The High Cost of Tax Complexity in America: Time for Reform
The United States tax system has evolved from a simple structure based on the revolutionary principle of “no taxation without representation” to a labyrinthine maze of rules, regulations, and requirements. Today, the sheer complexity of the tax code imposes heavy financial, time, and psychological burdens on individuals and businesses. This article delves into the current state of U.S. taxation, quantifying the enormous costs of compliance and highlighting the urgent need for reform.
The Origins of U.S. Taxation
The story of taxation in America began with the Boston Tea Party and the rallying cry against “taxation without representation” that fueled the American Revolution. Out of this foundational experience emerged a tax system rooted in principles of fairness and democratic representation1.
Over time, this system grew in complexity. The Internal Revenue Service (IRS) was established in 1862 to collect excise taxes and a temporary income tax to fund the Civil War2. The 16th Amendment in 1913 made the federal income tax permanent, and World War II brought the advent of tax withholding from wages in 1943, transforming tax collection and boosting compliance3.
The Compliance Burden on Individuals
As the tax code grew in complexity, so did the burden on individual taxpayers. In 2019, Americans spent an astounding 6.5 billion hours and $200 billion on tax compliance, according to the National Taxpayers Union Foundation4. That’s an average of 24 hours and $740 per individual taxpayer4.
Beyond the financial and time costs, tax season takes a psychological toll. A 2019 WalletHub survey found that 28% of Americans would rather serve jury duty than prepare their taxes5. The stress and anxiety surrounding tax preparation is a direct result of the system’s complexity.
Disturbingly, this burden falls disproportionately on low-income families. A 2018 ProPublica investigation revealed that the IRS audits low-income taxpayers claiming the Earned Income Tax Credit (EITC) at higher rates than the wealthy, in part because these audits are easier to conduct6. This raises troubling questions about the fairness of the current system.
The Crushing Load on Small Businesses
For small business owners, tax compliance is an even more daunting challenge. On top of federal income taxes, they must navigate a web of state and local taxes, including business license taxes, personal property taxes, franchise-excise taxes, payroll taxes, and sales and use taxes. Each tax type has its own complex rules and filing requirements.
The cost of this complexity is staggering. A 2017 survey by the National Small Business Association found that small businesses spend an average of $18,000 per year on tax compliance, with 58% of owners spending more than 40 hours per year on federal taxes alone7. This is time and money that could be invested in growing their businesses and creating jobs.
The psychological burden is also immense. A 2018 survey by Insureon found that 36% of small business owners cite tax compliance as their top business concern, ahead of issues like cash flow and customer acquisition8. The constant worry about getting taxes right takes a toll on entrepreneurs’ mental health and well-being.
The Tax Preparation Industry Paradox
The rise of tax complexity has fueled a booming tax preparation industry. Companies like H&R Block and Intuit (maker of TurboTax) have built billion-dollar businesses on the premise of helping taxpayers navigate the Byzantine tax code. In 2019, the tax preparation industry generated $11 billion in revenue9.
Ironically, these same companies have actively lobbied against efforts to simplify the tax system. ProPublica has extensively documented how Intuit has fought against return-free filing and other reforms that could reduce the need for their services10. This raises concerning questions about the influence of private interests on public policy.
The Global Perspective: Simpler Systems Abroad
The complexity of the U.S. tax system stands in stark contrast to the more streamlined approaches of other developed nations. In countries like Japan, the UK, and Germany, taxpayers with simple tax situations often don’t need to file returns at all11.
Under these “return-free” systems, the government uses information it already collects (such as W-2 forms) to calculate taxes owed and sends taxpayers a bill or refund. Taxpayers with more complex situations can still file returns, but for the majority, the process is simple and automatic. This approach saves time, reduces errors, and minimizes the need for costly tax preparation services.
The Path Forward: Simplicity, Transparency, Fairness
The current state of U.S. taxation is unsustainable. The immense financial, time, and psychological costs of compliance, coupled with the disproportionate burden on low-income families and small businesses, underscore the urgent need for reform.
Simplifying the tax code would be a good start. Eliminating loopholes, streamlining deductions and credits, and moving toward a return-free system for most taxpayers could significantly reduce compliance costs. Making the system more transparent would also boost public trust and understanding.
Ultimately, the goal should be a tax system that is simple, transparent, and fair. Taxpayers should be able to understand their obligations and trust that everyone is paying their fair share. Achieving this will require bold leadership and a willingness to stand up to special interests.
Conclusion
The history of taxation in the United States is a story of growing complexity and rising compliance costs. Today, the financial, time, and psychological burdens of this complexity are immense, falling heavily on individuals, small businesses, and low-income families.
By shining a light on these costs and contrasting the U.S. system with simpler models abroad, this article aims to spark a national conversation about the urgent need for tax reform. It’s time to envision a future where paying taxes is straightforward, transparent, and fair – a future where “tax season” is no longer a source of dread for millions of Americans.
The path forward won’t be easy. Powerful interests profit from the current system’s complexity. But the potential benefits – in economic growth, increased trust in government, and improved well-being for taxpayers – are too large to ignore. The time for reform is now.
References:
- IRS. (2021). “Brief History of the IRS.” https://www.irs.gov/about-irs/brief-history-of-irs
- IRS. (2021). “Historical Highlights of the IRS.” https://www.irs.gov/about-irs/historical-highlights-of-the-irs
- U.S. Treasury Department. (2019). “History of the U.S. Tax System.” https://www.treasury.gov/resource-center/faqs/Taxes/Pages/historyrobot.aspx
- National Taxpayers Union Foundation. (2020). “How Long Americans Will Spend Doing Taxes in 2020.” https://www.ntu.org/foundation/detail/how-long-americans-will-spend-doing-taxes-in-2020
- WalletHub. (2019). “Tax Day 2019 Survey.” https://wallethub.com/blog/tax-survey/42524
- Kiel, P. & Eisinger, J. (2018). “Who’s More Likely to Be Audited: A Person Making $20,000 — or $400,000?” ProPublica. https://www.propublica.org/article/earned-income-tax-credit-irs-audit-working-poor
- National Small Business Association. (2017). “2017 NSBA Small Business Taxation Survey.” https://www.nsba.biz/wp-content/uploads/2017/04/2017-NSBA-Small-Business-Taxation-Survey.pdf
- Insureon. (2018). “Top Small Business Risks & Challenges: Insureon 2018 Survey Results.” https://www.insureon.com/resources/reports/small-business-risk-survey-2018
- IBIS World. (2021). “Tax Preparation Services in the US – Market Size 2002–2027.” https://www.ibisworld.com/industry-statistics/market-size/tax-preparation-services-united-states/
- Elliott, J. (2019). “Inside TurboTax’s 20-Year Fight to Stop Americans From Filing Their Taxes for Free.” ProPublica. https://www.propublica.org/article/inside-turbotax-20-year-fight-to-stop-americans-from-filing-their-taxes-for-free
- Tax Policy Center. (2020). “Return-Free Tax Filing.” https://www.taxpolicycenter.org/briefing-book/what-other-countries-use-return-free-filing
A few months ago, during a visit to Nashville, my family and I were busy helping Thomas and Joseph move out of their dorm rooms at Vanderbilt University. To take a break from the hectic day, I decided to take Buddy, my loyal black lab, for a hike on one of the trails near the West End, close to the Nations.
In the heart of the Smokies, under skies so grand,