David Allen at the Heritage Foundation examines for the Daily Signal the costs associated with taxes.
In addition to the direct burden imposed by the taxes themselves, Americans face compliance costs, as well as costs in the form of revenue loss during the IRS’ tax collection process. Pete Sepp, president of the National Taxpayers Union; Jason Fichtner, a senior research fellow at the Mercatus Center at George Mason University; and Dan Mastromarco, a partner at the Mastromarco Firm described at an event at the Heritage Foundation in November how the current tax code imposes costs on taxpayers in three key areas:
• Accounting Costs. Under the United States’ voluntary compliance tax system, it is the individual taxpayer’s responsibility to determine his income tax liability and meet filing requirements. Given the complexity of the existing tax code, many Americans either purchase tax preparation software or hire a third party to assist them during this process. According to a 2013 study by the Mercatus Center, the vast majority of Americans pay for assistance with the accounting process.
Opportunity costs must also be considered- the Taxpayer Advocate Servicer found that Americans spent 6.1 billion hours in 2010 completing IRS forms and filing returns. Even if taxpayers’ time were monetized at the low value of $10 per hour, that still leaves a cost of $61 billion per year. …
… • Tax Gap (revenue loss). The U.S. tax code is extraordinarily long and complex. According to the Taxpayer Advocate Servicer report, it is nearly 4 million words long. When printed, the IRS’ guidance explaining the income tax stands more than 1 foot tall.
As if the task of navigating through countless pages of dense legal jargon wasn’t formidable enough, consider this: on average, the U.S. tax code changes every day.
The incomprehensibility of the tax code leads to predictable results: American taxpayers frequently fail to file returns on time, fail to pay reported taxes on time, or innocently underreport the amount of tax they owe. Collectively, this leads to a substantial difference between taxes owed and taxes paid on time, creating a form of revenue loss known as the tax gap. The size of the net tax gap is roughly $452 billion (in 2012 dollars).
• Deadweight loss (economic cost). Taxes further impose costs by distorting economic decision making, namely how individuals choose to spend and save. Economists call this deadweight loss. It can be thought of as all of the foregone economic transactions that would have occurred in the absence of the tax. This includes all of the products and services not purchased and investments not made.
Deadweight loss is an implicit cost of taxation that slows economic growth. Although it is more difficult to calculate, estimates of this lost economic growth range from $148 billion to $609 billion.
Even if we use the lower-end estimates from above, the combined loss from these three sources is still a staggering $667 billion. When compared against the IRS’ gross collection amount of $2.855 trillion in 2013, this number indicates that, out of every $100 collected, over $23 was lost. When we bring in the higher-end estimates, the loss soars to an enormous $1.439 trillion. This equates to roughly $50 being lost for every $100 collected.
The answer involves reforming the tax code, focusing on basic principles like the ones outlined by Roy Cordato in 2009.
Cordato urges lawmakers to adopt the “liberty principle” as they consider tax reform. “The liberty principle stands in direct opposition to the redistributionist principle,” he said. “The redistributionist principle says the more people earn, the greater proportion of their income should be paid in taxes. There’s no relation to the benefits received from taxes.”
“In stark contrast, the liberty principle focuses on minimizing the extent to which the tax system interferes with individual freedom or the ‘pursuit of happiness,'” Cordato added. “This liberty principle is consistent with the North Carolina Constitution. Article I, Section I of that document lists our inalienable rights, including the enjoyment of the fruits of our own labor.”
Boosting prosperity and freedom requires a tax system that emphasizes “neutrality and simplicity,” Cordato said. “By neutrality, we mean tax policy should strive neither to penalize nor favor taxpayers’ decisions about how much time to work versus pursuing leisure activities, how much money to save or invest versus how much to spend, what kinds of goods and services to purchase, and what kinds of investments to make.”