“We’ve got a personal tax system that’s so complicated it costs Americans about $500 billion a year to comply with the current tax code.”
--House Speaker John Boehner (R-Ohio), November 15, 2011
“The complexity [of the tax code] costs us $430 billion a year.”
--Herman Cain, Nov. 9, 2011
What’s $70 billion among friends?
We were struck by the House Speaker’s assertion on Tuesday that the U.S. tax code, which yielded just $1.1 trillion last year, cost Americans nearly one-half that amount just to fill in the tax forms—especially since GOP presidential hopeful Herman Cain offered a lower, but still eye-popping figure, just last week.
So where do these numbers come from and how accurate are they?
Boehner’s spokesman Brendan Buck said that Boehner’s figure—which he tossed out at the end of a news conference--came from a 2005 (!) study by the Tax Foundation. The study estimated that the cost of compliance was about $265 billion—22.2 percent of federal revenue—in 2005. The study then projected ten years in the future, calculating that the figure would be $482 billion in 2015, based on an estimate of 20.7 percent of expected revenue.
Of course, with the Great Recession, tax revenues have fallen far short of estimates back in 2005. At a 20.7 percent rate, the cost of compliance last year would have been a comparatively modest $230 billion.
And where does Cain get his $430 billion figure? That appears to have come from a much more recent study, by, among others, Arthur B.Laffer. But this study appears equally dubious.
The study relied on 2008 tax revenues of $1.4 trillion—before the recession hit in full force. Then it took a figure from the Internal Revenue Service’s Tax Advocate—that individuals and businesses spent 6.1 billion hours complying with tax filing requirements—and multiplied it against an absurd hourly income of $68.42 on the theory that the wealthy pay most of the income taxes.
Speaking of the IRS Tax Advocate, that office’s estimate of the cost of compliance in its 2010 annual report is a much more modest $163 billion. Given that this is an official government estimate, it seems a much more reasonable figure to cite. Other estimates put the cost of compliance even lower, from five to 10 percent of revenue collected, or as little as $55 billion.
“Few would disagree with the Speaker’s underlying point: our tax code is fraught with complexity that is both a burden for taxpayers and bad for our economy,” Buck said.
The Pinocchio Test
We don’t disagree with Buck’s statement, but we do question why Boehner would cite a figure that is so obviously out of date. Cain at least relied on a more recent study, though that study's figures seem gamed.
In fact, the estimates of the cost of tax compliance vary all over the map, but the safest bet would be to rely on the estimate of a federal government entity—the IRS Tax Advocate. It is certainly lower than $500 billion, but no matter how you count it, $163 billion is still a lot of change.
As we noted, Boehner said this at the end of a news conference, apparently from memory, so as we did with House Minority Leader Nancy Pelosi recently, we will cut him a break. But he should not be repeating such old data. It’s time to drop this talking point from his arsenal of “facts.”
Check out our candidate Pinocchio Tracker