Cost of tax compliance is high

Each year Americans spend enormous effort and cost on tax recordkeeping and compliance. A study by the Tax Foundation estimated the time and cost of complying with the federal tax laws, and found: “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. Projections show that by 2015 the compliance cost will grow to $482.7 billion.”

In Kansas for 2005, compliance costs for the income tax were estimated at 27.1% 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.

Furthermore, 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. Curiously, 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.”

It is estimated that nearly half of all households will pay no federal income tax this year. Some will point out that all workers pay social security taxes, but as we’re told, that’s not really a tax, it’s the government saving for our future retirement. (Only the truly deluded believe this.)

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.

A curiosity of tax season is that many people are happy because they get a refund. And they’re delighted to get that refund, so much so that many will pay high interest rates on a refund anticipation loan just to get the money a little earlier. The irony is that by adjusting their withholding, they could take possession of much of that money during the year as they earn it.

Read more at Voice for Liberty in Wichit