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1 Arthur Hall, The High Cost of Tax Compliance for U.S. Business 1 (1993)

handle is hein.taxfoundation/srcfxz0001 and id is 1 raw text is: FOUNDATION
November 1993, No. 25

The High Cost of Tax Compliance for U.S. Business
By Arthur Hall                The tax compliance costs-the paperwork    new Tax Foundation study conducted by
Senior Economist          burdens-of the U.S. business comnunity        Professors Joel Slemrod and Marsha Blumenthal
Tax Foundation            consistently account for about two-thirds or   reports that there is near unanimity among senior
more of the total compliance costs for all    corporate tax officers that the Tax Reform Act of
taxpayers. The Tax Reform Act of 1986, in part,  1986 added complexity to the tax system, resulting
sought to reduce this cost. The Act's proponents  in a combination of higher compliance costs and
billed it as, among other things, tax         less accurate information transmission [to the
simplification.                               IRS] .I Figure 2 shows the aspects of the Act that
The evidence shows, however, that the     tax executives believe created the most
simplification effort failed to reduce compliance  complexity.
costs. An Arthur D. Little study-commissioned     Despite efforts by the IRS to reduce the cost
by the Internal Revenue Service and using IRS  of tax compliance, the Tax Reform Act of 1986 and
data-showed that simplification failed to reduce  subsequent legislation has generally thwarted these
costs for small businesses; and for big business, a  efforts. For example, the tax provisions of the
_Omnibus Reconciliation Act of 1993 created six
Figure I                                                                 new tax forms and caused a revision of more than
Estimated Total Cost of Complianceftr American Businesses, 1983-1991     50 existing forms.2 The progress the IRS is making
($Billions)                                                             to reduce the cost of compliance is revealed in
Table 1. The hours of business paperwork remains
$140                                                                    relatively flat despite the upward trend in the
Snumber of business returns filed. The continuous
$12           flow of new tax legislation accounts for the lack of
$120 -                    progress in reducing compliance costs.
1                                         Figure 1 shows estimates of the total dollar
$100 -            9;                              [                     cost of federal tax compliance for American
61   .5                                                business. For 1993, the estimated total business
A  ,. .     ,v       cost of tax compliance is $123.4 billion. That sum
$80                                      :       .....                  corresponds to a per company average of
..'.      $6,080.30. Figure 1 also shows that compliance
.    .                      costs rose about 10 percent following the 1986
$60  .;                                                               Act, corroborating the results of the Tax
Foundation and Arthur D. Little studies.
$40  < '                                  : ;   '  : W '    , .          However, simple averages are misleading.
.4+  >' ' 4~  .      Small corporations have a significantly higher
.....,~                            , '*   '  ,~   gi  relative cost of compliance than do the nation's
$20              'ii,        ,' . ,,, ,,               ' '   4         largest corporations. As Figure 4 and Table 5
.       ...          show, corporations with annual sales of less than
$0                                ,. 44      a                         $1 million face a compliance cost burden relative
$ 3   8to sales about 10 times greater than corporations
'83   '84  '85   '86  '87  '88   '89   90    91   '92   '93       with annual sales of more than $10 billion. This
Note: Includes all corporations, partnerships, and nonfarm sole proprietorships,  ratio probably gets even larger as firms get
Source: Tax Foundation; Internal Revenue Service.                       increasingly smaller.

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