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1 J. Scott Moody, The Cost of Tax Compliance 1 (2001)

handle is hein.taxfoundation/taxfaafe0001 and id is 1 raw text is: TAX  ION
FOUNDATION

July 2001

The Cost of Tax Compliance
House Ways & Means Committee Testimony

ByJ Scott Moody            Mr. Chairman, Members of the Committee,
Senior Economist       it is with great pleasure that I appear before
Tax Foundation         this Committee to testify about the cost to
taxpayers of our tax code's complexity.
I am a senior economist at the Tax Founda-
tion, a 64-year-old non-profit, non-partisan
research institution that receives no federal
funds. Our goal is to explain as precisely and as
clearly as possible the current state of fiscal
policy in light of established tax principles, so
that you, the policy makers, have the informa-
tion to make informed decisions.
One such principle of taxation is that a
good tax system should be as simple and stable
as possible. Therefore, the Tax Foundation has
worked on estimating how much it costs both
individuals and businesses to read the rules, fill
out the forms, and do all the other things
necessary to comply with the nation's tax laws
in time for the April 15th tax filing deadline.
The economy is dramatically affected by the
state of tax law. If lawmakers create an
Internal Revenue Code that is terribly
complex or that changes rapidly, taxpayers
may not be able to obtain a reasonably
certain conclusion about how taxation will
affect a business plan or investment.
My testimony will provide the results of our
work to date on the cost of tax compliance.
It is important for the public to have an
estimate of this cost because the performance
of the economy is dramatically affected by the
state of tax law. If lawmakers create an
Internal Revenue Code that is terribly complex

or that changes rapidly, taxpayers may not be
able to obtain a reasonably certain conclusion
about how taxation will affect a business plan
or investment. When the tax consequences of
various economic activities are unpredictable,
then tax policy is handicapping the growth
and dynamism of the U.S. economy.
As if the complexities inherent in taxing
income did not pose a sufficiently daunting
challenge to the writers and administrators of
the tax code, political and social demands have
also been taken into account. In particular,
two goals for the code that contribute to
complexity are fairness and social utility.
They come into play when determining how
much individual taxpayers should owe, the
ability-to-pay principle, and when providing
incentives for socially beneficial activities.
Many studies of the tax code find that our
system, particularly the income tax code, is
excessively complex. This study concurs,
quantifying the code's complexity in a way
that makes clear how unnecessary much of it
is. In 2001 individuals and businesses will
spend an estimated 4.6 billion hours comply-
ing with the federal income tax, with an
estimated cost of compliance of over $140
billion. This amounts to imposing a 12-cent
administrative burden for every dollar the
income tax system collects.
If the high cost of complying with the
federal income tax were a necessary price to
pay for a fair and effective tax system, perhaps
there would be little room for complaint, but
in fact the complaints are justified.
The Complications of the
Federal Income Tax
Most Americans naturally think of their

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