Tax Day Blues Should Lead to Thoughts of Reform

It’s federal tax day, and many wonder why they owe the government so much money. And those who receive refunds might wonder why the federal government kept so much in the first place.

Yet the shared experience of filling out tax forms – or paying someone to do it for us – should also have us wondering if there’s a better way.

Although a big part of the tax bite stems from functions government has taken on that could easily be handled by the private sector, the costs of complying with the federal tax code are nothing to sneeze at either. According to the Internal Revenue Service’s own calculations, U.S. taxpayers and businesses spend 6.1 billion hours a year complying with federal tax statutes. Translate that time into hours worked instead, and it amounts to more than three million full-time workers, or about 2 percent of current U.S. employment. By comparison, the number of employed Americans between 2008 and today has dropped by about 4 million.

All of this at a cost of $163 billion – money that could have been spent starting businesses, putting more money into savings, or paying household bills.

And these estimates don’t include state-level tax compliance. Although filling out federal tax forms is something every taxpayer in each state has to do, the residents of nine states don’t have to file out a state income tax form. That’s because those states don’t have an income tax.

Those states benefit in more ways than just the cost of time and money spent on filling out tax forms and engaging in tax planning. For instance, those states tend to have higher net job creation rates – about 10 percent higher than those with an income tax between 2000 and 2007.

Why? Because income tax systems penalize work and investment. On the other hand, consumption taxes – like sales taxes – encourage wealth creation.

Arizona policymakers should head toward a broad-based consumption tax that could eliminate some of the current system’s complexity and unlock economic growth.

It’s certainly something that must have crossed the minds of beleaguered taxpayers this week.

Learn more:

Internal Revenue Service: National Taxpayer Advocate 2010 Annual Report to Congress (PDF)

Goldwater Institute: Investing in Arizona