February 15, 2011

Americans do NOT spend $163 billion Preparing Taxes

Last month I wrote that Americans do NOT spend 6 billion hours on their taxes  I explained how I think the claim that we spend 6 billion hours on taxes is, well ridiculous.   We'll call this article part 2 in the series.  

The other day I was reading Businessweek magazine at home for fun and profit and I came across this article Taxation Without Complication.    The article makes the argument that taxes are too complex.  (I'm sure that the imaginary people who think that taxes are too simple are now put in their place!)    Anyway ... In the article they throw this in :

"Olson, the national taxpayer advocate who runs an independent unit within the IRS, estimates the cost of preparing returns and coping with tax laws at $163 billion in 2008—11 percent of income tax receipts."

I'm sorry but am I the only one that thinks this kind of claim is totally ridiculous?  This Olson lady sure likes to make up ridiculously big and unbelievable numbers.   Next she'll be telling us that shipping all our jobs to China is saving us $18 trillion a year or that NAFTA has raised our GDP 200% or that Matthew Mcconaughey won 1 Oscar.    The $163 billion figure is another example of a Numerical Fiction.

To illustrate why I think that number is not even close to reality lets look at this a few ways.   

1. $525 per person.   There are roughly 310 million people in the USA.    $163 billion would work out to about $525 per person.   So if we spent $163 billion then every man woman and child in the nation spends $525 a year on average to handle their taxes.   Whats Turbo Tax cost like $30 or $50?

2.  $1,147 per tax form.   In 2008 there were a total of 142 million tax returns filed.   If we spent $163 billion a year total then that would work out to $1,147 average per tax filer.   Wow, that would hire a lot of CPA time.

3.  All the accountants in the nation.    There are 1.1 million accountants and auditors in the country.   They make mean wages of about $67k a year.  Total wages for all the accountants would be about $73.7 billion.    Many accountants do various other things.

4.  If H&R Block did all our taxes.     H&R block does the taxes for 1 in 7 Americans.   H&R Block's total annual revenue is around $4 billion.    If H&R Block did the taxes for all Americans then the cost would be about $28 billion and we'd be paying too much.

Lets just look at the cost of doing taxes based on the last two points:
If we hired every single accountant in the nation to do nothing but taxes = $73 billion
If we had H&R Block do all our taxes = $28 billion

Compare those two options to the $163 billion claim.   We could pay every accountant in the nation to do nothing but taxes and then pay H&R Block to check their work twice and still not spend $163 billion.    It doesn't add up.

Bottom Line:   We don't spend $163 billion preparing our taxes.


  1. Try figuring out EIC without using TurboTax or similar software. Try figuring out education credits for college tuition (there are three different places you can claim it. Which is best). Trying figuring out the Making Work Pay credit (this one is easier than the first two).

    All of these are credits or deductions aimed at low-middle class. A lot of these people don't have access to TurboTax. Would you want to prepare your taxes at the library? What about the guy peeking over your shoulder, who just wrote down the social security number of your child?

    I think taxes are WAY too complicated. And it hurts the lower income people.

  2. Randy,

    I agree that taxes are complex and expensive. Just not $163B expensive.

    Low income filers can get help through volunteer programs. Also H&R block will do 1040EZ forms for free (+$39 for state).

  3. I believe that you have made the case FOR these huge numbers! You are only taking into account PERSONAL Income Taxes. That is the dastardly LIE of taxes - not only are Business Taxes buried into the higher prices of everything we buy or in the lower wages we are paid, but the cost of COMPLYING with business taxes is HUGE!

    I worked in the Treasury Dept of a 2,700 employee Mfg company and our 6-person unit was surrounded by an entire floor of more than 47 other accountants and 11 of them did ONLY taxes! Plus, the company paid mid six-figures to an outside CPA firm to review it all! Corp taxes are about 40% of the total tax bill, so your analysis, by omitting them - not to mention state, county and local governments, confirms the larger number!

  4. How much time and money do you spend computing and paying your SALES Taxes?

    It is past time for us to implement the MI FairTax Tax Replacement Plan and as well as the Federal version (HR 25)! - www.mifairtax.org - and www.fairtax.org

  5. Spartan, You said that 11 of 47 accountants did taxes in that company. Thats less than 25% of the accountants doing taxes. I figured that if ALL of the 1.1 million accountants in tehe ntire country did nothing but taxes then they would cost about $73B for their wages. You've given a good example for why realistically a smaller fraction of all accountants are involved in taxes. 25% of $73B is only $18.25B.

    Sales taxes are a different topic. The figure if $163B was supposed to be about income taxes only.



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