Estimating the Compliance Cost of the U.S. Individual Income Tax

IBM and the IRS developed a microsimulation model to estimate the amount of time and money that individuals spend on federal tax compliance. Since the 1980s, IRS estimates of taxpayer burden have been based on a model developed in 1984 by the IRS and Arthur D. Little, Inc. The model was designed to measure only a subset of total compliance burden. In addition, the model can simulate only a narrow range of policy changes because it does not adequately represent the characteristics of the tax law that generate burden.

This paper will help the IRS understand the burdens placed on taxpayers by tax laws, tax system, and changes to those factors. Specific objectives related to this overarching goal include: Measure the Level of Taxpayer Burden. Develop a model that allows the IRS to estimate the burden impact of changes in the tax system. Support the identification, and prioritization of IRS burden reduction proposals. Help the IRS reduce the burden on small businesses by developing a model for small business tax burdens.

Tax liability is the net cost of all transfer payments between taxpayers and the IRS. Excess burden includes all of the remaining resource costs of the federal tax system. Taxpayers can affect the allocation of burden among tax liability and the three excess burden categories through their behavior. Changes in tax policy or in the administration of that policy may affect total burden by changing any of the components of excess burden. For example, taxpayers may choose to alter their labor supply, consumption patterns or investment decisions in response to tax incentives that favor selected activities.

Auto57

NTJ Burden Paper-final.doc (irs.gov)