At the 100th anniversary of the income tax as we know it, we should examine our overly complex tax code for much-needed reforms. On Feb. 3, 1913, Americans ratified the 16th Amendment to the U.S. Constitution. This amendment gave the federal government the power to tax income directly, rather than based on a state's population.
Over the century since, the tax code has become far too complicated and confusing, with the addition of numerous deductions, credits, exclusions and exemptions. In 2012, the Internal Revenue Service's Taxpayer Advocate estimated that Americans spend 6.1 billion hours and $168 billion preparing taxes. That's no wonder, when the tax code itself is 4 million words long. Commerce Clearing House, a tax information service, recently determined there have been 4,680 changes to the tax code since 2001. Taxpayers naturally struggle to keep up with a constantly revised statute. The last systemic reform was in 1986. We're due for an overhaul.
Tax simplification is the right thing to do for all taxpayers, and as chairman of the Committee on Small Business, I know it's in the best interest of economic growth and job creation.
Small businesses create about 70 percent of the nation's new jobs. More than 95 percent of these small companies and family farms file taxes as individuals rather than corporations. These S corporations, LLCs, other partnerships and sole proprietors employ more than half the U.S. private-sector workforce and account for more than half of all business net income. Small businesses add up to a big impact on our economy.
A study last year by the National Federation of Independent Business found that four of the top 10 problems faced by small businesses are related to their taxes. Entrepreneurs must decipher the complex code, keep records, file paperwork and make their payments -- all while running a business.
Unlike large corporations, smaller firms often just don't have the resources to spend on lawyers and accountants. But their taxes are still so complicated they could use that kind of help. On average, the cost for small businesses to comply with taxes is 206 percent higher than their larger counterparts, according to a 2010 Small Business Administration study. With employers of all sizes struggling, we need comprehensive tax reform and simplification that includes individual income taxes, and not just corporate taxes.
Businesses that pay taxes as individuals employ 54 percent of the private-sector workforce and pay 44 percent of all federal business income taxes. Lowering tax rates and making the code less complex would improve the economy because these businesses would have more capital to hire additional employees and invest in their companies, and spend less time and money complying with a convoluted tax system. After last week's anemic GDP growth report and disappointing unemployment announcement, we should be doing everything we can to boost private-sector growth.
Whether they own a business or not, Americans are often daunted by their tax preparation requirements. This complexity undermines compliance and Americans' confidence in our tax system. In 2012, the IRS' Taxpayer Advocate survey of 3,300 sole proprietor business owners found that only 16 percent believe tax laws are fair. We can do better than that.
Americans elected a politically divided government. I strongly believe lowering taxes would spur growth, while President Obama continues to call for higher taxes on many small businesses. That's irreconcilable, but we can still review the tax code and make changes -- seek common ground where we can. We can make reforms that are politically possible, and at least make the case for those that aren't. Let's step up to the historical moment, recognize the stakes for our next generation and make some lasting improvements that will be helpful for the economy, small businesses and American taxpayers.
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