• Freedom
  • Innovation
  • Growth

The Corporate Tax Mess Is Worse than You Thought

We’ve been campaigning for some time on a topic that is becoming well known: The U.S. economy is being actively harmed by the highest corporate tax rate in the industrialized world AND a dysfunctional international tax regime.

But it’s worse than that.

Our dysfunctional tax code also imposes enormous compliance costs upon businesses and the economy, and those costs represent financial capital that could be invested in any number of productive ways other than being lost to compliance with a ridiculous tax code.

The IRS itself estimates that, in 2009, businesses spent at least $104.1 billion simply complying with the tax code (PDF), and the IRS has every reason to be extremely conservative with its estimation.

So it’s almost certainly worse than that.

In fact, in 2013, economists Jason Fichtner and Jacob Feldman of the Mercatus Center found that compliance with the tax code costs the U.S. economy nearly $1 trillion each year. By that measure, out of a $17.25 trillion total U.S. economy, we’re spending almost 6 percent of our TOTAL U.S. economy on tax compliance.

But it’s worse than that.

Fichtner and Feldman also found that, despite these incredible compliance burdens, the U.S. Treasury probably forgoes nearly $450 billion per year in unreported taxes. But this should not be a big surprise. The higher and more unreasonable the tax rate, and the more difficult compliance is, the more effort taxpayers will undertake to avoid reporting income.

But it’s worse than that.

Things have gotten so bad that the IRS itself seems unable to function. Fichtner and Feldman report that, of the 115 million phone calls the IRS received in 2012, it only answered 68 percent of them, and the U.S. Treasury inspector general reported to Congress that most taxpayers who contact the IRS don’t get adequate help.  Maybe they would get better outcomes if IRS officials focused on their jobs instead of playing at being political operatives for the White House.

And it will get even worse.

The world isn’t static. When you have active harm from a dysfunctional tax code, people don’t just stay pat and take the abuse year after year after year. Corporate inversions, capital and jobs being moved overseas, intense lobbying and crony capitalism are not so much problems in themselves but are best seen as logical consequences of a dysfunctional tax code.

So the longer we remain mired in the dysfunction of our current corporate tax code, the more capital will flee, the more tax avoidance we should expect, and the more damage will accumulate. As we’ve written recently, ultimately we can either solve the problem or begin to see the erosion of our freedoms.