Americans now spend a combined 6.1 billion man-hours completing their taxes each year, according to a report from the Office of the Taxpayer Advocate, which plays the role of ombudsman within the Internal Revenue Service. That's the rough equivalent of a full workweek for every taxpayer -- a tremendous national waste of time, which comes with significant opportunity costs.
Compliance costs are approximately $105 billion to $175 billion per year in 2007 dollars, according to the Tax Policy Center, though changes to electronic tax filing may make these estimates a bit high. Nevertheless, this amounts to between 4.3 percent and 7.2 percent of total federal tax revenue. For comparison, compliance costs can be about 1 percent of tax revenue in other developed countries.
Successful tax standardization would thus reduce compliance costs by the equivalent of a historically large tax cut. If such costs could be reduced to 1 percent of revenue, standardization would be worth $1.2 trillion over 10 years. That's more than a third of the George W. Bush tax cuts in terms of value.
How could the U.S. accomplish such standardization? The Tax Policy Center provides a useful collection of the best proposals. Here are three broad strategies to simplify and standardize taxes: align the eligibility thresholds for rate brackets and all tax expenditures, consolidate similar tax provisions and use a single definition of "child."
Friday, January 11, 2013
Tax Reform's Lowest-Hanging Fruit
My latest post in Bloomberg talks about tax standardization, and ways we could dramatically reduce compliance costs and tax-code complexity without the political roadblocks in the way of 1986-style tax reform: