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Ted Cruz: Americans spend $500 billion complying with tax laws, about same as entire military budget
A reader questioned Sen. Ted Cruz’s comparison of military spending to how much it costs Americans to get their taxes done.
According to a blog post on txwinelover.com, Cruz toured Becker Vineyards in July 2014 before holding a roundtable with wine industry representatives during which he agreed the tax system should be simplified.
"Every year," Cruz elaborated, "we spend roughly $500 billion on tax compliance. That is roughly the budget of our entire military, entirely wasted on tax compliance. I agree with you we should move to a simple flat tax where everyone can fill out their taxes on a postcard and that we should shut down the IRS."
Cruz, a Texas lawyer elected to the U.S. Senate in 2012, has since declared his candidacy for president. But he’d already called for a flat-rate income tax and abolishing the IRS.
And was he right that about the same $500 billion a year getting spent on complying with tax laws and funding the military?
Both figures need explaining.
Per military spending, Cruz campaign spokesman Rick Tyler said by email that Cruz drew on a chart posted by The Washington Post in 2012 indicating that adjusted for inflation, defense spending has exceeded $500 billion a year since 2007 or so:
SOURCE: Blog post, "Defense spending in the U.S., in four charts," Wonkblog, The Washington Post, Aug. 28, 2012, chart citing Center for Strategic and Budgetary Assessments (noted in an email from Rick Tyler, chief national spokesperson, Ted Cruz presidential campaign, May 5, 2015)
The Post relied on the Washington, D.C.-based Center for Strategic and Budgetary Assessments where by email, analyst Todd Harrison told us the military’s 2014 base budget, meaning the cost of maintaining a standing military in peacetime, totaled $496 billion.
So far so good, except, Harrison advised, that figure did not reflect all military spending. Generally, he said, the base budget "does not include the cost of using the military to fight a conflict, nor does it include legacy costs, such as unfunded pensions and veterans benefits, or military activities conducted outside of (the Department of Defense) such as the maintenance and upgrade of nuclear weapons. All of those things are extra," he said. If you count those other expenses, Harrison said, the U.S. spent $866 billion on the military in 2014.
By email, Tyler stressed the military’s base budget doesn’t include overseas contingencies. But it’s "your rigged game, you make up any facts you want," Tyler said by email.
Next, we turned to what it costs Americans to fulfill federal tax requirements.
Tax compliance costs
To get our arms around "compliance costs," we reached out to certified public accountant Connie Weaver, a Texas A&M University professor, who guided us to June 2011 testimony on compliance costs by tax expert Michael Brostek of the investigative arm of Congress, the General Accountability Office. Broadly, Brostek said that complying with IRS regulations "costs taxpayers time and money," at least $107 billion in 2005, the GAO estimated, with other studies estimating costs 1.5 times as large.
Beyond compliance costs, Bostek noted even larger estimated "economic efficiency costs, which are reductions in economic well-being caused by changes in behavior due to taxes."
Previous fact checks
Even before Cruz commented at the roundtable, the FactChecker at The Washington Post awarded two Pinocchios to House Speaker John Boehner’s claim that it was costing Americans $500 billion a year to comply with federal tax demands. Cost estimates varied, the Post wrote, with the "safest bet" at the time being $163 billion as estimated by the IRS’s Taxpayer Advocate Service, entrusted with helping taxpayers resolve problems and recommending changes. Adjusting for inflation, that cost would have been nearly $172 billion a year around the time Cruz spoke in 2014.
More recently, the FactChecker weighed in again after noticing Cruz made his $500 billion military-tax compliance spending comparison at a May 2015 South Carolina stop. Like Boehner, Cruz drew a couple Pinocchios.
Weaver told us that because Cruz didn’t say what he meant by compliance costs — where he’d draw the boundaries — an observer could explore three possibilities: a taxpayer’s basic liability as in how much he or she sends the government in taxes; the costs associated with pulling together information and submitting it to the government; or efficiency costs as in "lost outputs, time taken from other productive activities or from missing out on other consumption activities."
For an individual, she said, it’s easy to calculate compliance costs by gauging how long it takes to fill out the required forms and multiplying that by an hourly dollar figure for how the individual values their time. "When you try to aggregate that nationally," she said, "it’s very difficult." She said she wouldn’t be comfortable specifying a national compliance-costs figure. But all in all, Weaver said, it looks like Cruz’s figure was high.
Cruz aide: Senator relied on two studies
Tyler told us Cruz got his tax-compliance costs from an April 2011 analysis by supply-side economist Arthur B. Laffer and others indicating $431.1 billion in combined annual costs incurred by taxpayers to pay federal taxes and a May 2013 study by researchers at the Mercatus Center at George Mason University stating the annual "hidden costs" of U.S. tax compliance ranged from $215 billion to $987 billion.
The Laffer-led study said researchers created a "comprehensive estimate of the total administrative costs, time costs, and direct tax compliance costs created by the complex U.S. federal income tax code." The $431.1 billion in estimated annual spending, the report said, reflects money spent "to comply with and administer the U.S. income tax system.*
Its estimate, relying on 2010 figures, broke out to approximately $31.5 billion in direct outlays (paying a professional tax preparer or purchasing tax software), total IRS administrative costs of $12.4 billion; and nearly $378 billion for the "time value costs taxpayers must bear to pay their taxes," filling out and submitting forms.
In 2011, the Post’s FactChecker called the Laffer study "dubious," noting it took a figure from the Internal Revenue Service’s Tax Advocate — that individuals and businesses spent 6.1 billion hours complying with tax filing requirements — and got to its cost estimate by multiplying "it against an absurd hourly income of $68.42 on the theory that the wealthy pay most of the income taxes."
Mercatus Center study
The Mercatus Center’s study, led by Jason J. Fichtner, a senior research fellow, similarly noted the high wage costs applied in the Laffer study, stating that in the study, the "average income used to monetize taxpayers’ time is significantly greater than the average income used in other estimates."
For its part, the center suggested a range of hidden costs connected to paying taxes including "time and money spent submitting tax forms, foregone economic growth, lobbying expenditures, and gaps in revenue collection" though the authors said they couldn’t pin a figure for lobbying by interests trying to reduce taxes paid.
As far as compliance costs, what Cruz singled out, the center study estimated $67 billion to $378 billion a year in accounting costs associated with filing taxes, a range based on IRS information suggesting 60 percent of individual taxpayers and 71 percent of unincorporated business taxpayers pay someone--an accountant, lawyer or tax professional--to prepare their taxes, with 32 percent of individual taxpayers relying on software.
Significantly, Fichtner told us, his paper, based on a review of relevant studies, was intended to cover far more than simple compliance costs. "I chose to give a range based on the different methodologies that I found in the research literature. It’s not that one method is better than another–or right versus wrong," Fichtner said. "All the measures have different assumptions for the time value of an hour of lost work/productivity as well as time spent."
Here’s a chart from the study summarizing a range of cost studies dating back to 2003:
Next, we asked the Washington, D.C.-based Tax Foundation about Cruz’s figure. Spokesman Richard Borean said by email it had no analysis to confirm or refute the $500 billion figure. But he noted the Mercatus Center study and suggested we consider annual reports on tax compliance costs put out by the National Taxpayers Union, a non-partisan research and educational organization that says it’s devoted to showing Americans how taxes, government spending and regulations affect them.
The union’s April 2014 report, which would have been the the latest one available before Cruz spoke, noted the IRS’s National Taxpayer Advocate had most recently estimated the annual paperwork burden generated by the federal personal and corporate tax system at 6.1 billion hours — the equivalent of about 3.05 million employees working 40-hour weeks year-round with two weeks off each. The group said: "The value of the labor behind the 6.1 billion hours amounts to a jaw-dropping $192.6 billion, when calculated with the most recently reported average employer cost for non-federal civilian workers by the Bureau of Labor Statistics: $31.57 per hour. Add in the $31.7 billion spent on tax software and other out-of-pocket costs for individuals and the total is $224.3 billion a year." (The union’s latest look at compliance costs, released in April 2015, said compliance with the federal income tax cost the economy $233.8 billion in productivity in 2014.)
Cruz said: "Every year we spend roughly $500 billion on tax compliance. That is roughly the budget of our entire military, entirely wasted on tax compliance."
This claim proved squishy at both ends. It looks like depending on how you value time, you can get to almost any total for what it costs Americans to prepare and file tax returns. However, most estimates run short of Cruz’s figure. Meantime, military spending exceeded $800 billion when he spoke though the senator’s spokesman indicated he meant to not count spending on conflicts abroad and other items not in the military’s nearly $500 billion base budget.
We rate the statement False.
FALSE – The statement is not accurate.
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Telephone interview, Connie Weaver, KPMG professor in accounting, Mays Business School, Texas A&M University, Austin, May 14, 2015
Document, "TAX GAP Complexity and Taxpayer Compliance," testimony to Senate Finance Committee by Michael Brostek, director, tax issues, General Accountability Office, June 28, 2011
Emails, Rick Tyler, national spokesperson, Cruz for President, May 5-6, May 20, 2015
Emails, Todd Harrison, senior fellow, Defense Budget Studies, Center for Strategic and Budgetary Assessments, May 7, 2015
Studies, "The Economic Burden Caused by Tax Code Complexity," the Laffer Center for Supply-Side Economics, April 2011; "The Hidden Costs of Tax Compliance," Mercatus Center, George Mason University, May 2013
Responses to PolitiFact Texas, Jason J. Fichtner, senior fellow, Mercatus Center, George Mason University, (received by email from Camille Walsh, media relations associate, Mercatus Center, May 11, 2015)
Policy paper, "A Taxing Trend: The Rise in Complexity, Forms, and Paperwork Burdens," National Taxpayers Union, April 15, 2014
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