Substantial Hidden Costs in the U.S. Tax Code

May 29, 2013

The U.S. federal government has a 60,000 page tax code. The purpose of this exorbitantly long document is not only to fund the government, but to instill "fairness" by granting tax advantages to some favored businesses. Numerous articles have been published about the obvious time and money wasted from compliance with the tax code, but beyond accounting costs, there are other hidden costs and implications, say Jason J. Fichtner and Jacob Feldman of the Mercatus Center.

Fichtner and Feldman analyze the current economic literature on hidden costs of the U.S. tax system and find that there are other hidden costs and implications of taxation:

  • Lobbying to gain and maintain tax advantages.
  • Economywide costs as tax incentives alter work, leisure, savings, consumption, production and investments.
  • Cost revenues as a result of taxpayer noncompliance.

These hidden costs result in nearly $1 trillion annually in hidden tax-compliance costs, while the Treasury forgoes approximately $450 billion per year in unreported taxes. According to the National Taxpayer Advocate:

  • There were 4,428 changes to the Internal Revenue Code between 2001 and 2010.
  • The tax code averages more than one change per day. The resulting complexity creates hidden compliance costs between $215 billion and $987 billion annually.
  • To put this in perspective, total revenue collected by the federal government in 2012 was $2.5 trillion.

In 2011, there were 173 different tax deductions and credits for individuals and corporations that amounted to around 7 percent of gross domestic product. The economic costs of these tax provisions and marginal rates are estimated between $148 billion and $609 billion, which is a substantial portion of economic capacity that is being removed by the tax code.

The United States can fix these problems by examining history and international reform, and making substantial reductions in tax credits and deductions provided in the tax code.

Source: Jason J. Fichtner and Jacob Feldman, "The Hidden Costs of Tax Compliance," Mercatus Center, May 20, 2013.

 

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