Another tax season has come and gone, and with it 7.6 billion hours in tax compliance that cost Americans $200 billion (according to a recent Wall Street Journal piece). While a complex and byzantine tax code can benefit those who make their living guiding ordinary mortals through it, or politicians who change it to reward favored interest groups, the current tax code actually hurts the country as a whole.

Firstly, the country is hurt economically in that $200 billion annually in compliance cost is actually waste. This money and output does not produce anything tangible for society, and only enables Americans to do what most of them would do anyway in the absence of such complexity (i.e. pay their taxes). When one considers that $200 billion is roughly equivalent to 33% of the amount that was eventually spent on Social Security in 2008, it is not hard to see that the amount of resources used on tax compliance is not insignificant and could likely be put to better use than simply helping Americans fill out their tax forms correctly.

Secondly, the current tax code hurts the country from a transparency perspective. An opaque tax code allows politicians to reward certain interest groups by changing the code in ways that the public does not understand to the benefit of those interest groups. Many of these favors would not be politically feasible if the public truly understood what was going on, which is why the politicians won’t simply write the favored interest groups checks from the public treasury. By keeping these changes and rewards hidden, the accountability of government is reduced.

Finally, a complex tax code hurts the country from a freedom perspective. In order for freedom to flourish, rules must be clearly defined and known in advance. A tax code where one is not sure whether or not one has broken the law, despite ones best efforts to comply, is not a code that can be said to promote freedom in society.

Simply put, the American tax code is badly in need of serious overhaul. While certain proposals for flat taxes or national sales taxes in the past have sometimes been criticized on the grounds that they would not raise enough tax revenue or that they are inherently unfair (i.e. having the rich and the poor paying the same tax rate), such concerns do not require complexity to be addressed. For example, a ‘progressive flax tax’ might have 3 or 4 flat tax rates for various income brackets, and there is no reason that these rates could not be set high enough to raise the required revenue. While one can legitimately argue over exactly what the various tax rates should be or what exactly an ideal tax system should look like, one would be hard pressed to make the case that the current tax system is the one that the United States should be using. A major overhaul of the U.S. tax system is long overdue.

Main page photo courtesy of Flickr user, hsinbridge.