Tax Complexity Now Costs the U.S. Economy Over $546 Billion Annually

The federal taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
code imposes many costs on the US economy. The most direct costs, of course, are the roughly $4.9 trillion in federal taxes that consume 17 percent of US gross domestic product (GDP). Our tax system is heavily reliant on individual and corporate income taxes, which economists at the Organisation for Economic Co-operation and Development (OECD) have determined are the most harmful for economic growth.

A less direct cost is the precious time taken out of our lives to comply with a Byzantine tax code that requires billions of hours completing mountains of IRS paperwork and tax returns. In 2023, Americans filed 271.5 million tax returns. Of these, nearly 71 percent, or 192.3 million, were individual and corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.
returns, while another 36.3 million were employment tax returns.

According to the latest estimates from the White House Office of Information and Regulatory Affairs (OIRA), Americans will spend more than 7.9 billion hours complying with IRS tax filing and reporting requirements in 2024. This is equal to 3.8 million full-time workers doing nothing but tax return paperwork—roughly equal to the population of Los Angeles—and nearly 46 times the workforce at the IRS.

If we assume a reasonable hourly wage, the 7.9 billion hours Americans spend complying with the tax code costs the economy roughly $413 billion in lost productivity. In addition, the IRS estimates that Americans spend roughly $133 billion annually in out-of-pocket costs to comply with the tax code. This brings the total compliance costs to $546 billion, or nearly 2 percent of GDP.

Measuring Taxpayer’s Compliance Burden

The Paperwork Reduction Act of 1980 (PRA) requires the IRS to estimate how many hours it takes taxpayers to complete each form and the amount of out-of-pocket costs they must spend to prepare each form. The IRS has spent decades developing various methods to estimate compliance costs.

In 1984, when most taxpayers filed paper tax returns, the IRS sponsored a study that used survey data and a mathematical model to estimate the compliance costs that tax regulations impose. The model has since been updated many times to reflect changes in the economy, taxpayer populations, filing methods, and tax laws. The new model uses input from surveys of individual and business taxpayers in addition to IRS administrative data to estimate both time and out-of-pocket costs of filing taxes.

According to a IRS whitepaper explaining their methods:

Taxpayer compliance burden is generally defined as the time and money taxpayers spend to comply with their tax filing responsibilities. Time-related activities include recordkeeping, tax planning, gathering tax materials, learning about the law, and completing and submitting the return. Out-of-pocket costs include expenses such as purchasing tax software, paying a third-party preparer, and printing and postage. Taxpayer compliance burden does not include a taxpayer’s tax liability, economic inefficiencies caused by sub-optimal choices related to tax deductions or credits, or psychological costs.

The IRS estimates taxpayer out-of-pocket costs will total $133.3 billion in 2024.

The Price of Our Time Totals Nearly $413 Billion Annually

Complying with the tax code costs more than just the out-of-pocket expenses and money on the checks that taxpayers send to the IRS every April 15^th. Every hour spent complying with tax forms and returns is an hour that parents cannot spend with their families or business owners cannot spend growing their firm. Economists call these opportunity costs.

Using hourly wage and benefit estimates from the Bureau of Labor Statistics (BLS), we can put a dollar figure on the time that the IRS estimates individual and business taxpayers spend complying with the tax code.

For individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.
forms, we use an hourly compensation cost of $44.50. This figure combines the $31.48 average hourly wage for all occupations with the $13.02 average hourly benefit costs for private sector workers.

For business-related and more complex returns—such as returns for estates and trusts or depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment.
schedules—we used an hourly compensation cost of $56.67 for accountants and auditors. According to the BLS, the average hourly wage for these workers is $43.65, to which we added the $13.02 average benefits for private sector workers.

Put in dollar terms, the 7.9 billion hours needed to comply with the tax code conservatively computes to $412.8 billion each year in lost productivity. When we add the $133.3 billion in out-of-pocket costs, it raises the total tax compliance cost to American taxpayers to a staggering $546.1 billion.

These tax compliance burden costs are equal to 1.9 percent of US GDP. To put this in context, it is larger than the 1.8 percent of GDP the corporate income tax is expected to collect in 2024. Moreover, $546 billion is also 26 times the IRS’s 2024 annual budget.

Much of the Tax Burden Falls on Businesses

The table below lists the 25 most burdensome tax regulations. While the most taxpayer hours and dollars are spent on individual tax forms (over 2.2 billion hours at a total annual cost of $145 billion), this accounts for less than one-third of the total time and burden cost of tax compliance. Thus, most of the remaining tax compliance burden is borne by businesses.

The IRS estimates that “that over half of the individual income tax compliance costs are associated with reporting and substantiating income, even for taxpayers with relatively simple sources of income.” Yet, they note, these individual costs are minimized because much of the administrative burden falls on the parties that prepare documents issued to individual taxpayers—such as W-2 and 1099-INT forms; parties that are predominately businesses.

The total tax compliance burden on US businesses is split among myriad tax forms. The compliance cost of business (corporate) income tax returns is nearly $119 billion. Their quarterly tax filings cost $44.7 billion to comply with while depreciation schedules cost another $25 billion.

The forms required by pass-through businesses, such as S-corporations and LLCs, to receive the 20 percent deduction for qualified business income costs those taxpayers over $19 billion. While many pass-through businesses are individually owned, we’ve applied the higher accounting wage to this calculation because of its complexity.

The income tax returns for estates and trusts impose a burden cost of $20.2 billion per year. To put this in context, the Office of Management and Budget (OMB) estimates estate and gift taxA gift tax is a tax on the transfer of property by a living individual, without payment or a valuable exchange in return. The donor, not the recipient of the gift, is typically liable for the tax.
revenues will total $29 billion this year, which means the tax costs taxpayers nearly as much to comply with as it raises in revenues.

As an alternative way to see the huge additional compliance burden imposed on businesses, consider that the IRS estimates it takes 13 hours on average to comply with the main individual form, the 1040; 9 hours for individuals without business income and 24 hours for individuals with business income. As bad as it may sound to spend three full days filing individual income taxes, corporations have it worse: the IRS estimates it takes 105 hours on average to comply with form 1120, the main form for taxable corporations. For small corporations it takes 55 hours, and for large corporations it takes 830 hours, more than 20 weeks.

New Requirements for Cryptocurrency Transactions Added 1.4 Billion Hours

OIRA’s updated time estimates to comply with Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions,” are a testament to why Congress should estimate the compliance cost of new laws before they enact them. In 2022, these forms required more than 674,000 hours to complete. But thanks in large part to the new rules enacted in the bipartisan Infrastructure Investment and Jobs Acts (IIJA), these hourly costs have jumped to nearly 2.2 billion hours at a cost of nearly $123.7 billion.

According to the Joint Committee on Taxation (JCT), these provisions were expected to raise about $28 billion in new tax revenues over a decade, or less than $3 billion per year, a fraction of the compliance cost the IIJA imposed on taxpayers.

The IIJA included new reporting rules on cryptocurrency transactions. Form 1099-B reports capital gains and losses from individual transactions, and it’s typically used by brokerage firms and barter exchanges to report net gain or loss amounts. The IIJA increased the reporting requirements around digital assets, expanding the term “broker” to include cryptocurrency exchange operators and requiring brokers to report transactions for cryptocurrencies on Form 1099-B. It also requires businesses to report transactions made with digital assets of over $10,000.

The IRS is the Primary Source of Regulatory Costs in America

OIRA estimates show that taxpayer compliance now comprise 66 percent of the 12 billion total hours Americans spend complying with federal paperwork and 72 percent of the $184 billion in government-wide out-of-pocket costs for regulations.

What is remarkable about these shocking figures is that advances in technology to assist taxpayers in preparing and filing their tax returns have nonetheless resulted in extraordinary compliance burdens. The IRS burden estimates do incorporate the efficiency gains from the 94 percent of individual federal tax returns prepared using software and the 90 percent of all returns filed electronically. But the efficiency gains from increased computing speeds have proved no match for tax complexity, which increases steadily decade after decade. Tax law has trumped Moore’s Law.

America’s Tax Compliance Burden in 2024 Will Top 7.9 Billion Hours and $546 Billion

Taxpayers will spend over $133 billion in out-of-pocket costs to comply with tax forms. The value of the time they spend complying with the code will reach roughly $413 billion.

Sources:
Hourly and out-of-pocket estimates: Office of Information and Regulatory Affairs (OIRA), “Inventory of Currently Approved Information Collections,” Downloaded 6/27/2024, https://www.reginfo.gov/public/do/PRAMain
Wages for all occupations: U.S. Bureau of Labor Statistics, “May 2023 National Occupational Employment and Wage Estimates,” (00-0000 All Occupations), https://www.bls.gov/oes/current/oes_nat.htm#00-0000
Wages for 13-2011 Accountants and Auditors: https://www.bls.gov/oes/current/oes132011.htm
Average benefits for private sector workers: https://www.bls.gov/news.release/ecec.t04.htm

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