The Cost of Compliance: A Waste of Time & Money

This past weekend, I was preparing for the start of my second-to-last semester in Accounting at Purdue University by reading the class syllabi that my professors had posted on the nets and interwebs. The purpose of this preparation was two-fold: I needed to know what text books to purchase and, more importantly, I needed to know what classes I would be taking and in which classrooms they would be located.

I scheduled my classes for the current semester in October of last year, so I did not remember which classes I would be taking. I was somewhat surprised to discover that I would be taking Management 504: Tax Accounting, a required course for my degree. My first reaction to this discovery was, “What a waste of my time!”

Now this was not the first time I’ve had such a reaction to a class I’ve learned I would have to take to fulfill my degree requirements. Such a response is not atypical for classes which I believe to be completely useless in terms of future benefit (e.g., philosophy, sociology, and other fluffy general electives). My response this time, however, was not due to any belief that a Personal Tax Accounting course is completely useless—sadly, it’s far too useful—but rather that a Personal Tax Accounting course should be completely useless.

Reading the syllabus for this class, I discovered that all exams will be open book and open notes and that we would only be required to “understand tax concepts, not memorize tax rules,” because throughout my career I “will have access to an extensive array of tax resources.” Extensive is an understatement.

I have never had a class where the tests were open book and open notes. Unfortunately, given the current tax code, it would be absurd to administer a tax accounting exam any other way. The current tax system is so incredibly complicated that if you were to send the necessary economic data concerning a specific household to 50 different tax accountants and 50 IRS agents, you would mostly likely receive 100 different tax returns. The likelihood of even one of those tax returns being completely correct would be miniscule.

Due to the extreme complexity of our current tax code, American citizens and businesses are estimated to spend nearly half a trillion dollars just to comply with that tax code. This is $500 billion which is spent every year yet produces no real economic benefit. Sure, this extraordinary amount of money spent on compliance contributes to GDP, but so do all of the “jobs” created (or saved) by the Federal Government. Yet we can’t sell what we produce from this $500 billion to foreign governments or business. It doesn’t improve our standard of living. It’s $500 billion dollars that we are wasting. We’d be better off sticking $500 billion under our mattresses.

Attempting to comply with our tax code not only wastes a lot of money, it wastes a lot of time. Accountants and financial advisors could be doing far more useful things with their time instead of filing tax returns and figuring out how much taxes can be avoided. Instead, these professionals could devote their time to figuring out how to increase future profit and earnings for their clients.

If you’re one of the few who files your own tax return (Timothy Geithner recommends TurboTax for doing that), then I have no doubt you could think of a thousand things that would be more productive of your time than trying to figure out how to get the biggest tax return.

Although I would still have to study for a FairTax Accounting exam—it’s not quite as simple as some make it out to be—I would certainly not need to take that exam open-book and open-notes. By substantially reducing complexity, the FairTax would provide a giant economic stimulus which is desperately needed in this country. And unlike current “stimulus plans,” we would actually save money. The economic benefit derived from transferring $500 billion and countless man hours to far more productive uses would greatly outweigh the transition costs.

Costs? Yes, there would be costs. The FairTax is not a miracle; it’s not perfect. There would be costs of transitioning from our current system to the FairTax. First of all, it would cost money. I don’t know if there are estimates on how much money it would cost, but we all know the Government never does anything for free.

More importantly, a transition to the FairTax would cost jobs. A number of people who rely on the current tax code for their livelihood will undoubtedly find themselves unemployed. That is, unemployment, in the short term, will rise by some degree. However, if these people were able to understand the tax code well enough to make a living by doing it, then it’s likely that these same people will have no trouble finding new jobs within relatively short amount of time.

These drawbacks will produce opposition to the FairTax, but we must remind its opponents that the benefits of such a plan will outweigh the costs. Hillary Clinton might say they need to “sacrifice for the greater good.” Milton Friedman would say, “There’s no such thing as a free lunch.” To my Tax Accounting professor, I would say, “It’s time to find a new subject to teach.”