NCPA - National Center for Policy Analysis

The Economic Cost of Paying Taxes

April 19, 2011

There is a lot more to taxes than simply paying the bill.  Taxpayers must spend significantly more than $1 in order to provide $1 of income tax revenue to the federal government, says Arthur B. Laffer, the chairman of Laffer Associates.

  • To start with, individuals and businesses must pay the government the $1 in revenue plus the costs of their own time spent filing and complying with the tax code; plus the tax collection costs of the IRS; plus the tax compliance outlays that individuals and businesses pay to help them file their taxes.
  • In a new study, Laffer and his colleagues estimate that these costs alone are a staggering $431 billion annually.
  • This is a cost markup of 30 cents on every dollar paid in taxes.

A tax reform to a simple flat-rate tax with no deductions would significantly reduce the current complexity inherent in our progressive tax system.  If a static, revenue-neutral flat-tax reform were to reduce the tax complexity in half, the long-term growth in our economy would increase by around one-half of 1 percent per year.  Small increases in our annual economic growth rate make a big difference over time, says Laffer.

  • Consider a family that made $40,000 in the year 2000.
  • If their income grew by 3.2 percent per year, the average long-term gross domestic product growth rate, their income by 2010 would be $53,110.
  • Now imagine that the growth in the family's income was not 3.2 percent but 3.72 percent (the impact from halving the costs of our current complex tax system).
  • Under this higher growth scenario, the family's annual income would have been $55,568 in 2010.
  • The slight increase in the economic growth rate raises this family's purchasing power by 4.6 percent.

Regardless of the reform approach taken, the U.S. economy will be enhanced greatly by significantly reducing the complexity of the current tax code.

Source: Arthur B. Laffer, "The 30-Cent Tax Premium," Wall Street Journal, April 18, 2011.  Arthur B. Laffer, Wayne H. Winegarden and John Childs, "The Economic Burden Cause by Tax Code Complexity," Laffer Center, April 14, 2011.

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