Monday, April 19, 2004
Joe Bankman (Stanford) presents Should the Government Bear (Some) Tax Compliance Costs? at the NYU Colloquium on Tax Policy and Public Finance. Here are excerpts from the introduction to the paper:
“Regulation is expensive. The federal income tax comprises one of the most extensive forms of government regulation and one of the most expensive. Much of this expense is recognized in the form of reduced work effort or saving, or tax-driven decisions among types of work or savings. Economic models that evaluate fundamental tax reform proposals often focus exclusively on these two forms of tax-induced changes in behavior, ignoring compliance costs. These costs, however, are quite significant. They include the time spent filing one’s tax return and maintaining records related to that filing; the time spent learning and negotiating the rules when engaged in various forms of tax planning; and the amounts paid to third parties, such as accountants, lawyers, financial planners or software providers, to that same end. They also include the costs the government incurs to promulgate and enforce the law.
Compliance costs associated with the individual income tax are estimated to comprise about 10% of revenue raised from the tax, or about $100 billion a year. In at least one respect, these compliance costs understate the burden, since they do not attempt to put a cost figure on the anxiety many taxpayers feel when filing their return. Compliance costs substantially reduce the social gains from taxation; in some areas, these costs may outweigh those gains altogether.
This paper examines the question ‘Who should bear individual income tax compliance costs?’ The question is important for a number of reasons. First, many voters believe that those responsible for the tax law do not accurately reflect constituent needs, and that as a result the government does not adequately take taxpayer compliance costs into account when designing tax rules…. Second, some compliance costs fall disproportionately upon a small group of taxpayers…. Third, and more generally, many compliance costs are variable, and it may be efficient to require those costs be borne by one party or another. Finally, compliance costs reduce the social value of regulation in fields other than tax, and it may be possible to extend the analysis here to those other fields.
Part I introduces the subject and analysis with an example that provides probably the strongest case for government reimbursement of compliance costs: taxpayer compliance management program (‘TCMP’) or TCMP-like audits….
Part II sets forth a preliminary analytical framework with which to view compliance costs. Part II.A. examines the special case in which voter preferences are flawlessly translated into law and procedure…. Part II.B. assumes that government officials maximize values other than (or possibly in addition to) those they impute to voters and do not adequately weight compliance costs; and that those costs would receive greater weight if they were treated as a separate budget item…. Part II.C. assumes that the IRS is well intentioned but impolitic; that the legislature and/or electorate wrongly believes that the agency does not adequately weigh compliance costs when setting policy and so sets undesirable constraints on agency behavior….
Part III briefly discusses one area in which the government does absorb taxpayer compliance costs. Section 7430 provides limited reimbursement for certain costs incurred in challenging an IRS determination or collection.
Part IV uses the analytical framework in Part II to analyze two significant forms of taxpayer compliance costs: the costs of garden-variety audits and the costs of filing individual tax returns. The argument for a rimbursement system for garden-variety audit is similar to the argument for reimbursement for TCMP-style audits. However, a garden-variety audit reimbursement system poses additional difficulties, and is certain to be more expensive to maintain. A reimbursement system for filing costs is attractive only under a very constrained and unrealistic set of assumptions.”
