AUSTIN – With Tax Day 2011 just four days away, the release of a new study by Dr. Arthur Laffer, Dr. Wayne H. Winegarden, and John Childs underscores the importance of simplifying the U.S. tax code as a way to reduce the compliance costs of the tax burden, thereby boosting growth in the economy.
Entitled “The Economic Burden Caused by Tax Code Complexity,” the study (available at www.LafferCenter.com) suggests that a reduction in tax code complexity would help the U.S. reduce its national debt by as much as $1.4 trillion over a 10-year period.
“U.S. taxpayers pay an estimated $431.1 billion annually, or 30% of total income taxes collected, just to comply with and administer the U.S. income tax system,” said Dr. Laffer, who rose to prominence as an economic expert during the Reagan Administration and whose name is forever linked to the ‘Laffer Curve’ tax revenue model. “Individuals and businesses spent an estimated 6.1 billion hours complying with the filing requirements of the income tax code.”
The study estimates that those 6.1 billion hours equate to $377.9 billion, compounded by direct outlays (paying professional tax preparers or purchasing tax software) estimated at $31.5 billion and IRS administrative costs running $12.4 billion. Comprehensive audits impose an additional taxpayer burden of at least $9.3 billion, bringing the total to $431.1 billion in order to comply with the complexity of the federal income tax system. These costs don’t account for the lost economic opportunities caused by the uncertainty and confusion of the tax code, nor the pain and suffering for people dealing with the IRS.
Tax Code Changes and Complexity
According to government figures, there have been approximately 4,428 tax code changes in the last 10 years, including an estimated 579 changes in 2010 alone. Based on an analysis early last year, the tax code had grown from 1.4 million words to 3.8 million words just since 2001. Between 1986 (the last major tax reform) and 2005, Congress passed 14,400 amendments to the tax code – an average of 2.9 changes every day for the full 19 years.
“The tax code’s complexity befuddles many tax preparation experts and even those manning the help lines at the IRS,” said Laffer. “In 2002, the IRS help centers provided wrong answers to taxpayers 29% of the time. In each of the last two fiscal years, the IRS received 110 million calls from taxpayers and they were unable to answer 25% of the questions.”
According to the study, the tax code is confusing for families, businesses, people working for the IRS, and even for professionals in the industry. In 2007, USA Today had five professional tax preparers determine tax liabilities for a hypothetical family. None of their answers were the same.
According to the study, compliance costs would plummet under comprehensive tax reform, such as a low rate flat tax on income and/or consumption. Inefficiencies caused by the tax code complexity would be greatly reduced. Overall economic efficiency would increase, capital and labor would flow to more highly valued uses, and the growth in income and wealth in the U.S. would increase substantially.
Laffer Center for Supply Side Economics – Austin, Texas
Dr. Laffer is partnering with the Texas Public Policy Foundation to create the Laffer Center for Supply Side Economics, with a focus on preserving and promoting supply-side ideas by housing all of his work dating back to the 1970s and providing a forum for new and original research on economic ideas based on the core tenets of supply-side economics.
“The foundation is honored to be working with Dr. Laffer on the development of the Laffer Center here in Austin, Texas,” said Brooke L. Rollins, president & CEO of the Texas Public Policy Foundation. “As an influential and renowned economist, academician and strategic thinker, Dr. Laffer has had a tremendous impact on our country and the world, and we look forward to being a part of his effort to preserve this legacy and advance prosperity for future generations.”
The Laffer Center for Supply Side Economics is a partnership with the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin.
Laffer Center website: www.LafferCenter.com
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