Tax Compliance Costs for Corporations and Partnerships: A New Look
George Contos, John Guyton, Patrick Langetieg – Internal Revenue Service (RAS:OR: Taxpayer Analysis & Modeling)
Allen Lerman, Susan Nelson – U.S. Treasury Department (Office of Tax Analysis)
June 21, 2012
The views expressed are those of the authors and not the official positions of the U.S. Treasury Department or the Internal Revenue Service.
June 21, 2012 2
Overview
Background Previous Compliance Cost Estimates for
Corporations and Partnerships New Preliminary Compliance Cost Estimates
for Corporations and Partnerships Conclusions and Outlook
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Objectives of Compliance Costs Research
Gain insight into determinants of compliance costs: Changes in the macro-economy, tax law, tax administration Support policymaking and tax administration through
“what-if” analysis
Better understand the role of compliance costs: Cost of information needed to support tax administration Compliance costs as a driver of taxpayer behavior Compliance costs as an indicator of taxpayer needs
IRS provides annual estimates for: Taxpayers on tax forms OMB for the Information Collection Budget to Congress
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Existing IRS Estimation Method for Business Taxpayers:A.D. Little Methodology
Average time burden estimates by tax form Estimates based on number of lines on each form
Limitations Outdated - Based on information collected in the early 1980s Average Time Burden only
Limited ability to convert to monetary costs Limited information for distributional analysis
Ignores technology - Estimates are independent of the preparation and submission methods used by taxpayer
Prior efforts to monetize ADL burden estimates have used a constant monetization rate
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New Compliance Costs Research Methodology
Surveys measure time and out-of-pocket costs taxpayers spend on pre-filing and filing activities
Controls for substitution of time and money by monetizing time and reporting total compliance burden
Establishes econometric relationships between total compliance burden and tax return characteristics
Uses econometric micro-simulation model for forecasting and what-if analysis
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Estimation Method
Simple model similar to Slemrod and Venkatesh (2002) Dependent variable: Logarithm of total monetized
compliance burden Controls include:
Log of total assets No total assets reported Organization form
Separate estimation for each asset size category: Less than $100K $100K to $1M $1M to $10M $10M or more
Eventual goal is to develop a more robust model along the lines of the previous small business model discussed in Contos et al (2009)
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Characteristics of Prior Research
Prior efforts to monetize ADL compliance costs: Used constant monetization rate Tended to ignore the fact that compliance costs are tax
deductible for businesses
Prior econometric studies: Showed comparable costs to current preliminary estimates Ignored tax deductibility of compliance costs for businesses
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Corporate and Partnership Income Tax Compliance Costs, Literature Estimates
Total Compliance
Costs
Small Businesses - IRS/Treasury: Tax Year 2004 (Small Business Survey)
$60B
Large & Medium Business - Slemrod (1996) Slemrod and Venkatesh (2002) (Medium and Large Business Surveys)
$24B
All Corporations and Partnerships $84B
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Monetization of Time Burden
Constant hourly rate $47[1]
Variable hourly rate based on simple methodology Rate based on total assets and turnover, from $17.50 to $68 Limits:
If total assets and turnover zero then rate $17.50[2]
If total assets are over $30M and turnover over $10M, then rate $68[3]
All hourly rates reflect inclusion of fringe benefits
[1] Based on Tax Foundation methodology blending the mean Accountants and Lawyers rates from the May 2009 Occupational Employment Statistics (OES) Survey Estimates: BLS, Department of Labor.[2] The minimum rate is the 25th percentile wage of Bookkeeping clerks from May 2009, OES, BLS.[3] The maximum rate is the 90th percentile wage of Accountants from May 2009, OES, BLS.
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Total Assets C corporations S corporations Partnerships All
$0 to $100k 17.98 17.86 17.87 17.89
$100K to $1M 19.20 19.05 18.39 18.84
$1M to $10M 25.77 24.32 21.26 22.78
$10M to $500M 54.20 50.35 42.07 45.89
$500M or more 67.27 67.28 61.72 64.65
All 20.13 18.94 19.72 19.44
Average Monetization Rates, by Total Assets
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Total Assets C corporations S corporations Partnerships All
$0 to $100k 923,332
2,648,407
1,468,464
5,040,203
$100K to $1M 550,924
1,115,871
926,823
2,593,618
$1M to $10M 178,506
293,809
645,051
1,117,366
$10M to $500M 37,656
36,022
124,019
197,696
$500M or more 4,452
452
4,371
9,275
All
1,694,869
4,094,562
3,168,728
8,958,158
Source: IRS, Statistics of Income
Tax Year 2009 - Number of Returns
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ADL Methodology – Constant Monetization RateTY 2009 Business Income Tax Compliance Costs, by Total Assets
Average Compliance Costs Total Compliance
Costs,
in BillionsTotal Assets C corporations S corporations Partnerships All
$0 to $100k $9,200 $8,900 $7,800 $8,600 $43.5
$100K to $1M$10,500 $9,600 $9,500 $9,800 $25.4
$1M to $10M$12,000 $10,400 $10,600 $10,800 $12.1
$10M to $500M$19,800 $13,300 $19,100 $18,700 $3.7
$500M or more$23,400 $18,800 $19,400 $21,300 $0.2
All $10,200 $9,300 $9,300 $9,500 $84.8
Hourly rate = $47
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ADL Methodology – Variable Monetization RateTY 2009 Business Income Tax Compliance Costs, by Total Assets
Average Compliance Costs Total Compliance
Costs,
in BillionsTotal Assets C corporations S corporations Partnerships All
$0 to $100k $3,500 $3,400 $3,000 $3,300 $16.6
$100K to $1M$4,300 $3,900 $3,700 $3,900 $10.2
$1M to $10M$6,800 $5,500 $4,900 $5,300 $6.0
$10M to $500M$23,300 $17,800 $17,200 $18,400 $3.6
$500M or more$33,600 $26,900 $25,600 $29,500 $0.3
All $4,600 $3,800 $4,200 $4,100 $36.7
Hourly rates from $17.50 to $68
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Tax Year 2009 Survey – Variable Monetization RateTY 2009 Business Income Tax Compliance Costs, by Total Assets
Average Compliance Costs Total Compliance
Costs,
in BillionsTotal Assets C corporations S corporations Partnerships All
$0 to $100k $6,000 $5,200 $5,200 $5,300 $26.8
$100K to $1M$7,400 $6,800 $6,300 $6,800 $17.5
$1M to $10M$15,100 $13,200 $12,800 $13,300 $14.8
$10M to $500M$69,300 $37,900 $84,900 $73,300 $14.5
$500M or more$720,200 $271,300 $694,200 $686,100 $6.4
All $10,700 $6,500 $11,100 $8,900 $80.1
Hourly rates from $17.50 to $68
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Total Business Income Tax Compliance Costs, by Size of Total Assets, TY 2009
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
$40.0
$45.0
$0 to $100k $100K to $1M $1M to $10M $10M to$500M
$500M or more
ADL constant ADL variable BTB Variable
Size of Total Assets
Tot
al C
ompl
ianc
e C
osts
($
bill
)
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PRELIMINARY SUMMARY –Business Income Tax Compliance Costs in Billions
Total Compliance
Costs
Prior Research $84
A.D. Little - Constant Rate $85
A.D. Little - Variable Rate $35 – $40
Tax Year 2009 Survey -Variable Rate
$75 - $100
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Tax Deductibility of Compliance Costs
For businesses – unlike for most individuals – compliance costs may be deductible.
So far, compliance cost estimates have been gross and do not reflect any benefits from income tax deductibility.
Benefits of tax deductibility are not uniform. Benefits of deductibility depend on organizational form
and size. The impact of deductibility on the aggregate compliance
burden may be large.
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June 21, 2012 18
Conclusions and Outlook
Conclusions Total business income tax burden: $75-$100 billion Total burden close to earlier estimates Better reflects distribution of costs by size of
business
Outlook Expand estimation methodology Refine monetization methodology Explore implications of tax deductibility of
compliance costs
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