Tax Day costs us more than we think

Our country’s tax code is far too complicated.

by Derek Olson

Yesterday marked the 101st year in which Americans reported their taxable income to the federal government. While many student readers likely have simple and easy tax forms, if any, older workers are likely well-acquainted with the nuisance of filing taxes.

The federal income tax has changed quite a bit since it was signed into law in 1913. In its first year, less than 1 percent of Americans paid any tax at all, and those who did paid an average of 1 percent of their incomes. Since then, the tax rates and brackets have changed nearly 40 times. From its initial rate of 7 percent in 1913 to its peak of 94 percent in the wake of World War II debts to the current 39.6 percent, the top tax rate has been all over the map. The lower brackets have followed similar patterns.

Congress has made nearly 5,000 changes to the tax code since 2001. That’s more than one per day. Despite all those changes, the tax code has not had any major reform since the Tax Reform Act of 1986, which sought to simplify the system, eliminate loopholes, gain lost revenue and lower tax rates. The tax code has a tendency to perpetually increase in complexity because of Congress’s incentive to slip in special new loopholes for their campaign donors at any chance they get.

Commerce Clearing House, a tax services provider, has produced a book to explain the tax code ever since it was first created. CCH published its first version of the book in 1913, which was 400 pages long. Its latest version is 25 volumes and more than 73,000 pages. Nearly 4 million words of the book are the tax code alone.

Given that a law student reads roughly 10,000 pages in a year of law school, it would take approximately seven years to study CCH’s guide to the income tax in its entirety. At least we know there are two industries for which the government creates a lot of jobs: tax accountants and tax lawyers.

In 2007, the average taxpayer spent 18 hours and $258 to simply comply with the tax code, according to the IRS Office of Research. That’s a big cost to pile on top of our existing tax bills. That’s why a majority of individuals resort to hiring tax professionals to help them. All in all, the complexity of our tax system results in a $168 billion cost of compliance each year.

That $168 billion, or about $535 per person, is a government-created drag on the economy. It’s money spent that doesn’t improve our standard of living, and it is the direct result of terrible tax laws. If the tax code were simpler, we could put those resources to productive use, grow the economy and have more to spend on things that do improve our lives, like health care and education.

Most, if not all, of the successes of the Tax Reform Act of 1986 have eroded away. The tax code is more complicated than ever, and the cost of compliance is sky high. Not only do we need a major overhaul to simplify the tax code and eliminate hundreds or thousands of loopholes, but we need a way to prevent it from growing complicated again.

Now we can enjoy the 364 days until the next Tax Day.