Numerous times  here on the Isaac Brock Society, one or another of us has talked about the physical size of the US Tax Code. The figure I remember is on the order of 73,000 pages. Today Chris Edwards at the Cato Institute responds to a critic of  his recent article  on the size and complexity of the US tax code. The critic calls Edwards a liar, informing us that the Tax Code is a featherweight 5500 pages and takes up a paltry 18 inches of bookshelf space, not the nine feet claimed by Edwards.  In response, Edwards defends his claim by distinguishing between the standard edition of the US Tax Code itself, which is the smaller version, versus the Standard Federal Tax Reporter published by CCH which includes the Tax Code, plus the tax regulations from the Treasury Department, plus rules and commentary from tax case law, and which is the document that tax practitioners must work from. This latter document is indeed over 73,000 pages.

The metric of shelf space, nine feet and counting, comes from the Taxpayer Advocate Service as a means of illustrating the burden of tax complexity for the taxpayer. CCH has a  nice historical visual of this burden.  In 1913, the 1040 form was one page, with two pages of instruction.   The 1040 is still only two pages , but this year the instruction book for the 1040 is 189 pages long. And anyone who’s filled one out lately is aware of how many other forms, with their own interminable instructions, can be spun off from this deceptively short document.

The waste of life credits filling in these documents is staggering.  From Edwards:

In a recent report, the IRS Taxpayer Advocate said that the compliance or paperwork costs for the federal tax code are more than $160 billion a year. That cost represents pure waste to the economy — it’s like throwing in the trash the entire retail sales of Target, Home Depot and Safeway every year.

In addition to being complex, the federal tax code is constantly changing. The Taxpayer Advocate found that there have been 4,428 changes to the tax code in just the last 10 years. Those changes stem not just from a hyperactive Congress, but also from the constant gushing forth of new tax regulations from the Treasury. The result is growing tax instability, which undermines financial planning, business investment and other decision-making in the economy.

And further:

It is true that average households don’t get into the nitty gritty of those nine feet of rules. But many thousands of highly paid professionals do have to on behalf of their individual and business tax clients. That is part of the reason why the current federal tax system is so wasteful. It consumes the time and energy of a huge number of skilled people, probably including the grumpy tax lawyer who called me a liar.

The complexity probably doesn’t come from the multiple loopholes. Edwards’ critic says:

I am a corporate tax lawyer with 25 years’ experience. I can’t prove it, but in my experience the vast majority of the complexity of the tax law has nothing to do with tax breaks. It has to do with providing precise rules to deal with an infinite variety of structures and transactions, in the face of taxpayers and their tax counsel who are determined to minimize their tax bill. Rules relating to tax breaks are insignificant in volume compared to the rules relating to consolidated tax returns, corporate reorganizations, foreign tax credits, taxation of the foreign subsidiaries of U.S. corporations (Subpart F) and hundreds of other things.

Edwards agrees:

Homemade loopholes stem from the inherent complexity of taxing business income, and they are an important reason why chopping the high U.S. corporate tax rate would create a large dynamic response from businesses. That is, it would not be worth the cost or legal risk for businesses to invent so many tax avoidance tricks if we had a much lower corporate tax rate. If we cut the rate, the U.S. corporate tax base would expand automatically as homemade loopholes shrank.

When rules and laws and regulations become an unreasonable burden, they lose legitimacy, and people look for ways to avoid and evade. Compliance falls off and is replaced with disrespect and cynicism.  And relinquishment, and renunciation. And for the US economy, a foolish loss of opportunity.