NCPA - National Center for Policy Analysis

Income Tax Compliance Burden Tops $140 Billion In 2001

July 31, 2001

The complexity of the U.S. income tax is imposing continually higher costs on taxpayers, so high that a substantial "tax cut" could be achieved just by simplifying the code, according to testimony by J. Scott Moody, senior economist with the Tax Foundation, before the Oversight Subcommittee of the House Ways and Means Committee.

  • Moody projects that in 2001, the nation will spend 4.6 billion hours on just the paperwork requirements that taxpayers must meet.
  • That is the equivalent of a work force of over 2,235,000 people, more than work in the auto industry, the computer manufacturing industry, the airline manufacturing industry, and the steel industry combined.
  • The dollar equivalent is $140 billion in compliance costs for 2001, says Moody, according to an extremely cautious estimate that excludes many substantial costs that are part of the overall "compliance burden."

If tax simplification could be achieved, the resulting "tax cut" would be progressive because the burden of complying with the tax code falls more heavily on low- and middle-income taxpayers. For taxpayers whose adjusted gross income is less than $20,000, the cost of compliance averages over 4 percent of Adjusted Gross Income.

The estimate does not include the productive value people may have added to the economy if they had been working instead of filling out forms is excluded because estimating this "opportunity cost" is difficult and speculative. The costs of the IRS, the Tax Court and all the litigation taxpayers pay for when in dispute with these institutions are also excluded.

Source: Scott Moody, "Cost of Complying with Federal Income Tax Will Reach $140 Billion in 2001, According to Tax Foundation Testimony," July 17, 2001, updated from "The Cost of Complying with the U.S. Federal Income Tax," Tax Foundation Background Paper No. 35, November 2000, Tax Foundation, 1250 H Street, N.W., Suite 750, Washington, D.C. 20005, (202) 783-2760.


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