News Release

April 14, 2003

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Cato scholar cites 10 surprising facts about the income tax
Tax code and regulations span 54,846 pages

WASHINGTON -- As the income tax filing deadline of April 15 quickly approaches, Chris Edwards, Cato's director of fiscal policy studies, has come up with a list of 10 surprising facts regarding the income tax. For more information, see http://www.cato.org/fiscal.

1. The IRS "tax army" is six times larger than the U.S. army stationed in Iraq. Income taxes are so complex that there are up to 1.2 million paid tax preparers in the country-six times more than the 200,000 or so troops in Iraq.¹ The IRS itself has a workforce of 100,000.²



2. Tax code sets new record of 54,846 pages. The number of pages in the tax code and regulations doubled from 26,300 in 1984 to 54,846 by 2003.³ The number of pages has jumped 20 percent in just the past two years. The energy bill currently being debated, H.R. 1531, is chock-full of fancy anti-market tax credits for such items as solar hot water heaters, fuel cells, homebuilding, and oil and gas drilling.



3. The costs of complying with the complex tax code cost Americans $100 to $200 billion every year. The costs of the income tax are far greater than the actual cash paid to Washington each year from American taxpayers. Millions of taxpayers waste both time and energy filling out tax forms, collecting receipts, preparing for audits, and other hassles. Billions of dollars are spent on tax accountants and computer tax software. Most estimates put these compliance costs at about 10 to 20 percent of income tax collected, or about $100 to $200 billion of extra costs every single year.⁴



4. There is a tax form for every "special interest." The number of IRS tax forms jumped from 402 in 1990 to 526 by 2002.⁵ That is good news for accountants because they are the only ones who know how to file tax forms such as "6781-Gains and Losses from Section 1256 Contracts and Straddles." The education breaks require three IRS taxpayer guidebooks with 76 pages of instructions.



5. Congress promotes discrimination -- through the tax code. The tax code is riddled with exemptions, deductions, credits, and narrow rules that treat people with similar or different incomes differently. Consider that a higher-income homeowner can effectively deduct non-home interest, such as on car loans, by shifting around their finances, whereas a lower-income apartment dweller cannot.



6. "Voluntarism" works for the U.S. military, but not for the income tax. The IRS says that it pursues "enforcement programs to promote voluntary compliance" and establishes "strategies to maximize voluntary tax law compliance by emphasizing customer satisfaction."⁶ But with 32 million IRS penalties assessed each year and about $10,000 in income taxes imposed on each taxpaying household, the tax isn't voluntary and these customers aren't satisfied.⁷



7. Congress still can't figure out how to measure "income." Although the income tax is 90 years old this year, Congress still can't figure out how to properly measure "income." Indeed, the income tax treats different income and deduction items grossly inconsistently. Some income such as municipal bond interest is not taxed, but other income such as dividends are taxed twice. The solution is to replace the income tax with a low-rate consumption-based tax that exempts personal savings, and taxes businesses on an easy-to-measure cash-flow basis.



8. Alternative Minimum Tax -- originally designed to catch 155 taxpayers is soon to catch 37 million. An elaborate new tax structure that began in 1969 and then expanded because just one out of every half million taxpayers legally reduced their taxes "too much." The number of AMT taxpayers is set to skyrocket from 3 million in 2002 to 36 million by 2010.⁸ Congress should follow the advice of its own Joint Committee on Taxation and repeal the AMT.⁹



9. Families shouldn't need an advanced math degree in order to save for their futures. Congress has manufactured dozens of vehicles and special rules for certain types of savings. We have unique rules for 401(k)s, Keoghs, deductible IRAs, nondeductible IRAs, education IRAs, Roth IRAs, traditional pension plans, annuities, SIMPLEs, SEPs, MSAs, and other alphabet-soup provisions. President Bush's recent initiative to consolidate some of the savings plans and create a universal IRA would be a good first step to bring some sanity and fairness to the IRS savings mess.



10. Double-tax on dividends: 60 years and still not fixed. At the present time corporate profits are taxed first to the corporations, then again to the stockholders when they are distributed as dividends. In the 1930s, a Treasury report argued that the tax disincentive to pay dividends caused corporate management problems.¹⁰ Recent scandals proved them right. Congress should reform dividend taxes now -- before the next round of corporate management scandals begins.

Source: CCH Inc. Number of pages in the CCH Standard Federal Tax Reporter, www.cch.com.

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Notes:

¹ Nina Olson, National Taxpayer Advocate, testimony before the Senate Finance Committee, April 1, 2003.

² Internal Revenue Service, Data Book 2002, p. 37.

³ Page count of the CCH Inc. Standard Federal Tax Reporter, 2001, www.cch.com/wbot2003. CCH has been an expert source on the tax code since 1913 and their page count includes the tax code, regulations, and various IRS rulings. The page counts for 2001 and 2002 are 45,662 and 52,310, respectively.

⁴ Chris Edwards, Cato Policy Analysis No. 416, "Simplifying Federal Taxes: The Advantages of Consumption-Based Taxation," October 17, 2001.

⁵ Phone call with John Harris, Forms and Publications Division, IRS, April 9, 2003.

⁶ IRS, Publication 3385, March 2002, pp. 10, 28.

⁷ Number of penalties from IRS, Data Book 2002, p. 5. Average tax is tax liability after credits (but before EITC) of $976 billion divided by number of returns with tax for 2000 of 96.9 million. IRS, Statistics of Income Bulletin, Summer 2002.

⁸ Joint Committee on Taxation, "Estimated Budget Effects of the Conference Agreement for H.R. 1836," JCX-51-01, May 26, 2001.

⁹ For example, see JCT, Study of the Overall State of the Federal Tax System, V-II, p. 15.

¹⁰ George Haas, "Rationale of the undistributed profits tax," staff memo, Division of Tax Research, U.S. Treasury, March 17-18, 1937.