Tax Code Compliance Costs Economy $1 Trillion Annually

Accounting costs alone total $409 billion, the annual GDP of 36 states combined

December 14, 2016

The complexity of the tax code now costs the economy around $1 trillion per year, according to a report from the Tax Revolution Institute.

Title 26 of the U.S. Code has 74,608 pages and 2.4 million words. The IRS recently added 7.7 million words of tax regulations to help clarify what the code means, as well as 60,000 pages of case law for accounts and tax lawyers.

The report noted that the 32 volumes of the Encyclopedia Britannica is 44 million words in length, which means that the tax code is nearly one-fourth of its length.

"The complexity of the tax code and its supplementary regulations is continuing to climb at an alarming rate," the report said. "This is exacerbated by growing layers of provisional carve-outs, loopholes and special privileges."

According to data from the Bureau of Labor Statistics and the Office of Information and Regulatory Affairs, the accounting costs of tax compliance will total $409 billion in 2016—equal to the annual GDP of 36 states combined. When including economic costs of compliance, the burden to the economy becomes even greater.

"Economic costs include those accounting costs (i.e. the direct price tag of carrying out the actions) and our opportunity cost (i.e. the amount of money that could have been made via employing the same capital on other economic objectives)," the report said.

The Tax Foundation found that Americans spend 8.9 billion hours per year complying with the tax code, which is equal to 4.3 million Americans spending all of their time working on tax compliance.

"There is no doubt that firms would use 8.9 billion labor hours per year on far more efficient tasks than attempting to comply with over 10 million words of tax rules," the report said.

Polls have shown that Americans view the tax code as too complex. According to Pew Research, 72 percent of Americans said they are dissatisfied with the tax code. According to the Tax Foundation, 82 percent said they want a complete overhaul of the federal tax system.

In June, Chairman of the House Ways and Means Committee Kevin Brady (R., Texas) put forth the Republican's outline for tax reform known as "A Better Way," focusing on making the tax system more simple and fair for taxpayers.

"Since President Reagan reformed the tax code in the 1980s, it has exploded in size, tripled in size, 70,000 pages—incredibly complex," Brady said at an event at the Heritage Foundation.

"For years Americans have asked why can't we have a tax code so fair and so simple it could fit on a postcard?" he asked. "And for years Washington dismissed that idea but our tax team went to work and that's exactly what we're proposing."

The IRS did not respond to requests for comment by press time.

Published under: IRS , Taxes