A household's cost of figuring income taxes adds up to a pretty penny
Boston — The cost of tax compliance for each of the nation's 97 million taxpaying households averages about $275. This is one conclusion of recent research by economists Joel Slemrod and Nikki Sorum - research highly relevant to the current national discussion over congressional bills that would simplify the complex and expensive tax system.
Other findings of the study, made of the 1982 tax year, include: The average American taxpayer requires about 21.7 hours to prepare his state and federal income taxes and maintain the necessary records. That time, if devoted to work, would be worth about $231 on average. Further, this average taxpayer spends some
Altogether, taxpayers in 1982 devoted about 2.13 billion hours to tax compliance at a total ''resource cost'' of $26.7 billion.
Jimmy Carter called the nation's tax system ''a disgrace to the human race'' during his presidential election campaign of 1976. More recently, Treasury Secretary Donald T. Regan said: ''There isn't one person in the United States who understands completely the tax system, and it's got to be simplified.''
Speaking in support of a tax simplification bill he has sponsored with Sen. Robert W. Kasten Jr. (R) of Wisconsin, Rep. Jack Kemp (R) of New York noted: ''There is little logic, reason, or economic theory behind the way the US collects its taxes. With 40,000 pages, the current tax code is horribly complex and nearly impossible for the layman to understand. The tangled web of regulations and red tape imposes significant economic costs and tends to undermine the equal treatment of taxpayers of similar circumstances.''
The study by Mr. Slemrod and Miss Sorum is the most sophisticated one yet of the costs involved in individual income tax compliance. But as Slemrod admits, it is approximate. The margin of error is such that the total cost could be as low as $17 billion, rather than $27 billion. And the hours devoted to tax compliance could have been as low as 1.9 billion rather than 2.1 billion.
Whatever, the compliance cost amounts to 5 to 7 percent of the revenues raised by federal and state income tax systems. This doesn't include costs to the federal and state governments of collecting these taxes. Nor does it add in costs to third parties, such as the expense to business of deducting taxes from employee wages.
Not all of the effort and money devoted to tax compliance is wasted. The research done by the two economists, partly sponsored by the Treasury and reported as a working paper of the National Bureau of Economic Research, calculates that two-thirds of the time spent on filing is devoted to record-keeping. Even if the tax system was greatly simplified, most taxpayers would still have to spend time on records. It also gives taxpayers a more accurate understanding of their financial state.
Besides the Kemp-Kasten ''flat tax'' bill (called ''the Fair and Simple Tax Act of 1984,'' which would tax all taxable income at the same 25 percent rate), Sen. Bill Bradley (D) of New York and Rep. Richard A. Gephardt (D) of Missouri have before Congress their ''Fair Tax Act of 1983.'' It provides for a simple, progressive tax with three rates: 14, 26, and 30 percent. Also, the Treasury has under way a study of various tax proposals that include a basic flat tax and a modified flat tax. That study is scheduled for publication after the election.
Mr. Slemrod, who was with the University of Minnesota and the Hoover Institution while doing his tax research, has just updated another paper, calculating the compliance cost savings from tax simplification. These savings ''are smaller than what some people expect.'' Using an econometric model, he estimates that a flat-rate tax schedule would save between $8 and $34 per taxpayer, or between $776 million and $3.3 billion.
The wide spread gives some idea of the roughness of such a calculation. And, he admits, it could be an underestimation. The calculation assumes that the sources of income are unchanged, whereas it seems likely that a flat tax would discourage the use of various tax shelters and thus alter the income mix and reduce tax preparation time by more than he estimates. In any case, Slemrod's figures are apparently the best available.
His study with Miss Sorum, then a graduate student, was based on a a survey of a random sample of 2,000 Minnesota residents, which produced 600 usable replies. This information, with several necessary adjustments, has been reweighted to represent more closely the taxpaying population of the entire nation.
Some other findings include:
* Actual preparation of tax returns accounts for about one-fifth of the time devoted to tax compliance. Tax research takes around one-tenth of total time.
* Slightly less than half of all households hired professional tax assistance. These households paid on average $76 for the help.
* About three-quarters of the households spent less than 20 hours on tax matters.
* For those with annual incomes of more than $50,000, the average resource cost (actual out-of-pocket outlays plus the value of time spent on tax compliance) exceeds $1,400.
So many people are fed up with the tax hassle that Slemrod concludes: ''It is obviously going to be an issue before the next session of Congress.''