Mary Whittinghill - April 10, 2008
Montana Taxpayers Association
Tax Deadline
The deadline for filing your state and local taxes is a short five days away. For those of us who put this annual effort off to the bitter end, the next five days can be filled with nail biting and anxious moments. You may wonder why I would wait until the very last moment to delve into the countless piles of paper and receipts laying on every flat surface in my house – It’s because it is just plain confusing. I know in that stack of federal and state forms and booklets blocking my computer screen are changes, new definitions of allowable and disallowable expenses, and other items buried somewhere that will take considerable time to find. It’s a wrestling match I find difficult to enter.
This is what millions of taxpayers face every year. Some foolish people attempt this task on their own, others will consult with and hire experts and others are able to utilize the services of volunteers. These tax experts are pros. When you enter their office with your box of financial information for the past year, they are able to quickly separate them into neat and manageable piles and accurately enter the information on the appropriate forms.
However you approach the annual filing of your income taxes, the cost of compliance is high. So how much does this compliance cost the taxpayers? According to a report by the Tax Foundation in 2005, individuals, businesses and nonprofits spent an estimated 6 billion hours complying with the tax code at an estimated cost of $265 billion. They project by 2015 that number will nearly double.
The burden of compliance does not fall equally on taxpayers. Businesses bear the majority of the tax compliance cost, nearly 56 percent; individuals account for 43 percent and nonprofits around 2.5 percent.
But if you look at the costs by level of income, it becomes clear that the cost of compliance is highly regressive. Lower income taxpayers can pay as much as 5.9 percent of their income on compliance costs while higher income taxpayers incur about 0.5 percent of their income on compliance. This same relationship holds true for businesses.
In addition, there is the expense of the IRS to administer and enforce the federal tax code. The operating costs have almost tripled between 1970 and 2004 growing from $3.5 billion to $9.8 billion. Employment has risen from nearly 69,000 employees to 99,000 in that same time period.
The Tax Foundation determined that during the past 45 years the income tax regulations have grown from 547,000 words in 1955 to almost 6 million words in 2005, an increase of 956 percent.
How in the world did we get to the point where the cost of compliance and collection has grown at an amazing pace and the tax code is so incredibly complex people would be well advised to seek assistance from a professional?
Some people believe the entire system should be overhauled, even to the extent of resorting to repeal of the 16th amendment and reverting to excise or apportionment taxes. Researchers at the Tax Foundation believe Congress could begin reducing the complexity (and, therefore, its high compliance costs) by adding more stability and simplicity to the current tax system. I would add to that a strong dose of education by the IRS and our own Department of Revenue. Stability, simplicity and taxpayer education are sound tax policies that actually work to increase compliance and should help reduce the high cost of reporting today. Sounds easy enough. Let’s just hope at some point it will become politically feasible.
This is Mary Whittinghill with the Montana Taxpayers Association wishing you a pleasant evening.
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