GAO Study: Complexity of Tax Code is Costly

Yesterday the Government Accountability Office (GAO) released a study on the complexity of the federal tax code at a Senate Finance Committee hearing on tax reform. The GAO study shows that switching to a simpler, fairer, and more efficient tax code would be a relatively easy way to control the deficit while bolstering the economy.

The study notes that the complex rules in the tax system lead to taxpayer errors which result in uncollected taxes. In 2001, the most recent year the IRS estimated the tax gap (the difference between what taxpayers owe and what they pay), the tax gap was calculated to be $345 billion. The figure has unquestionably risen since then, and the complex rules of our tax system are a major contributor.

"A simpler tax code will ease the burden of compliance on honest Americans and help them meet their responsibilities,” said Senate Finance Committee Chairman Max Baucus (D-MT) at the hearing. Ranking Member Sen. Orrin Hatch (R-UT) agreed, saying “complying with the tax code should not be a "Choose Your Own Adventure" story, where the complexity of the code leaves citizens guessing their tax liability."

In addition to reducing the tax gap, simplifying the tax code has the potential to boost the economy’s efficiency. GAO noted that complying with complex rules that demand recordkeeping, computations, and planning costs businesses and individual taxpayers valuable time and money. According to the IRS, taxpayers spend more than six billion hours each year complying with tax responsibilities, and GAO reported in 2005 that low-end estimates for annual compliance costs totaled $107 billion (close to 1 percent of GDP).

After yesterday’s hearing, Sen. Thomas Carper (D-DE) introduced legislation that would attempt to ease compliance burdens on law-abiding taxpayers. The legislation, titled the “Taxpayer Advocacy and Government Accountability Promotion (TAX GAP) Act”, also attempts to crack down on delinquent taxpayers, thereby reducing the tax gap. "Reducing the tax gap is a common-sense approach to combating our nation's ballooning debt," said Sen. Carper.

CRFB applauds Sen. Carper’s efforts to simplify our tax code. As we’ve stated countless times, fundamental reform that broadens the base, lowers rates, and closes loopholes in our tax code can help reduce the deficit as well as improve the efficiency of our tax system and strengthen the economy. (A tax reform proposal along these lines is outlined in the paper Less is More: The Modified Zero Plan for Tax Reform, co-authored by CRFB policy director Marc Goldwein) We hope that Sen. Carper’s proposed legislation succeeds in moving the debate over this issue forward and calls further attention to the urgent need for comprehensive tax reform.