Tax Compliance Costs 22 Cents Per Dollar, Study Suggests

by Glen Shapiro, LawAndTax-News.com, New York

13 January 2006

A study published by the Tax Foundation on Tuesday has estimated that complying with the federal income tax code during 2005 cost US taxpayers $265.1 billion.

“That’s about 22 cents in overhead costs for every dollar of income tax collected,” Scott Hodge, president of the Tax Foundation and co-author of the study, observed.

The Tax Foundation is a non-profit and non-partisan organization, best known for its annual calculation of Tax Freedom Day.

According to the figures released by the Foundation, in 2005, the $265.1 billion compliance burden represented over 6 billion hours spent by individuals, businesses and nonprofits complying with the federal income tax code. Projections show that by 2015 the compliance cost will grow to $482.7 billion, or an inflation-adjusted $405.8 billion.

Hodge and his co-authors, J. Scott Moody and Wendy P. Warcholik explain that the estimated burden is cautious and excludes many substantial costs normally thought of as part of the overall “compliance burden.”

For example, the productive value that 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 exceedingly difficult and speculative. The study also excludes the costs of the IRS, the Tax Court and all the litigation that taxpayers pay for when their tax returns are in dispute.

The study additionally shows that the burden of tax compliance does not fall evenly on taxpayers. It varies by type of taxpayer, income level and state. In 2005, businesses will bear the majority of tax compliance costs, totaling nearly $148 billion. Compliance costs for individuals will be $111 billion, and non-profits will bear nearly $7 billion.

State-by-state estimates of the 2005 federal compliance cost also vary widely because state populations and economies differ so significantly. On a per capita basis, Wyoming ($1,242), Delaware ($1,181) and Colorado ($1,167) face the highest compliance cost while Mississippi ($658), West Virginia ($689), and Tennessee ($705) face the lowest. Measured per $1,000 of income, Montana ($38), Utah ($37), and Wyoming ($33) face the highest compliance cost while California ($19), Connecticut ($20) and Massachusetts ($21) face the lowest.

“The cost of tax compliance has grown tremendously in recent years,” concluded Hodge, adding that:

“As Congress debates the tax reform recommendations of the President’s Advisory Panel on Federal Tax Reform, Members should work to reduce this growing compliance burden through tax simplification and reform.”

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