March 22 2010
The Tax Man Cometh
Carrie L. Lukas
Spring is in the air. Americans are removing coats, walking into the sunshine, admiring budding flowers. Unfortunately, they'll have to return inside, descend into poorly lit basements or cramped home offices, and get to work preparing taxes to meet the looming April 15.
No one enjoys paying taxes. The average American taxpayer loses about 30 percent of his or her income to federal, state, and local taxes-that are a greater share of income than is spent on food, clothing, and housing combined. http://www.taxfoundation.org/files/sr165.pdf
Yet it's not just the money that we lose to taxes that makes paying them such a burden. Complying with the mind-numbingly complex tax code is itself a cost for millions of Americans. We lose more of our time, spend more of our money, and expend more of our energy worrying about how to make sense of all the paperwork and ensure that we aren't accidentally breaking laws or giving Uncle Sam more of our hard-won earnings than we have to.
The National Taxpayers Union estimated that in 2009 Americans spent 3.8 billion hours complying with income tax laws. That was 200 million more hours than just the year before. The cost of all this time was an estimated $110 billion. In other words, if people could have put those hours to productive use-instead of going blind filling out pages of fine-print forms-our economy would have been bigger and our standard of living higher. http://www.ntu.org/news-and-issues/taxes/income-tax/a-taxing-trend-the-rise-in-tax-complexity.html
The lost time wasn't the only expense born by American taxpayers. In addition to this lost time, Americans paid out of pocket nearly $30 billion for help in preparing their taxes, from software programs to tax preparation professionals. That's a little more than $200 for the average taxpayer. Two hundred dollars may not sound like much, but at a time when so many Americans are struggling to make ends meet, facing major declines in their housing values and savings, who can afford to spend money like this?
Politicians regularly lament the sorry state of our tax code. Last year on tax day, President Obama pledged "we'll make it easier, quicker and less expensive for you to file a return, so that April 15th is not a date that is approached with dread every year." http://online.wsj.com/article/SB123980697575621155.html President George W. Bush made similar promises. http://www.washingtonpost.com/wp-dyn/articles/A57466-2004Sep2.html Yet instead of solving the problem, our tax code is only getting more complex. The average compliance time for an individual taxpayer has climbed from 25.4 hours five years ago, to 26.4 hours as of last year. That's an extra hour of our lives lost to filing out taxes thanks to policymakers continuing each year to make the process even more confusing and complex.
Of course, the individual tax code creates the most obvious burden for individual taxpayers. Yet the equally complex corporate tax system also levies real costs on average American citizens. Last year, the National Taxpayers Union estimated that compliance costs alone would take $159.4 billion from American corporations. That's around half of what those companies had to pay in taxes, a startling statistic, attesting to the corporate tax code's incredible inefficiency. Think about it: for every dollar the government raises in revenue from corporations, companies have to pay out more than $1.50. Surely policymakers can do better.
Often, people shrug off the importance of corporate tax reform. Corporations have lots of money, the thinking goes. Better for them to bare a larger share of the tax burden to spare average families. Yet in reality it's everyday consumers who end up paying corporate taxes. The money corporations send to the government (and that they pay to lawyers and tax preparers to make sure that they all complying) has to come from somewhere. Companies pass on those costs to consumers by charging higher prices on products and services. Workers receive lower wages and have fewer job opportunities. As a company becomes less profitable, it becomes a less valuable investment, leaving shareholders worse off. As we learned all too well during the recent financial crisis, it isn't just the rich who are hurt when stock values go down: everyone who has a 401k or other retirement account, including public pension systems, is affected.
With the federal government facing trillion dollar annual deficits, Congress is unlikely to pursue tax cuts anytime soon. Yet surely they can explore ways to simplify the tax code to reduce the dead weight loss - that's the economic term for all the time and money wasted on compliance - even while keeping the tax code revenue neutral.
Americans shouldn't have to pay nearly a third of their income in taxes. That's just too much. And certainly we shouldn't also lose a day of our lives in process of turning over so much of our money. It's time for tax reform so that the American people can get back to enjoying the spring.