The Compliance Cost of the U.s. Individual Income Tax System: a Second Look after Tax Reform***

S IMPLIFICATIONwas one of the prinforms with pages of confusing directions, cipal objectives of the tax reform the need to keep complex and detailed movement of the 1980's that culminated records and to understand the personal in the Tax Reform Act of 1986 (TRA86). impact of a code which treats alternative To emphasize the importance of simplifieconomic behaviors differentially, the cation, the Treasury Department's Noconsequences of making a mistake or being vember 1984 proposal was entitled Tax tardy, and the trouble and expense of hirReform for Fairness, Simplicity and Ecoing competent assistance. Simplifying the nomic Growth. Whether there was much, income tax would lower these barriers and if any, simplification in the bill that rereduce the necessary investment of taxsulted from nearly two years of subsepayers'time and expenditures in complyquent debate has been hotly contested. ing with the regulations. Certainly some aspects of TRA86 were Because we focus on the behavior of insimplifying, and other aspects were comdividual income taxpayers, the term plicating; it is the net result that is con"compliance costs" here refers to the value troversial. of the time spent on tasks related to filing In this paper we attempt to provide a individual income tax returns as well as quantitative answer to that question for to any expenditures on goods or services the individual income tax. Comparing data for that same purpose. For example, most from surveys of compliance cost contaxpayers spend some time reading the ducted in 1982 and 1989, we will conclude instructions which accompany their rethat tax reform did not reverse the growth turns, gathering and maintaining records in compliance costs in the 1980's. To reach of their income sources, and deciding which that conclusion, we proceed as follows. In forms to use. Those who itemize must dethe first section we briefly review the vote additional time to keeping and orcompliance cost literature, stressing the ganizing records of their deductions. Some recent contributions, and discuss the kinds taxpayers research the income tax literof activities and expenditures which are ature in order to learn more about the taxrelevant. The second section describes the reducing provisions to which they are ensample and our survey instrument. The titled. On occasion, this entails purchases results are presented and discussed in the of books or computer programs. Many citthird and fourth sections, and conclusions izens, lacking confidence or sufficient are presented in the final section. knowledge or time (or being unwilling to bear the risk of a mistake alone), will seek Uterature help from others, frequently hiring a professional tax advisor. The total comThe total cost of any tax system necpliance cost we estimate below is the sum essarily includes the resources expended of the monetary value of the taxpayers' on collecting the revenues. While some of time and their expenditures on materials the "collection" costs are bome directly by and advice. Slemrod (1984) argues that the tax-administering agency, taxpayers compliance cost, plus the cost of the tax shoulder much of them, in the guise of the administration agency and of that borne time and money they spend filing returns by third parties, is a reasonable, though and complying with (or avoiding) the rules. not unflawed, measure of the complexity From the taxpayer's point of view, there are many barriers to low costs: multip. le of a tax system. While previous attempts to measure the *University of St. Thomas, St. Paul, MN 55105. compliance costs of individual income **University of Michigan, Ann Arbor, MI 48109. taxation directly are sparse, the results