America’s Weighty Business Tax Compliance Costs

By SBE Council at 24 September, 2024, 12:24 pm

by Raymond J. Keating –

The costs of taxes reach far beyond the individuals or businesses directly being taxed, and certainly beyond those targeted with higher taxes by politicians. SBE Council explained some of this as it relates to the corporate income tax in a recent analysis.

It must be noted that taxes come with rules, regulations and other compliance costs. The Tax Foundation released a report in early September offering the results of a survey of 21 large multinational enterprises (MNEs) regarding income tax compliance costs.

Before I highlight several key findings, it should be pointed out that as with other regulatory costs, tax compliance costs fall more heavily on smaller businesses.

As noted in the National Association of Manufacturers’ updated study by economists Nicole V. Crain and W. Mark Crain  titled “The Cost of Federal Regulation to the U.S. Economy, Manufacturing and Small Business,” per employee tax compliance costs were 90 percent higher for businesses with fewer than 50 employees ($1,900) compared to those with 100 or more employees ($1,000), and these costs were 120 percent higher for businesses with 50-99 workers ($2,200) versus those with 100 or more.

The Tax Foundation survey found:

● “In total, as of tax year 2022 or 2023, the companies spent $537 million on income tax compliance, an average of $25.6 million per company, including $282 million for foreign income tax compliance, $194 million for federal income tax compliance, and $61 million for state and local income tax compliance.”

● “All companies indicated an increase in income tax complexity since 2017, with a weighted average increase in funds dedicated to compliance costs of 32 percent from 2017 to 2023. Most companies attributed compliance cost growth primarily to increasingly complicated international rules, including the Tax Cuts and Jobs Act (TCJA) reforms. Several companies also cited the new corporate alternative minimum tax enacted as part of the Inflation Reduction Act, as well as the OECD’s Pillar Two rules and the TCJA provision requiring research and development amortization.”

The Tax Foundation also acknowledged the point about smaller firms facing higher costs:

“While the sample size is small and limited to relatively large companies, evidence points to economies of scale in tax compliance costs, meaning smaller companies are disproportionately burdened and disadvantaged by tax complexity.”

It also was pointed out that “complex policies may be reducing dynamism and competition more broadly in the economy, to the extent they present barriers to entry for, say, domestic companies seeking to grow internationally, or mid-sized companies seeking to become large companies. In other words, the case for simpler taxes is really made by considering the impacts on the millions of smaller companies and potential companies that would be allowed to flourish absent the complexities of today’s tax system.”

Indeed, elected officials arguably should have two goals when addressing taxes, whether they be levies imposed on individuals and families, on unincorporated businesses, on LLCs or S Corps, or C Corps:

1) Reduce tax rates and burdens

2) Reduce tax complexity and compliance costs

If that remained the focus of politicians at the federal, state and local levels, the U.S. would see robust results in terms of enhanced competitiveness, entrepreneurship, investment, productivity and economic growth.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist, The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist and The Weekly Economist III: Another 52 Quick Reads to Help You Think Like an Economist.