by Kyle Johnson
Now that Donald Trump’s second term is underway, it’s a good time to highlight opportunities for him to significantly improve the economy.
You’ve probably heard Trump and Elon Musk talk about the “Department” of Government Efficiency (DOGE)—their push to combat waste, fraud, abuse, and inefficiency.
Well, talk is cheap, and I’m not foolish enough to trust promises made on the campaign trail. Here’s what I’d say if I had their attention. And I can’t imagine how even Trump’s biggest detractors could put up much of a fuss… if they’re honest.
Covert Taxation
Tax rates typically dominate the discussion whenever the subject of taxation is in the spotlight. But I’m going to save that discussion for another day. Trump could foster economic growth by greatly reducing the cost of tax compliance.
Politicians on both sides of the aisle will talk about “streamlining” or “simplifying” the tax system. But the tax code’s current form proves such words are insincere talking points. It’s a complete disaster.
The Sixteenth Amendment and the Revenue of Act of 1913 created the income tax (a mere 27 pages long when printed on six-by-nine-inch paper). For years, changes were made by individual revenue acts. But the Internal Revenue Code (IRC) as we know it today has been through just three major amendments: the 1939 Code; the 1954 Code; and the 1986 Code. While efforts have been made to modernize the tax code, the US tax system remains governed by a nearly 40-year-old piece of legislation.
Today, the IRC is over 2,600 pages long (over four million words). The Internal Revenue Service’s (IRS) official interpretation of the IRC is called the Treasury regulations and is comprised of final, temporary, and proposed regulations. It’s currently over 17,000 pages long (over 12 million words).
Then there’s a labyrinth of various authorities, such as federal court cases including the Tax Court—a special court created to exclusively adjudicate federal tax issues. Taxpayers must also heed official publications by the IRS (Revenue Rulings, Revenue Procedures, Private Letter Rulings, etc.).
Complicating matters further still, the IRS has an official policy known as “nonacquiescence.” Essentially, the IRS will honor a decision from the Tax Court or federal courts with respect to the specific taxpayer in each case. However, it will not extend the same treatment to all other similarly situated taxpayers.
The complexity of the US tax system is perhaps best exemplified by the Standard Federal Tax Reporter, published by CCH. CCH is a private-sector information service that helps tax practitioners navigate the rats’ nest of laws, court cases, and other authorities. It’s bare bones and contains no advocacy. To celebrate the 100-year anniversary of the Standard Federal Tax Reporter, CCH published a fact sheet stating the publication grew from 400 pages in 1913 to over 73,000 pages in 2013.
While some tax practitioners get lost in endless minutiae, others address the basics. Just last year, the US Supreme Court decided Moore v. US—a case regarding the operational definition of “income.” Somehow, that wasn’t yet fully settled.
These absurdities have resulted in a form of covert taxation: the government’s commandeering of time and attention. The Tax Foundation estimates Americans spend 7.9 billion hours per year on tax compliance—time everyone would prefer to spend doing just about anything else. It estimates that tax compliance costs about $546 billion annually, or about 2% of GDP. This includes $413 billion worth of “lost productivity” and $133 billion in out-of-pocket costs.
I suspect the real figure is even greater. It’s impossible to measure the true opportunity cost, which must include the frustration of new business formation. Many remain at jobs they’d prefer to quit, placing their entrepreneurial dreams on the back burner.
Advanced economies like Singapore and Hong Kong have thrived with simplified tax codes—taxpayers typically file in under 15 minutes. Subjecting American taxpayers to the current tax system is unnecessary and economically self-destructive. This meets Doug Casey’s definition of stupidity (an unwitting tendency toward self-destruction).
Death by 190,000 Paper Cuts
The Treasury regulations for taxes are just a small portion of the Code of Federal Regulations (CFR), which now exceeds 190,000 pages.
Like everything in this world, these regulations come at a price. A study by the Competitive Enterprise Institute estimates that regulatory compliance costs $2.1 trillion annually—a staggering sum considering the IRS collected $2.3 trillion from individual income taxes in 2023.
I’m sure some would contest this estimate. But nobody can deny that compliance costs get passed on to consumers one way or another. The costs are priced in to every good and service purchased by Americans. At $2.1 trillion, regulatory compliance costs the average American household over $15,000 annually.
Funny how this is ignored by the politicians who rally against comparatively trivial ATM fees, bank overdraft fees, and various “service fees” attached to things like concert tickets.
Oh, how I wish I lived in a world in which businesses printed receipts with itemized lines for regulatory compliance fees. Social media is full of people getting outraged after a surprise fee increased their bill by a couple bucks (like how many restaurants tacked on a small fee for their staff’s personal protective equipment during the pandemic). But few seem to care when much larger costs are obscured.
I’m not suggesting that the economy should be a lawless free-for-all. But the CFR was just over 126,000 pages in 1990. I don’t recall massacres and rampant chaos. US law is fully capable of handling crime. It’s fanciful and destructive to believe we can regulate away all future misdeeds and undesirable outcomes.
The costs for regulatory compliance are too high, and I’m not just talking about money. I’m talking about economic growth. A 2017 study by the Phoenix Center at Auburn University found that every full-time government regulator destroys 138 private-sector jobs. Using CPI to adjust for inflation, the researchers estimate every regulator destroys $14.3 million in economic output.
We’re all poorer because of overregulation.
Expensive?
It’s easy to understand how deregulation could result in economic growth. But taking the necessary steps might be too expensive with respect to political capital. The mess that is America’s tax and regulatory system did not happen by accident. It’s the result of lawyers, lobbyists, and cartel-like behavior by the biggest players within many industries. The status quo has big-money backing and inertia.
I’m aware that Trump has called to abolish the income tax. Musk has talked about using DOGE to cut $2 trillion from the budget. But don’t be caught off guard if changes are modest compared to the viral soundbites.
Stand Guard
Officially, Stephen Miran is Trump’s current economic advisor. But I’m not sure who (if anyone) actually has Trump’s ear. I suspect the debt will grow under his second term, as it did during his first.
Many statistics show inflation picking up yet again. Last August, 818,000 jobs were revised out of existence. An early report from the Philadelphia Fed claims Q2 24 was weaker than BLS statistics show, hinting that more revisions will be necessary.
Economists and pundits have their own agendas and preferences. Perhaps the next batch of revisions will cause many to suddenly reconsider their stance on the economy.
Rising inflation, deficit spending, a weaker job market than many believed (or claimed to believe during Biden’s presidency)… stagflation is a real danger. So too is the likely response from Trump, Congress, and the Fed – enough money helicopters to blot out the sun.
Not a promise.
Not a prediction.
But something to keep an eye on.
As Lobo says,
Caveat Emptor.
KJ
PS: Lobo calls it like he sees it. If you want some help guarding against your own biases while Trump is in office, consider subscribing to the Speculator’s Digest—our free, no-hype, no-spam newsletter. It’s the only place to get his latest thoughts on the economy.
