Tax Law has Trumped Moore's Law
Two things are required to comply with the federal income tax: time and money. The money part is the roughly $4.9 trillion in federal tax collections, amounting to 17% of the U.S. gross domestic product. How about the time element?
The Tax Foundation has issued a new analysis, relying on figures developed from the White House Office of Information and Regulatory Affairs. Americans will spend more than 7.9 billion hours to comply with tax filing and reporting requirements in 2024. That is the same as 3.8 million full-time workers doing nothing but tax paperwork—which comes to 46 times the IRS workforce. This is why the U.S. tax system is characterized as a “voluntary” system, as most of the cost of compliance falls upon those trying to comply.
The report converts those hours spent on taxes to an estimated cost of $413 billion in lost productivity. There’s an additional out-of-pocket expense, for computer software or accountant services and such, that adds $133 billion to the bill. Total compliance cost comes to $546 billion, which is about 1.9% of GDP. For comparison, that is larger than the entirety of corporate income taxes collected, which is 1.8% of GDP.
New rules for cryptocurrency
The advent of virtual currencies such as bitcoin has created new and novel tax problems. The IRS treats virtual currency as property, with a tax basis, not as money. Thus, every use of cryptocurrency in a transaction represents a possible capital gain or loss. In 2022 keeping track of such transactions required 674,000 hours. However, the Infrastructure Investment and Jobs Act dramatically expanded the requirements, to a projected 2.2 billion hours, a cost of $123.7 billion.
The new rules were projected to raise $28 billion in new tax revenue over 10 years, not quite $3 billion per year. The costs and benefits of the new requirements seem unbalanced.
Moore’s law posited that the number of transistors on a chip would double every two years at very little increase in cost, which in turn led to the explosive growth of many tech firms through continuously improved efficiency. One might think that because 94% of individual tax returns are prepared with computer software and 90% of returns are filed electronically, efficiency gains would cause compliance costs to fall. That has not been the case, according to the IRS’ own estimates.
Why not? Because tax law has become ever more complicated faster than technology can keep up. Concluded the report: “Tax law has trumped Moore’s Law.”
© M.A. Co. All rights reserved.