To this we must add the shear wastefulness of the colossal compliance costs of the current tax system. To administer the tax laws, the IRS directly employs about 112 thousand employees. The IRS budget is about $8 billion. However, direct expenses of the IRS are not the central compliance problem; rather, it is the expenses that are pushed forward on the taxpayer to be tax collector, tax accountant, and record-keeper.
According to the non-partisan Tax Foundation in 1997 Americans spent no less than $225 billion complying with the income tax. The most recent projections made by the IRS of tax returns to be filed in Calendar Year (CY) 1999 indicate that the grand total, or sum of all major tax return filings, will be 228.2 million. This number is then expected to grow at 1.24 percent annually until CY 2005, when the grand total return count is expected to reach 245.2 million. This does not include the 1 billion information returns that will be filed. In addition, more than 8 billion forms and instructions are sent to taxpayers each year, enough to encircle the globe several times.
Paperwork is the most visible compliance cost, but it is clearly not the only, and perhaps not the largest compliance costs. Return processing, determining liability, recordkeeping and other burdens are an estimated 19 to 33 % of the total revenue raised by the income tax system and 2.0 to 3.5% of the Gross Domestic Product (GDP)[an additional 3% of GDP1999 = $279Billion]. We waste money each year on seeking to avoid taxes, avoid trouble with the IRS, interpret the laws or determining the best course of actions with the laws.
Who pays these compliance costs? You do. The hardest hit segments of our economy are middle income wage earners and business owner. Small corporations in particular endure compliance costs estimated to be several multiples of the tax actually collected. Although duly included in the National Income Product Accounts (NIPA), payments made to tax lawyers, accountants, IRS agents and other tax professionals do not really improve our collective standard of living. These compliance costs are wasteful expenditures, which absorb so much time and energy of American people that they roughly approximate in costs the assets of the entire building industry. None of this is necessary.
Adding to the costs and to unfairness, our tax laws are so complicated not even the common tax lawyer can understand them. There are a number of ways of measuring complexity; one of which is the number of penalties issued and then abated for reasonable cause. There are more than 34 million civil penalties issued each year; more than a third of all small firms receive payroll tax-related penalties alone. More than 50 percent are abated.
The tax system is now so monstrously complex that it is beyond the ability of any one person to understand it. Understanding the system is certainly beyond the reach of most mere tax lawyers, accountants and tax administrators. A system that is so complex must be administered in an arbitrary and unfair way. If no one really understands what the law is, it is impossible to administer fairly and uniformly - and of course, it is not so administered.
Our government embroiled its citizens in more than 35,000 litigation actions. Taxpayers sustained more than 3 million levies. As long as we insist upon an income tax system, the system needs to be complex. The system needs to be enforced with a heavy hand. The system needs to have all of the 34 million in civil penalties. The system needs to be intrusive. It is the price we have to pay for an income tax system.
Perhaps most troublesome, we have gotten little in return for this payment because our current tax system has inspired an increasingly lower level of compliance. Despite the costs of enforcing and maintaining our system, tax evasion is at an all time high. Today's income tax system has invited massive noncompliance. According to the IRS own statistics, only about 80 percent of taxes owed are voluntarily paid -- $200 billion are not. In 1992, the tax gap was estimated to be $127 billion. Taxes evaded continue to be in the range of 22 to 23% of income taxes collected. These IRS figures did not include taxes lost on illegal sources of income. Evaded taxes increased by 67% in the decade between 1982 and 1992. As a percentage of Gross Domestic Product (GDP), tax evasion has reached 2.0% compared to 1.6 % in 1991.
Our current system is also problematic because much of the burden of the current system is hidden from the American taxpayers. Most taxpayers have been taught that an amorphous entity - business -- must pay its fair share. However, they do not understand that businesses are merely a collection of individuals engaged in a productive enterprise. When businesses are taxed, the taxes result in fewer businesses, lower wages or higher priced goods and services if the taxes can be pushed forward. In some businesses, taxes cannot be pushed forward and the owner must endure these taxes. Businesses don't pay taxes, people do; however, the corporate income tax and the employer share of payroll taxes perpetuate this myth.
It is not a harmless myth. The hidden cost of our tax system ensures that Americans remain ever ignorant of the increasing proportion of federal taxes they pay. Taxes are now more than 20 percent of Gross Domestic Product, and despite the claims of tax cuts, Americans pay more now than we have in the history of our nation, including the height of World War II. Upstream taxes only ensure that taxpayers cannot see the true cost of our government, raise the costs of goods and services and ensure more taxes in the future.
There is another problem with hidden taxes. Apart from ensuring the system lacks integrity, hidden taxes buried in goods and services reduce exports, and result in lower profits, lost productivity and a competitive advantage to foreign commodities.