TAXES cost a lot more than most people imagine. For every dollar the federal government raises, an additional 65 cents is spent by the private sector on tax-related expenses. Such expenses include the time and equipment -- phones, cars, computers and so on -- needed to comply with IRS rules.
These hidden costs are so enormous that the cost-effectiveness of most federal programs -- all, of course, fueled by taxes -- is suspect.
In the mid-1980s, the IRS commissioned three research teams to determine the cost of tax compliance. The results are mind-boggling: Individuals and businesses spend 5.4 billion hours a year -- about 3 million Americans working full time -- on activities such as record-keeping, learning about tax requirements and filling out tax forms. These figures are for 1985, but since tax forms have gotten more complicated, the numbers surely are now even greater.
Lost working time means lost revenue. The largest accounting firm, Arthur Andersen, had an employee-per-hour cost in 1985 of $35.47. The corresponding figure for the IRS was $21.14 per hour. Thus, the average of these two figures, $28.31, gives a fair estimate of the employee-per-hour cost of tax-compliance work for the typical private business and individual taxpayer. When added to the $6 billion spent on professional tax preparers, Americans spent $159.4 billion on tax compliance in 1985, or 24 percent of tax revenues.
If this percentage remained constant, the cost of tax compliance in 1990 was $232 billion.
Another cost of the tax system is the damaging impact it has on production. This shows up in a number of areas, including taxes on labor, which shrink workers' purchasing power; taxes on corporations, which penalize risk-taking; and taxes on capital income, which discourage investment.
And as taxes and their associated costs increase, so do the number of people who try to avoid them. This means more forced collections, and episodes where the IRS seizes property or places liens on property.
In reality, total private-sector costs of complying with existing tax laws amount to about 65 percent of tax revenue (about $618 billion in 1990). This means that every federal program costs the country 65 percent more than the announced budgetary cost. The $20 billion housing program actually represents a sacrifice of $33 billion; the $125,000 salary of congressional members actually costs the country $206,000. Far from being trivial, the burden of the tax system is a policy question of major importance.
James B. Payne is director of Lytton Research and Analysis in Sandpoint, Idaho.