Complying with the federal tax code costs American taxpayers at least $100 billion annually, and lost economic efficiency associated with the tax system may top half a trillion dollars, auditors for the Government Accountability Office told Congress.In a report likely to add fuel to the campaign for an easy-to-administer national consumption tax, the GAO said that the lowest available estimates of the cost of complying with federal income, payroll and excise taxes is $107 billion - a whopping 1 percent of the nation's total gross domestic product. Other studies suggest that compliance costs may be 50 percent higher than these estimates.
Citing U.S. Treasury Department estimates that individuals, businesses and exempt organizations spent a total of 6.4 billion hours completing federal tax forms last year, the agency concluded that even these estimates may be conservative.
"If this burden were monetized at rates between $15 and $30 per hour, the total cost would amount to between about $100 billion and $200 billion" each year, the report said.
In addition to the above-mentioned compliance costs, the present system "also results in economic efficiency costs, because tax rules cause individuals to change their behavior in ways that ultimately leave them with lower-valued combinations of consumption and leisure than they would have obtained if the tax system did not affect their behavior," the GAO said.
The most comprehensive studies of this issue suggest that the economic efficiency costs imposed on Americans by the tax system are on the order of magnitude of 2 percent to 5 percent of GDP - another $200 billion to $500 billion on top of the compliance costs already facing taxpayers.
With Americans expected to pay $2.1 trillion in federal taxes this year, eliminating these costs and inefficiencies could produce savings equivalent to a reduction of 25 percent or more on their total tax bill.
Opponents of a shift from income taxes to consumption taxes will also be able to draw ammunition from the GAO report. "Any replacement tax system will impose significant compliance costs of its own," the auditors noted. And considering that "many state and local government income taxes depend upon the same compliance activities as the federal income tax does, taxpayers would still bear the costs of those activities, unless those other governments replaced their own taxes to conform to the new federal system."
