January 10, 2006
For immediate release
Media contact: William Ahern (202) 464-5101
A new Tax Foundation study estimates that complying with the federal income tax code during 2005 cost U.S. taxpayers $265.1 billion.
“That’s about 22 cents in overhead costs for every dollar of income tax collected,” said Scott Hodge, president of the Tax Foundation and co-author of the study.
In 2005, the $265.1 billion compliance burden represented over 6 billion hours spent by individuals, businesses and nonprofits complying with the federal income tax code. Projections show that by 2015 the compliance cost will grow to $482.7 billion, or an inflation-adjusted $405.8 billion.
The study appears as No. 138 in the Tax Foundation Special Report series, authored by Hodge and economists J. Scott Moody and Wendy P. Warcholik. The authors explain that the burden estimate is cautious and excludes many substantial costs normally thought of as part of the overall “compliance burden.”
For example, the productive value that people may have added to the economy if they had been working instead of filling out forms is excluded because estimating this “opportunity cost” is exceedingly difficult and speculative. The study also excludes the costs of the IRS, the Tax Court and all the litigation that taxpayers pay for when their tax returns are in dispute.
The size and economic importance of a $265.1 billion economic cost can be illustrated by comparison. The compliance cost is greater than the revenue of Wal-Mart ($259 billion), the nation’s largest company. Similarly, 6 billion hours per year represents a work force of over 2,884,000 people. That’s larger than the combined populations of Dallas (1,210,393), Detroit (900,198) and Washington, D.C. (553,523), and it’s more people than work in the auto industry, the computer manufacturing industry, the airline manufacturing industry, and the steel industry combined.
Importance for Political Debate
If lawmakers create an Internal Revenue Code that is terribly complex or that changes rapidly, taxpayers are often unable to reach a reasonably certain conclusion about how taxation will affect a business plan or investment. As a result, tax policy can handicap the growth and dynamism of the U.S. economy.
“The cost of tax compliance has grown tremendously in recent years,” said Hodge. “As Congress debates the tax reform recommendations of the President’s Advisory Panel on Federal Tax Reform, Members should work to reduce this growing compliance burden through tax simplification and reform.”
The Tax Foundation has monitored tax policy at the federal, state and local levels since 1937. Best known for its annual calculation of Tax Freedom Day®, the Tax Foundation is a nonprofit, nonpartisan 501(c)(3) organization.