How Much Does Federal Paperwork And Tax Compliance Cost?

by Wayne Crews on January 28, 2013

in Deregulate to Stimulate, Economy, Features, Regulation

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Regulations notwithstanding, the off-budget costs of tax compliance for individuals and businesses are said to account for most of the federal paperwork burden, although there might increasingly be cause to question that assumption given growing paperwork-heavy regulation in health care and finance.

In any event, for present purposes, government paperwork costs associated with regulation are presumably (but in actual fact perhaps not likely) accounted for in the Regulatory Impact Analyses for particular executive agency rules, and thus already reflected captured in OMB Costs and Benefits reports; however, again, here only major or economically significant rules and those cited as having a notable impact on small business get counted. So the paperwork associated with the bulk of rules may not be well tabulated.

Paperwork Hours and Hourly Costs
The Office of Management and Budget, in its 2011 Information Collection Budget of the U.S. Government, estimates that 8.783 billion hours is required to complete regulatory paperwork annually, up from 7.4 billion in 2000, but down from 2009. The OMB doesn’t focus on the projecting of cost estimates for all these hours, but does allow that “if each hour is valued at $20, the monetary equivalent would be $176 billion.” The Progressive Policy Institute reiterated this same figure in “When Paperwork Attacks! Five Ideas for Smarter Government,” noting that the figure would position “paperwork” as number five in the Fortune 500 based on “revenues” equivalence.

(Note: A newer Information Collection Budget report has just been released for FY2011, finding that “the public spent 9.14 billion hours responding to Federal information collections. This total represents a net increase of 355 million burden hours, or about 4 percent, from the estimated 8.78 billion hours that the public spent responding to Federal information collections in FY 2010.” Shortly this report will be used to update figures herein and in Tip of the Costberg and accompanying charts; clearly costs will be higher.)

With respect to OMB’s dollar cost number, one wonders when was the last time a lawyer was hired for $20 per hour. If one assumes $40 an hour, we’re looking at over $350 billion in paper-shuffling costs alone, let alone compliance with the underlying rules generating the paper.

Other hourly labor cost estimates abound. The National Federation of Independent Business conducts a survey of members with respect to paperwork compliance costs. The numbers vary depend on type of requirement.

Meanwhile, the Bureau of Labor Statistics (BLS) notes the following hourly wages for basic categories one might regard as relevant in keeping up with complex federal paperwork.

  • Business Human Resources professionals: $52.21.
  • Accountants and auditors: $33.15.
  • Compliance officers: $29.88.

Tax Compliance Costs
Those wages give some idea of hourly compliance costs. In the Small Business Administration’s 2010 “The Impact of Regulatory Costs on Small Firms,” with respect to estimating costs of compliance with the federal tax code, costs were divided between businesses and individuals/nonprofits, with (also BLS) figures of $49.77 and $31.53, respectively. The SBA report relies primarily on 2008 Internal Revenue Service data regarding paperwork hours for businesses and individuals/non-profits. It employs an overall burden of 4.3 billion hours (2.3 billion for businesses and 2 billion for individuals and non-profits). Using BLS data on hourly wage rate for tax form preparation, SBA computes $159.6 billion for compliance in 2009 dollars.

Note that the SBA report was in the ballpark or conservative compared to other governmental estimates. In a 2005 report, the Government Accountability Office had noted low-end estimates of tax compliance costs at $107 billion, or 1 percent of GDP at the time. Taking into account efficiency costs in the economy, GAO further cited reports assessing mid-1990s tax compliance costs at 2 to 5 percent of GDP annually, and even these still were not “comprehensive estimates of the efficiency costs of the current federal tax system.” Current-dollar GDP in third-quarter 2011 was $15,198.6 billion. All else equal, 2 to 5 percent of that now would mean a range of $304 billion to $760 billion.

Those are big numbers. In a 2006 report, the Tax Foundation projected 2010 overall compliance costs would amount to $368 billion (at a time when 2004 costs were $244 billion). Earlier studies found business tax compliance costs at $102.3 billion in 1993, and $141.1 billion in 1995.

The Department of the Treasury (and therefore tax compliance) appears to account for most of the paperwork burden, yet its costs do not appear in the OMB annual Costs and Benefits report. In the “FY 2010 Burden Changes by Agency” chart on page nine of the 2011 Information Collection Budget, Treasury accounts for 6.379 billion of the total 8.783 billion hours, or 73 percent. Note that both GAO and the Tax Foundation note compliance costs of $300 billion at minimum. With no way of knowing the real indirect costs of taxation, and no true correct answer with respect to hourly wage costs, we may note that selecting $47 an hour on the paperwork cost spectrum gives us a back-of-the-envelope estimate for Treasury paperwork costs (primarily but not exclusively tax compliance) of $300 billion (or, $299.8 billion). This is a convenience measure that avoids a poring over IRS data and that avoids adopting the high but defensible estimates cited by GAO and Tax Foundation that include efficiency costs as well as basic compliance. These higher estimates could have been, but were not, selected here. For what it’s worth, H&R Block has annual revenues of nearly $3 billion.

Other Independent Agency Paperwork Costs
Other notable independent agency paperwork burdens do not get accounted for at all in OMB’s annual Costs and Benefits roundup of executive agency costs, including the Securities and Exchange Commission with its 361 million hours, and the Federal Communications Commission’s 58 million. Some of this paperwork, like contracting regulations and Social Security amount to costs of doing business with the government and administration of economic benefits like Social Security payments.

Be that as it may, as this chart on Independent Agency Paperwork Burdens shows, these hours add up to 616 million, and at $35 (note I’m not using the $47 used immediately above with respect to tax/Treasury compliance), add another $21.56 billion in compliance costs to the regulatory budget OMB makes explicit in it’s annual Costs and Benefits reports.

So, leaving aside all of the paperwork presumably already accounted for in executive agency Regulatory Impact Analyses, total costs for paperwork burdens associated primarily with taxation of $300 billion and independent agency paperwork of $21.6 billion, total $321.6 billion.

That’s my baseline at this point, which I’ll update with the new, higher burdens from the just-released 2012 Information Collection Budget.

This baseline is reflected also in respective agency sections in the Tip of the Costberg draft’s “The Total Annual Cost of Federal Regulation” chart. If better data appears on the regulatory costs of financial services, health care, consumer safety rules, I might lower this some, but my figure is already lower than other governmental estimates.

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