Taxing Numbers

Chris Edwards of Cato had an interesting brief piece on 4/17 titled The Simple (Tax) Life. There was talk last year, pushed by the Bush administration, of significant tax reform. It doesn't look like it will happen now, but it really is needed. Check out these numbers:

• The number of pages of federal tax rules and regulations increased from 40,500 in 1995 to 66,498 in 2006
• The number of pages in the IRS guide for Form 1040 increased from 84 in 1995 to 142 in 2005
• The number of different IRS tax forms increased from 475 in 2000 to 582 in 2006
• The cost of compliance for federal taxpayers - filling out tax returns and related chores - increased from $112 billion in 1995 to $265 billion in 2005
• H&R Block's revenues from tax preparation soared from $740 million in 1996 to $2.2 billion in 2005
• The complex alternative minimum tax hits 4 million taxpayers today, but will hit 30 million by 2010 if not repealed.
• The number of special tax breaks for education increased from 7 in 1995 to 16 today. The number of breaks for the energy industry jumped from 11 to 26 during the same period.

Edwards then notes that four costs imposed on society from tax complexity itself (read his article for an explanation of each):

1. It creates a large and growing "tax industry" that draws some of the nation's brightest minds into unproductive activities such as designing corporate tax shelters.
2. It impedes efficient decision making.
3. It promotes an invasion of privacy by the government.
4. It exacerbates noncompliance with the law.

He then concludes that:

The good news is that reducing tax avoidance, simplifying the tax code, and boosting economic growth go hand in hand. For example, the current tax code has different rules for different types of businesses and investments. Tax lobbyists are expert at combining these disparate rules in unexpected ways to avoid taxes. Such tax rule arbitrage would be ended under a Steve Forbes-style flat tax, which would treat all businesses in the same neutral manner. Also, the low rate under the flat tax would discourage loophole lobbying. The result would be that resources flowed to their highest-value uses, not politically favored ones, thus boosting U.S. productivity and output.