The brutal cost of paying taxes

In short, over half a trillion dollars per year. Read on.

In 2007, US taxpayers contributed $2.6 trillion in taxes1. But as any US taxpayer knows, filing your tax return is among the most dreaded of financial activities. Many outsource this activity to tax professionals or companies like Intuit (makers of the TurboTax software) or H&R Block (which many seem to hate).

As of 2007, there were almost 139 million tax payers in the US, and 59.2% of them used paid tax preparers 2. Prices for tax preparation range from tens of dollars for software like TurboTax, to hundreds and more, for tax specialists having to deal with complex tax situations. What would then be the total cost associated with filing taxes alone?

It turns out that the question is not simple at all, but the US Government Accountability Office ran a study on it:

Complying with the federal tax system costs taxpayers time and money. [...] total compliance costs are large. For example, combining the lowest available estimates for the personal and corporate income tax yields a total of $107 billion (roughly 1 percent of GDP) per year. [...] The two most comprehensive studies we found suggest that these costs are large--on the order of magnitude of 2 to 5 percent of GDP each year (as of the mid-1990s).
-- Tax Policy: Summary of Estimates of the Costs of the Federal Tax System

If we look up the United States GDP for 1995 and do the math, 2 to 5 percent of $7.3 trillion is quite staggering: between 146 and 365 billion dollars have been spent just filing taxes in 1995. That year, the total amount of tax collected was $1.135 trillion3. This means that in 1995, it cost between 12% and 32% of tax revenue to pay the taxes.

This calculation is confirmed by economics author Bruce Bartlett, who in a 2005 article, arrived at a figure "between $240 billion and $600 billion every year". If we assume the 12%-32% range has remained constant, in 2007 the amount of tax filing overhead was between $312 billion and $832 billion.

Add to that the cost to run IRS itself: $9.7 billion in 20054 and a 2008 budget request of $11.6 billion5.

We're in 2009. Why can't I easily file taxes online for free?

Tax returns can be sent to the IRS online, but - here's the catch - only through a private industry intermediary. Of course, these 3rd parties don't print your returns and then mail them to the IRS. They connect to the IRS online. "Why then is the government doing this through a partnership with private industry rather than providing its own software free to the public?" Here's the official answer:

The government believes that private industry, given its established expertise and experience in the field of electronic tax preparation, has a proven track record in providing the best technology and services available. The Government believes that a partnership with private industry will: provide taxpayers with higher quality services by using the existing expertise of the private sector; maximize consumer choice; promote competition within the marketplace and meet these objectives in the least costly manner to taxpayers.
-- US Department of Treasury - Free File FAQS

This answer is an excuse, designed to mask the fact that lobbyists made sure the IRS doesn't release the details of the e-filing protocol, so that:

  • a completely useless intermediary market of e-filing could form
  • open-source tax software was at a disadvantage in competing with commercial software
  • US citizens' tax filings, which represent a gold mine for demographic profilers, can be tapped into6

While this may sound like a conspiracy theory, unfortunately it seems not to be the case. The NPR ran a story in 2007 on this topic, which later got dugg:

[...] the IRS refuses to set up its own Web portal to receive the filings. Instead, most Americans have no choice but to e-file through private companies like Intuit (Turbo Tax) and HR Block (Tax Cut).

In most cases, the companies charge an extra fee for e-filing. In other countries, free and direct electronic filing is a given. But in the United States, Intuit has lobbied hard to make sure taxpayers aren't allowed to e-file directly to the IRS.

I wonder if the tech-savvy Obama administration has considered free online tax filing as a way of reducing deficit. Online filing would eliminate human errors associated with entering data from paper filing, and would eliminate those data entry jobs from the IRS as well. Sounds like a great idea, no? An idea to be posted and voted up at Citizen's Briefing Book.

But wait, the Citizen's Briefing Book was closed7 after the election. Why?


  1. The precise amount of tax revenue for 2007 varies according to different sources: $2.568 trillion according to the White House Office of Management and Budget, or $2.688-$2.691 trillion according to the IRS. ↩

  2. Number of tax returns: 138,893,908 (IRS - Tax Stats at a Glance) ↩

  3. White House Office of Management and Budget - Tax revenue 1934-2013 ↩

  4. IRS costs data ↩

  5. US Government Accountability Office :: Internal Revenue Service - Assessment of the 2008 Budget Request and an Update of 2007 Performance ↩

  6. Kuro5hin - IRS e-file is a Scam, or, Why I'm Going to Snail-mail My Tax Returns (2003). Note that the IRS itself has software systems that have been deployed with known vulnerabilities. ↩

  7. It was good while it lasted - Citizen's Briefing Book top 10 ideas ↩

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