Itemize This

Friday, July 30, 1999

If you are merely average, says the Internal Revenue Service, you spent 11 hours and 34 minutes filling out your Form 1040 this year, up from 9 hours, 28 minutes in 1988. Both figures are unnervingly high, given that most people take the standard deduction.

Since it was introduced in 1944, the standard deduction has relieved many millions of taxpayers from some of the complexity and cruelty of the tax code. The tax changes in 1969 and 1986 made taking the standard deduction more attractive to a lot of filers. But, overall, itemization remains at the historically high levels it first reached by the 1960s.

“The U.S. personal income tax system is probably the most complicated in the world,” says Professor Joel Slemrod, director of the Office of Tax Policy Research at the University of Michigan Business School. Funny thing, because by international standards, personal income tax levies here are (believe it or not) relatively low.

Click on image to see larger version.

Complexity costs money. Estimates provided by Slemrod suggest that direct and indirect costs of complying with the personal income tax code—such as accountants’ fees and taxpayer time, respectively—are running at more than 8 percent of the money Washington gets from the personal income tax. A tax to pay tax—amounting to well over half a percentage point of GDP.

Note: Compliance costs for 1982, 1989, and 1995 are calculated from data in Joel Slemrod’s chapter in The Economics of Fundamental Tax Reform (1996), edited by Henry Aaron and William Gale. The 1986 estimate is based on Edwin S. Rubenstein’s extrapolation of Slemrod’s figures. The compliance cost “spike” in 1986 reflects the numerous taxpayers who realized capital gains that year in anticipation of the 1987 capital gains tax hike. Research: Edwin S. Rubenstein. Sources: Internal Revenue Service; University of Michigan economist Joel Slemrod.