The only question is how bad will things have to get before Congress is roused from its slumber?

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