Tax Complexity Costs the Economy $233.8 Billion

June 26, 2015 | By: Matt Robinson

tax compliance costsWe all know the tax code is complex. In fact, many of us think that the tax code is needlessly complex. An annual study of the tax code’s complexity and its costs was recently released by the National Taxpayers Union Foundation (NTUF). This study takes a look at the costs associated with tax code compliance. The latest numbers indicate that the economy lost $233.8 billion, thanks to 6.1 billion hours of lost productivity, due to tax code compliance.

Time and Money Spent on Tax Code Compliance

Most of us dislike filing our taxes. In fact, the complexity of the tax code ensures that many of us need some sort of assistance with tax filing. I hire an accountant to prepare and file my tax return. Even those who don’t hire a professional to help with their taxes often purchase tax preparation software to help them through the steps.

It’s not just individuals that need to worry about time spent on taxes. Businesses, particularly small businesses, are impacted by tax code compliance.

According to the NTUF, lost productivity due to dealing with tax compliance amounts to about 6.1 billion hours. In that amount of time, claims the study, the Voyager spacecraft could fly to Proxima Centauri (the nearest star other than the sun) and back four times.

For 2015, the reasons given for the increasing amount of productivity lost to tax code compliance are mainly FATCA and the Affordable Care Act. The NTUF reports that there are 3,322 pages of legal guidance just for the Affordable Care Act alone.

It doesn’t help, either, that the tax code is 4 million words long. In order to get through Form 1040, many taxpayers must confront 209 pages of instructions. This compares with the two-page instructions issued with 1040 forms 75 years ago. No wonder many people need help preparing and filing their taxes.

The money spent on tax preparation is also on the rise.  The NTUF claims that the economy lost $233.8 billion due to lost productivity and personal expenses. The study says that individuals are expected to pay $31.7 billion in out-of-pocket expenses related to complying with the tax code. This includes money spent on tax preparation software and on visits to tax professionals.

Is There a Way to Simplify the Tax Code?

Many taxpayer advocates think that the tax code should be simplified. There are so many regulations, credits, deductions, and other issues when it comes to taxes that it’s hard to keep track of everything.

Suggestions for simplifying the tax code range from instituting some form of a flat tax to getting rid of a number of deductions for everyone to closing loopholes that are considered favorable to the wealthy.

Simplification of the tax code would require a complete overhaul of the system in many cases, and it is difficult to see what the outcome might be. However, with the complexity of the tax code costing the economy so much, there is some reason to wish for something a little easier for individuals and businesses to manage.