The US Tax Code, officially the IRS Internal Revenue Code (IRC), is almost 7000 pages long. Together the IRC along with Federal Tax regulations, and IRS Guidance are a behemoth with over 70,000 pages of rules, regulations, and instructions.1 Imagine reading “War and Peace” … 54 times in a row — that’s the tax regulation for you.2 Reading it cover to cover would take an average person over 2,300 hours—that’s about 98 days of non-stop reading!3
It’s not static either; it changes annually to reflect new laws and adjustments. In 2020 the IRS made more than 4600 changes to the tax code. That’s more than a dozen changes every day for an entire year4.
Components of Tax Regulation and Guidance
IRS Internal Revenue Code (IRC) – This is the actual US Tax code, and represents the core legal framework. The is the smallest component of the Regulation and Guidance.
Treasury Regulations – These are more specific instructions, and they provide instructions on how the Treasury interprets the IRC including examples of specific tax areas and how to apply the IRC. This represents a moderately sized component of the Regulations and Guidance.
IRS Guidance – This is a broad category that encompasses various resources published by the IRS to help taxpayers understand and comply with the tax code. It represents the largest component of the Regulations and Guidance and includes:
Revenue Rulings: Official interpretations of the IRC by the IRS on how the law applies to specific factual situations. (Think of them as Supreme Court decisions interpreting the Constitution).
Revenue Procedures: Statements outlining procedures for taxpayers to follow when dealing with specific tax situations. (Imagine them as IRS regulations implementing the tax code).
Notices: Announcements from the IRS providing information on tax law changes, upcoming deadlines, or other relevant topics.
Publications: Informational guides published by the IRS to explain tax topics in a clear and concise manner.
Tax Simplification
There have been many attempts at simplifying taxes, but for the most part there has been limited relief for Taxpayers. Many of the simplifications passed were about reducing tax brackets and simplifying calculations, but not many things that actually simplified taxes for citizens. There have been calls for solutions like the Flat Tax which would greatly simplify the Tax code by eliminating deductions, and simplifying taxes by requiring everyone to pay a flat fixed rate eliminating many of the complexities of the tax code.
Help is Available
Recognizing the Herculean task facing taxpayers, the IRS offers several resources. From the Free File program5, which provides free tax preparation software to those who qualify, to the Taxpayer Advocate Service for those facing tax problems, help is available. There’s also a plethora of guides and FAQs on the IRS website to illuminate the path through the tax jungle.
A significant portion of the population, about 53% according to recent statistics6, seeks some form of help when filing taxes. This help ranges from using software like TurboTax to hiring professionals.
Despite free resources, many opt for paid services to ensure their taxes are filed correctly. Over one-third of taxpayers pay for tax preparation services7, with costs varying widely depending on the complexity of their tax situation.
For those with limited income, paying for tax help might not be feasible. Fortunately, there are programs like the Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE), offering free tax help to those who qualify based on income, age, or disability8.
The U.S. Tax Code is indeed vast and ever-changing, making tax season a daunting time for many. While the IRS and government do provide resources to help, the complexity of the system means a significant number of people still seek and pay for professional help. However, there are free alternatives that offer a guiding light through the tax code forest, ensuring that everyone has the opportunity to navigate the intricacies of tax filing without being left in the dark.
Taxation, often seen as unavoidable, is more an art form than a mere financial obligation. It is a delicate balance between funding government operations and not overburdening the taxpayers.
“The art of taxation is the art of plucking the goose so as to get the most feathers with the least hissing.” Jean-Baptiste Colbert
This concept was famously summed up by Jean-Baptiste Colbert, who knew that taxation was the art of collecting the most taxes while minimizing the complaints over taxation.1 This analogy is more relevant today than ever, especially when considering the U.S. tax system’s complexity and its relationship with citizens.
The challenge lies in the inherent tension between the need for the government to collect taxes to fund public services and the natural desire of individuals and businesses to minimize their tax liabilities. Tax policies must be designed to be fair, efficient, and effective, encouraging compliance while discouraging evasion and avoidance. This balance is precarious, and tipping too far in one direction can lead to dissatisfaction, economic distortion, or both.
The Challenge of Taxation
How to solve Unlimited Wants with Finite Means
Jean-Baptiste Colbert, serving as the Finance Minister under King Louis XIV of France, revolutionized the way we think about taxation.1 His philosophy emphasized the importance of a tax system that is as painless as possible for the taxpayer while still being effective in meeting the needs of the state. His approach underlines today’s tax policies, aiming for a system that extracts necessary resources without stifling economic growth or public contentment.
US Tax Code
The U.S. tax code, a labyrinth of rules and regulations, is a testament to the complexity and intricacy of modern taxation. It is akin to a vast, sprawling metropolis, where every street, building, and alleyway has been meticulously planned, yet can still confound those navigating it without a map. This complexity arises from the need to address a multitude of scenarios, ensuring fairness across diverse economic situations.
Taxation in the U.S. embodies a symbiotic relationship between the government and its citizens. As with the ebb and flow of a river, so goes our taxes. Over various periods of time we have expected our government to provide more or less services and that balance of what the government provides, and what individuals provide creates the basis for the Social Contract (See our article: Social Contract). It is a partnership where individuals and businesses give up some of their freedoms and liberties to live in a society fueled by their taxes that provide the public services everyone relies on, from roads and schools to national defense and social welfare programs. This relationship requires trust and transparency, where taxpayers comply with their obligations, believing in the effective use of their contributions.
The Art of Taxation
The “art” of taxation, therefore, lies in crafting policies that achieve the delicate balance of maximizing revenue without discouraging economic activity or provoking widespread discontent. It is about understanding the psychology of taxpayers, employing strategies that encourage voluntary compliance, and designing a tax system that is perceived by citizens as fair and just.
A Model used by economists called the Laffer Curve2 is a U-shaped curve that shows the relationship between tax rate and tax revenue. If you tax someone nothing and move the tax up to 1% people will continue to work and revenue will rise. As rates on taxes rise, revenue continues to rise until the rates reach a point where rates are too high. The curve begins to bend before plateauing and people begin actively avoiding paying taxes (through legal and illegal means). After it plateaus, revenue begins to drop and people are both actively avoiding taxes, and at a certain point dropping out of the workforce as it is no longer worthwhile. For example, if you were taxed at 100%, would you work? Obviously not, as there would be no reward for your labor, and the model reflects that knowing that people will stop working well before 100%.
The art of taxation is akin to weaving a complex tapestry, where each thread represents a different tax rule or policy, and the goal is to create a harmonious and functional whole. It requires a deep understanding of economics, sociology, and human psychology, like Colbert’s approach centuries ago, proving that while the tools and context may have evolved, the underlying principles of effective taxation remain timeless.
Every year, it’s the same frustrating story diving into tax season. Seriously, why can’t the IRS just sort it out for us? Given the rise of AI and tools like ChatGPT, do we really need to fill out endless forms and dig through receipts, especially since many are sent directly by Banks and Employers?
The IRS already knows everything there is to know about our finances, right? Plot twist: our tax system is a maze of deductions, credits, and blind spots where the IRS may not have all the data. Beside being our civic duty and mandated by law, doing our taxes has many perks and pitfalls.
So, what’s the deal with filing taxes? Are all these forms and the giant tax code really necessary? How much time and money are we spending on this, and what’s it costing the economy?
Do We Need to File?
Even though the IRS knows a lot about our financial lives, everyone’s situation is different. Filing taxes lets us tell our side of the story, like any extra money we made or tax breaks we should get which might not have been reported to the IRS.
Forms Galore
Most of us can get away with a 1040EZ, but for the rest of us the IRS has over 800 forms and schedules for every tax situation under the sun. Whether you’ve got a simple paycheck or a bunch of side hustles, there’s a form for that.
Tax Code
The Internal Revenue Code (“Tax Code”) is 6871 pages long, and approximately 75,000 pages including rules, regulations, and instructions2. No wonder tax season feels like a marathon, 75,000 pages lined up end to end is equivalent to the distance of a half marathon, and tax lawyers are expected to be familiar with ALL of it, and technically ignorance of it is no excuse for us either.
Time and Money
Americans spend over 6 billion hours (equivalent to 1 year of work for 3 million people) with a cost of about $34 billion10,11 every year just to file their taxes. To put that into perspective, it is estimated to cost $20 billion to end homelessness in the United States1, or give everyone under the poverty line 4 a $5000 car that could last them 6 years. Americans spent approximately $14 billion on software alone for tax preparation.11
Internal Revenue Service (IRS) Enforcement
The IRS spends approximately $12 billion a year and employs over 79,000 people to process taxes and make sure everyone’s playing by the rules.5
The Economy Feels It, Too
The tax process takes a lot of productive capacity from the country and costs the economy a significant amount of output, around 0.8% to 1% of our National Output12 (Gross Domestic Product or GDP).
Jobs, Jobs, Jobs
The tax prep world is huge, the AICPA estimates there are over 2 million tax professionals in the US (public accounting, private industry, government).6 We’re talking hundreds of thousands of jobs for tax lawyers, consultants, accountants, administration, and techies making tax software.7
Is There A Better Way
A lot could be done to greatly simplify our tax code and reduce or eliminate many of the arcane sections, and in lieu of that make preparation easier. America is home to brilliant technology that brings the knowledge and history of the known universe to our fingertips with tools that mimic human intelligence, and yet here we are. Several countries including Denmark, Sweden, Estonia, and South Korea have automated pre-filled tax submission where filers only need to review and submit. The IRS just rolled out Free File9 to allow online guided tax filing. While not fully pre filled or automated, and not as comprehensive as commercial software it is a step in the right direction. While this may not be of comfort as you file your taxes now, the march of improvement is never ending and eventually we’ll figure this out.
Summary
So, yes our tax code is overly complicated, our systems are not as easy or automated as they could be, and filing taxes feels like a chore we could do without, but until we see these improvements it is our Civic Duty. Taxes are a necessary component to support the services, freedoms and protections we enjoy. As Oliver Wendell Holmes succinctly said, “Taxes are the price we pay for a civilized society.”
Tax Project Institute is a fiscally sponsored project of MarinLink, a California non-profit corporation exempt from federal tax under section 501(c)(3) of the Internal Revenue Service #20-0879422.
