The cost of tax compliance

Several 2012 GOP Presidential nominees have released some form or another of income tax reform centered on one variation or another of a flat tax. One candidate is being advised by Steve Forbes, the 2000 primary candidate who first introduced much of the country to the concept. One of the major selling points of a flat tax is its simplicity leading to the benefit of skipping the purchase of tax software and taking much less time to file a return. These and other considerations are considered to be compliance costs and by some estimates are astounding, as in hundreds of billions of dollars a year, just another hidden cost of being a productive citizen in this country.

It has been mentioned that some of these flat tax proposals are deficient in the cost of compliance arena because they allow each person to be taxed at the flat rate or to follow the current code with all its complexity. This is true enough, as it is easy to imagine the enterprising tax payer still purchasing tax help in order to determine the path allowing them to keep more of what they earned. One retort there is that it can then be assumed that if in year one if the flat tax is better or equivalent to the current tax code then it would be the same in subsequent years, delivering the promised benefit of reduced compliance cost in year two and beyond.

Which brings up another point, that there is an entire industry dedicated to tax compliance with multiple commercially available software packages and multiple accounting firms dedicated to it, what will happen to this industry if a flat tax is adopted? The answer is that this industry will be destroyed and the loss of jobs associated with it won’t be pretty. Versatile companies will be able to adjust and focus on other industries while others will disappear. This might appear to be a substantive argument in favor of maintaining the insane tax code of today but it isn’t. From an emotional level it is because it will cause financial distress. But these opportunities only exist to the detriment of us all. Compliance with the taxation policy of the federal government should not require the purchase of anything. Technically tax reporting can be done by hand but many do not have the knowledge or time necessary. And that’s obscene. While the flat tax proposals currently presented are first steps, at least they are steps in a positive direction. There will be bumps in the road and an industry dedicated to complexity may slip into rent-seeking by bringing in lobbyists in order to cling to life but in the end a flat tax will benefit the country.