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Tax Returns & How They Affect the Economy

Effects

Various tax cut packages over the years may have lowered the burden of paying taxes, but not the time-consuming burden of preparing tax returns. The National Taxpayer's Union, a nonprofit organization advocating lower taxes and smaller government, reported in the spring of 2010 that American households and businesses spend billions of hours and dollars complying with federal tax requirements and completing longer, more complex tax return forms. NTU's annual study of tax complexity estimated that federal paperwork--mostly income tax returns--cost Americans nearly eight billion hours, or the equivalent of 3.7 million people working 40 hours a week all year long.

Types

Hours and money spent completing complex tax returns and complying with federal tax laws impose multiple economic effects. The Cato Institute, a libertarian think-tank in Washington, D.C., reported in 2006 that tax complexity creates regulatory costs associated with compliance of $265 billion a year. In addition, Cato Institute tax policy analyst Chris Edwards reported that the complex tax returns and complying with tax laws interfere with business decisions on investments and mergers. For households, tax complexity creates confusion for decisions regarding saving, retirement or starting a new business.

Identification

Nina Olson, head of an Internal Revenue Service watchdog organization created by Congress in the 1990s, identified complexity of tax laws and returns, rather than tax rates themselves, as the biggest problem facing U.S. taxpayers, according to "The Economist" news magazine. Money and time that could be used more productively in an economic sense often goes instead to accountants, attorneys and tax preparation professionals to ensure that household and business income tax returns comply with all applicable laws.

Significance

The complexity of the U.S. Tax Code and the tax returns Americans must file apparently flummoxes even the director of the Internal Revenue Service, the agency that collects federal taxes. "The Economist" reported in April 2010 that the head of the IRS, a division of the U.S. Treasury Department, has someone prepare his income tax return.

Prevention/Solution

The National Taxpayer's Union and the Cato Institute, among other organizations, have proposed sweeping tax reform that includes a simpler tax return. The National Taxpayer's Union advocates an income tax system with a single flat rate or a national sales tax as alternatives to the existing system. The Cato Institute favors a flat-rate income tax system with few deductions. Such a reform, the institute claims, will create a simpler, more transparent tax system.

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