Taxes Cost More Than What We Pay

Mention the word "taxes," and most people immediately think of how much money, or what percentage of their income, they pay to the government. If you mention the word on April 15, they are apt to offer many unprintable thoughts as well. But in general, people view the cost of taxes in terms of what they are required to fork over to the Internal Revenue Service every year at this time in addition to any quarterly estimated payments and payroll deductions.

That is not the true cost—to either individuals, businesses or society at large. Time is money. Americans spend about 6.1 billion hours and $224.3 billion a year—$90.3 billion of it by  individuals—to comply with the filing requirements of the tax code, according to the IRS National Taxpayer Advocate. (Yes, you have an advocate at the IRS!) Those statistics don't include the opportunity cost, or the benefit the public would have received from devoting resources to some alternative activity.

So complex are the tax code and the myriad of IRS forms that about 60 percent of individual taxpayers pay someone else to prepare their tax returns. An additional 29 percent rely on tax preparation software. In other words, we have to pay (someone else) to pay (the IRS).

Every year by law, the Tax Advocate submits an annual report to Congress identifying at least 20 of the most serious problems facing taxpayers. Until recently, Tax Advocate Nina Olson had emphasized complexity as the most serious problem. In her January 2015 report, Olson cited a "devastating erosion of taxpayer service" as the No. 1 problem in fiscal 2014, the result of automatic spending cuts mandated by the Budget Control Act of 2011. More than one-third of phone calls to the IRS went unanswered and only half of the written correspondence was handled in a timely manner. The net effect was to increase the cost to taxpayers, who had to seek professional advice.

Even the IRS is complaining about the workload in the face of a shrinking budget. Last year, the IRS processed almost 160 million individual and business returns; received more than 100 million phone calls and 10 million pieces of correspondence; helped more than five million taxpayers who visited an IRS walk-in site. This year is expected to be even more challenging because of new tax-filing complexities introduced by the Affordable Care Act.

Of course, a flat tax or national sales tax would resolve the complexity and compliance issues for taxpayers. The role of the IRS would be dramatically reduced, eliminating a host of government jobs. Tax lawyers and accountants would be free to do something more productive than exploit the myriad of loopholes in tax code.

Olson didn't ignore tax reform in this year's report. To the contrary, complexity ranks as one of the top 20 problems.

"Although this year’s report does not focus on tax reform, I have recommended tax reform in my reports and congressional testimony for many years," Olson said when she delivered her 2014 report to Congress in January. "I believe we need fundamental tax reform, sooner rather than later, so the entire system does not implode."

For some reason, the IRS has chosen to ignore a 1998 law requiring it to report to Congress each year on "the sources of and ways to reduce complexity in tax administration," according to Olson's report. The IRS issued only two such reports, the most recent in 2002. That's too bad because the failure to document tax complexity likely contributed to it, Olson says in the report. At almost four million words and counting, the tax code "continues to burden taxpayers and drain IRS resources." Security breaches and fraud are on the rise. Budget constraints have forced the IRS to close the last of its 13 overseas walk-in sites, which were based in U.S. embassies.

Congress talks a good game when it comes to tax reform, but the two parties can't agree on what it should look like. For Republicans, when it comes to taxes less is more. Democrats are focused on tax fairness, whatever that means. The top 1 percent paid 38 percent of the total income taxes collected by the federal government in 2012, according to the National Taxpayers Union Foundation. The top 5 percent paid almost 59 percent. The bottom 50 percent of income earners paid less than 3 percent of the total.

If that's not fair enough for you, you always have the option to pay more. The Treasury's Bureau of the Fiscal Service gladly accepts contributions to reduce the public debt. Interested parties may write a check, pay by credit card, donate an outstanding government obligation or contribute other intangible property. If you choose to contribute by check, you may enclose it with your income tax return but do not make the mistake of combining your gift with your tax payment, the IRS warns.

And yes, your gift is considered a charitable contribution and is therefore tax deductible. So don't roll your eyes and complain about the lack of tax fairness. Do something about it.

Caroline Baum is a contributor to e21. You can follow her on Twitter here.

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