Many Americans have started receiving their tax “refunds” by now. And while they may like the feeling of getting back money from the taxes they paid, it’s important to remember that the tax code results in waste all throughout the economy. It imposes trillions of dollars in costs on individuals and businesses, both explicit and implicit, costing both time and money that could be better spend elsewhere.
We’re of course always keenly aware of the explicit costs of taxes. Trillions of dollars every year are siphoned out of paychecks, or paid by businesses, to the government. That money is then redistributed, used to pay government workers, purchase multi-billion dollar contracts for goods and services that aren’t really needed, or sometimes it just disappears down a black hole.
What’s less appreciated is the cost of compliance with tax laws. Between compiling all the necessary paperwork, determining whether or not to itemize, figuring out which tax credits they’re eligible for, and finally filling out and double-checking the paperwork, Americans spend nearly 9 billion hours every year complying with IRS tax requirements. That’s the equivalent of nearly 4.5 million people working for an entire year. Some recent estimates put the cost of tax compliance at 1.2 percent of GDP. Imagine just how much more productive the economy could be if those hours were spent producing goods and services that people actually wanted, versus filling out government paperwork.
The massive size and complexity of the tax code has spawned entire industries devoted to helping individuals fill out their tax forms, and to helping individuals and businesses minimize their tax obligations. From accountants to tax preparers to tax lawyers, hundreds of thousands of jobs and billions of hours are spent on tax compliance.
Can you imagine how much more productive our society would be if, instead of an H&R Block or Jackson Hewitt in every shopping mall, those tax preparers were replaced by shops that sold shoes, shavers, or electronics? Can you imagine how much more advanced our society would be if, instead of working as an accountant or tax attorney, the brains of intelligent people were put to use researching new technologies or advancements in science and medicine? Can you imagine how much more small businesses could produce if they could put the billions of dollars they spend every year on filling out quarterly tax payments, 1099s, and W-2s to better use by hiring new workers or investing in new equipment?
The complexity of the tax code grows each year, and more and more time and energy will be wasted in an attempt to continue complying with it. That sheer waste of resources that results from the tax code is more than enough reason to scrap it.