Which country has the simplest taxation system?

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Jan. 6 2011 6:37 PM

The Turbo-est Taxes

Which country has the simplest taxation system?

Tax forms. Click image to expand.
"I've had it. I'm moving someplace where the taxes are easier."

In her annual report to Congress delivered Wednesday, the Internal Revenue Service's ombudswoman urged lawmakers to simplify the federal tax code. Even if Congress listens to her advice, overhauling our tax system for the first time since 1986 could take years. In the meantime, where should you move to avoid a tax-season headache?

The Maldives—particularly if you own a business. To determine the relative arduousness of various taxation systems, researchers from the World Bank and PricewaterhouseCoopers dreamt up a hypothetical, but very specific, company—a ceramic flowerpot manufacturer that owns one building, two plots of land, and one truck; has 60 employees; and pays 50 percent of its net profits to its owners, among other assumptions—and brought it through the taxation process of 183 nations and territories. It would take the imaginary flowerpot manufacturer's accountant less than an hour to comply with the Maldives' tax code. Compare that with Brazil, the lowest-ranking country, where the company would have to spend 2,600 person-hours—about 108 days of nonstop work, or 325 eight-hour shifts—to meet the requirements. That makes filing taxes in Belarus, the second lowest, seem like a cakewalk—at 1,080 hours. The United States, where it would take the flowerpot company 187 hours to comply, ranks 66th from the top by this measure. *

What if you don't own a company? Unfortunately, it's tougher to find easily-comparable data for taxes on individuals. But the Maldives, which has no income, sales, property, or capital-gains taxes, would still rank near the top—as would notorious tax havens like the Cayman Islands and Andorra. (Countries without these taxes can fund their governments by charging companies an annual licensing fee.)

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Tax reformers frequently attack the length of our tax code. Olson's report notes that the code climbed from 1.4 million words to 3.8 million words between 2001 and last February. Since 1913, the code's physical volume has increased from 400 pages to about 70,000 pages. But length is a poor proxy for simplicity. Almost nobody besides engineers at TurboTax actually needs to read the whole code. Much of it consists of so-called "tax expenditures"—spending programs that Congress works into the code—most of which individually apply to very few people or industries. *

Those who research the so-called "compliance burden" of tax codes prefer an alternative measure for complexity: How long it takes people to prepare, fill out, and submit their taxes. It's tougher to measure this for individuals than for businesses, since people rarely keep track of this data themselves, but the IRS estimates (PDF) that individuals take an average of 12 hours to file their taxes: five hours for record-keeping, two hours for planning, three hours to fill out forms, one hour to submit the forms, and two hours for miscellaneous activities.

The Explainer thanks Ben Harris of the Brookings Institution and Adam H. Rosenzweig of Washington University, currentlyvisiting at the University of Texas.

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Correction, Jan 7, 2011: Originally this article mistakenly listed the United Kingdom's ranking (23rd) in place of the United States' ranking. (Return to the corrected sentence.) It also originally implied that tax expenditures in aggregate, rather than most of them individually, apply to few people or businesses. (Return to the corrected sentence.)

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