As everyone who pays Uncle Sam knows, filing taxes is time-consuming and nerve-wracking, requiring meticulous record-keeping and often expensive accounting services. The undo stress that taxes create should be reason enough to simplify the system. The American Psychological Association has found that money is the top source of stress among adults in the United States, and those anxieties intensify at tax time. Indeed, the fear, uncertainty, and doubt that surround taxpaying are a tax all their own.
This tax is particularly steep on independent workers, a group of 54 million men and women that now comprises a full one-third of the American economy, who spend more on tax software and support, accountants and bookkeepers to navigate the tax system than self-employed workers in their peer countries That's a true inhibitor to creative, pioneering businesses.
Instead, filing taxes should be made easier. Satisfying the needs of the IRS is currently a massive and intimidating hurdle -- not only for new small business owners, but for folks who have been in business for years. Why? Complexity. Can the hurdle be lowered? Yes. Tax filings can actually be made easier. Indeed, they need to be.
According to Joseph Bankman, a professor of tax law at Stanford Law School, no other country in the industrialized world makes it so difficult for its citizens to file taxes. It takes taxpayers in the U.S. an average of 13 hours to file their taxes -- with four of those hours devoted to just completing the forms. And for the self-employed, it's even worse -- business filers spend an average of 23 hours. If those hours went to billable work instead, new business owners could generate thousands of dollars, according to calculations from a recent Google survey of young businesses.
The time and effort demanded by America's current code take their toll -- self-employed Americans pay more in accounting services than do their counterparts in many other countries, including the United Kingdom, Canada, Australia and South Africa. Why? Determining how much you owe often necessitates the engagement of accredited professionals. This is true in other countries as well, but the total cost is higher in the U.S. in terms of both dollars and as a percentage of revenue per business, as FreshBooks found from a random sample of 18,000 businesses. But, it doesn't have to stay this way.
Looking outside the U.S., several models exist for simplifying tax code and filing processes that reduce stress and needless accounting fees. By lowering tax-filing costs and reducing complexity, these countries are gaining a competitive advantage by appealing to job creators and innovators. And in this increasingly global, competitive world, any edge matters.
So, what specifically can be learned from other countries? Well, a 'return-free filing system' is used by many technologically-advanced countries, including Denmark, Sweden, and Spain. It is a simple, standardized process in which the government prepares a baseline tax return for each taxpayer. You have the choice to simply pay that number. Or, you can review this amount (perhaps with the assistance of a professional) and submit a lesser amount back to the tax agency if it's warranted. The result: a simple number, and one you can challenge. It's efficient and personalized -- the best of both worlds.
The United Kingdom is taking another approach and experimenting with 'digital tax accounts,' which brings together all of a taxpayer's details, just like a bank account. That way individuals can register for new services, update their information and understand quickly and easily what they need to pay. The U.K. government is trying to phase out the tax return altogether with this program, a compelling vision in many respects.
But before America moves to solutions, it's important to aƒccept there is a problem. The emotional and monetary costs of the current way of doing things are today are immense. The fact that the least economically-advantaged have higher tax rates than the wealthiest also poses problems that could be addressed through a simpler tax code. With the self-employed sector so dynamic, fast-growing and increasingly integral to the future of the American economy (over the past year, they generated more than $1.15 trillion of revenue or nearly seven percent of GDP, according to a study by MBO Partners), we need a better, clear-cut approach to paying taxes. And, by simplifying the world for entrepreneurs and risk-takers, the economy will be strengthened over the long run.
So why wait? If we want to promote entrepreneurship, we have to support entrepreneurs. The first way to do that is by making it easier for them to do what they do so well: work.