Ever wondered how much it costs U.S. businesses to comply with the nation’s tax laws?

The long-awaited release Friday of a report from the President’s Economic Recovery Advisory Board, headed by Paul Volcker, provides a rough answer: north of $40 billion per year, or more than 12 percent of the revenues collected.

That’s just one nugget from many in the report, which sheds a disturbing light on the tangle of dilemmas and inefficiencies that the tax code foists on companies of all sizes.

About 30 pages of the document cover the corporate tax realm and, as mandated by the President, explore ways to simplify the system and improve compliance. Options include reducing the tax burden either by a direct reduction in tax rates or by increasing incentives for new investments and broadening the tax base by limiting deductibility of interest, applying the corporate tax rates to pass-throughs, or taking out a bunch of tax expenditures.

Along the way, we get a veritable frightfest of unintended consequences of the current laws.

The preference of the tax code for debt over equity encourages companies to maintain a relatively high level of debt in their capital structure, “increasing the likelihood of financial distress and bankruptcy.”

The taxation of business income at the corporate level and again at the individual level has sparked an explosion of non-corporate businesses, such as S corporations and partnerships, which now account for half of business income in the U.S. and one third of receipts.

High corporate tax rates push capital out of the business realm entirely and into owner-occupied real estate, which is subsidized in various ways by the tax system.

On the international side, the U.S. is stuck with basically the worst of all possible worlds: a hybrid system that imposes the (relatively high) domestic rate on all income from subsidiaries abroad, combined with a tax credit for foreign taxes paid and deferral of tax on active income until the funds are repatriated. In addition to complex expense allocation rules, this system requires “onerous transfer pricing enforcement, while generating strong incentives for tax planning and avoidance by businesses,” according to the report. For large organizations, no less than 40 percent of their compliance burden arises from the taxation of foreign source income.

Cleaning up this mess will mean moving far beyond the rhetoric of “closing tax loopholes.” It will take a concerted effort to work through a mixture of delicate tradeoffs and sweeping revisions to the Code. Whether Congress will have the stomach for it is anybody’s guess. ###