Taxes are expensive

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The IRS estimates that the amount of time spent complying with the federal tax code is 7 billion hours per year. That’s 3,500,000 people working full-time on taxes.

Not to pay the taxes, mind you. This is the effort required just to figure out who owes how much tax — in other words, complying.

A few years ago the Tax Foundation looked at the cost of tax compliance and found this: “In 2005 individuals, businesses and nonprofits will spend an estimated 6 billion hours complying with the federal income tax code, with an estimated compliance cost of over $265.1 billion. This amounts to imposing a 22-cent tax compliance surcharge for every dollar the income tax system collects.”

In Kansas for 2005, compliance costs for the income tax were estimated at 27.1 percent of the tax collected. That’s almost $2.5 billion in total costs, or $877 per person. To place this number in context, Kansas spends about $2.9 billion on public schools each year.

It’s expensive to collect income taxes. We also have evidence that it’s expensive for governments to spend the taxes they’ve collected.

A curiosity is that the cost of complying with the federal tax code is highly regressive. Those earning less than $20,000 spent nearly 6 percent of their income on compliance. Those with incomes of over $200,000 spent just 0.45 percent of their income on compliance. Those earning less than $20,000 will generally pay no income tax, yet they still pay to comply. (Many of these low earners will qualify for various spending programs that are implemented through the income tax system.)

By simplifying our tax code, we could eliminate much of this cost, and return that effort to productive use. As Paul Jacob wrote in a commentary: “This complexity has costs. And not just to my sanity. A whole industry has risen to ease the burden of figuring out our taxes. One hates to begrudge anyone an honest living, but really, most of today’s tax accountants would better serve humanity in some other job.”

For those who do pay taxes, they often aren’t aware, on a continual basis, of just how much tax they pay. That’s because for wage earners federal and state taxes are conveniently withheld from their paychecks. Many people, I suspect, look at the bottom line — the amount they receive as a check or automatic bank deposit — and don’t really take notice of the taxes that were withheld. This makes paying taxes almost painless.

For property taxes, anyone who has a mortgage probably has these taxes incorporated into their monthly mortgage payment, so they’re not aware of the taxes on a monthly basis. Renters pay them as part of their rent. Everyone who trades with a business pays them, as taxes such as the sales tax are part of what people have to pay to buy something.

To increase tax awareness, we should eliminate the withholding of taxes from paychecks and from monthly mortgage payments. Instead, each month or year the various taxing governments should send a bill to each taxpayer, and they would pay it just like the rest of their periodic bills. In this way, we would all be acutely aware of just how much tax we pay.

Since tax withholding from paychecks and mortgage payments reduces our awareness of just how much tax we pay, it’s unlikely that governments will stop the withholding of taxes and submit a bill to taxpayers. Instead, it’s left to ourselves to remain aware of how much we are paying. Politicians just hope we don’t notice.

Comments

One response to “Taxes are expensive”

  1. Pam Porvaznik

    Time to get rid of the IRS and seriously consider the Fair Tax.

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