The Cost and Benefits of Tax Complexity

General Electric, one of the largest corporations in America, filed a whopping 57,000-page federal tax return earlier this year but didn’t pay taxes on $14 billion in profits. The return, which was filed electronically, would have been 19 feet high if printed out and stacked. [Recall that GE claimed a tax benefit of $3.2 billion for this effort. -Ed.]

57,000 pages is a lot of ink and effort to turn taxes from a cost to a benefit. But it should now be easy to see who could profit from a complex tax code.

Large corporations should generally support a complex tax code because their taxes are prepared on a large enough scale to make it profitable to filling out complex returns. The same is not generally true of smaller businesses, so tax code complexity actually serves as a competitive advantage for larger firms because they will generally find it cost-effective to shell out millions of dollars to have their tax returns prepared.

Tax lawyers should also support tax code complexity because it means job security. Forcing businesses to wade through page after page of highly complex and remarkably boring legalese should convince them they want to hire a lawyer to handle this for them. Also, factor in the additional time compliance costs, and the case for hiring tax lawyers makes sense.

The most impressive part of this story is how much GE paid to avoid paying taxes. Hiring tax firms is never free, so GE shelled out a pretty penny to change their status from paying a check to receiving it. It was undoubtedly worth it to do so, but this imposes significant costs on society and the economy.

In the first place, society suffers because it ends up paying GE. Instead of GE paying for its government benefits, it simply robs taxpayers and keeps their money for itself.In the second place, GE’s compliance with tax law imposes economic costs, primarily in the form of opportunity costs. Instead of hiring people to actually produce something, GE has instead employed tax lawyers whose only job is to avoid paying taxes. The tax compliance costs have made the economy poorer because there are now fewer people being productive since it is now more profitable to outwit government statutes instead of making things people find useful.

In fact, tax compliance is a major drain on the economy, and is one of the oft-overlooked costs of taxes. People often get caught up on tax rates, but tax complexity imposes its own costs as well, and should be part of the tax debate. Thus, the fact that GE not only had a corporate tax benefit of over $3 billion but did so with a 57,000 page return should suggest that something is terribly wrong with the current tax system.

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