Is the US Tax System Efficient?

 (Including side comments about the US Federal Budget)

The following facts were excerpted from the July 13-19th, 2013 edition of The Economist.

1. The US tax code isn't simple. 90% of US taxpayers use an accountant or commercial software to file their returns.
2. Americans spend at least 6.1 billion hours each year complying with tax rules. This time could have been spent more productively. (See below for an interpretation.)
3. Interestingly, tax revenues would remain unchanged by getting rid of all loopholes and by allowing individual income-tax rates to fall a whopping 44%. (See below for an interpretation.)
4. Each year $1.1 trillion in tax revenues is foregone through countless deductions, exemptions, and credits. To put this in perspective, total federal tax revenues are only $2.8 trillion each year.
5. Corporate tax rates are the highest in the rich world: add state and local taxes to the 35% federal rate and they reach 39.2%.
6. The top individual tax rate is 39.6%.

Commentary on Fact #1

The US federal tax code is 73,954 regular 8-1/2" x 11" sheets of paper long. (source: Google search). This would be a stack of paper that's about 30 feet tall or as tall as a 3-story building.

Commentary on Facts #3 & 6

If the 39.6% top individual tax rate were to fall by 44%, it would become 21.4%.

Commentary on Fact #2

Assuming 115 million households in the US, the time spent on tax filing translates to 53 hours per household or 6.6 eight-hour work days per household. (Source: http://quickfacts.census.gov/qfd/states/00000.html)

If the time spent on tax filing were valued at $20 per hour, it would be worth $122 billion. Valued at $100 per hour, it would be $610 billion. To put this in perspective, the US defense budget for 2013 is $672 billion and is the largest discretionary line item in the federal budget. (Source: http://en.wikipedia.org/wiki/2013_United_States_federal_budget.)

Interesting facts about the 2013 US federal budget are (a) the annual rate of tax increases budgeted for the 2012-2022 period, (b) sources of US tax revenue, and (c) composition of US federal budget. Here are some excerpts.

Growth rates. The highest annual rate of increase among major tax revenue categories belongs to individual income taxes, at 8.4%. The highest annual rate of increase among major spending categories belongs to interest payments on Public Debt, at 14.2%.

Revenue composition. Corporations pay 12% of tax revenue while individuals pay 47%.

Expenditure composition. The top 5 spending categories in the federal budget account for 76% of spending and are, in descending order:

1. Medicare, Medicaid
2. Social Security
3. Defense
4. Interest payments on Public Debt
5. Agriculture

Some questions to think about: 

• If interest payments on Public Debt are growing so fast, what does this mean in the long run? 
• If corporations pay a smaller percentage of tax revenue than individuals, does this mean that individuals are disadvantaged?
• How fast is the US federal budget growing relative to the general economy?

For answers, please visit my next blog entry.

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