Promoting and Preserving Supply-Side Economics.

The Economic Burden Caused by Tax Code Complexity

By Arthur B. Laffer, PhD

Thursday, April 14th, 2011

Executive Summary

Government doesn’t create wealth, it redistributes wealth. Government has a tax base from which it receives its tax revenues. It has constituents to whom it provides benefits. And, government has a vast tax collection infrastructure that collects the money, processes the money, and disperses the money.

The costs taxpayers actually incur are far greater than the net sums the government collects in taxes. Looking at the world from the taxpayer’s perspective, the difference between what a person receives for work net of all taxes and what the worker is paid gross is the tax wedge. The government tax wedge changes the market outcome dramatically from the pre-government equilibrium. This tax wedge decreases output and raises prices. Beginning with the tax collection process and extending through the benefit disbursement process, there are inherent costs associated with the government’s vast tax collection infrastructure.

Individuals and businesses as taxpayers must pay substantially more than$1 in order for government beneficiaries to receive $1 of federal government services. Before individuals and businesses pay their tax liability, they must first spend time collecting records, organizing files, and wading through the tax code to determine exactly what their tax liability is. Second, individuals purchase products and services, such as tax software or an accountant, to assist them in determining their tax liability. These are tax compliance outlays. Third, taxpayers must also pay the administrative costs of the IRS, which are needed to run the IRS etc. solely for tax collection purposes. Still there is more.

Businesses, large and small, hire teams of accountants, lawyers, and tax professionals to track, measure, and pay their taxes. This tax infrastructure is also used to optimize the tax liability of the business. Individuals and businesses change their behavior in response to tax policies, hiring tax experts to discover ways to minimize their tax liabilities. The efficiency costs from both legal tax avoidance and illegal tax evasion are difficult to quantify, but could be the highest costs of all.

This is their story.

This study creates a comprehensive estimate of the total administrative costs, time costs, and direct tax compliance costs created by the complex U.S. federal income tax code. This paper deals only with Segments B, C, D, and E from Figure ES 1. One can only imagine what the full burden of government on the well-being of society might be. In our analysis we estimate that U.S. taxpayers pay $431.1 billion annually, or 30% of total income taxes collected, just to comply with and administer the U.S. income tax system.

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