Feed on
Posts
Comments

As you ponder the inane debates about tax “reform” (i.e. deck chairs and symbolism), suppose you take the work of Martin Feldstein seriously. He has previously estimated that the dead weight loss in an economy due to taxation would be up to 30% of the size of the tax take. Now, I suspect the direct effect is smaller if only because not all taxes are equally distorting.

But for fun, take this to be true.

The US federal government in 2016 collected $3.27 trillion in taxes. The states collected $1.60 trillion in taxes. Local entities collected $1.26 trillion in taxes. Therefore, in total, the government in the U.S. collects $6.13 trillion in taxes.

Note, that taxes are neither bad nor good from a pure economic standpoint. They are transfers. The reason economists may be frustrated with taxes is that the collection of taxes themselves generates distortions in economic activity by shielding the role that prices play in a market mechanism. In other words, taxes generate inefficiency – which means that even if we collected the same amount of taxes, we could still have all of the current government programs we want AND be considerably richer. I do not think many critics of economists understand this point.

How inefficient might our tax system be? (now, I think it is in many regards worse than this, I am just talking about the direct dead weight losses here). Well, if the tax take is $6.13 trillion, then simply because we do a terrible job of collecting taxes our country is poorer by $1.84 trillion!

Let me say it again. We could have exactly the government we have right now, yet could generate an additional $1.84 trillion in economic transactions every year, just by restructuring the tax system to be efficient. Lest you think this is chump change, can you name ANY program that could generate even a fraction of those gains? And not only that, these are not one time gains, this is activity that happens each and every year.

To put that in context, the inefficiency of our current tax system is the equivalent of putting an entire economy the size of Brazil into the trash, each and every year. The dead weight loss of our tax system is larger than the entire economy of Brazil, South Korea, Russia and even Australia and Canada. Let that sink in a little bit as you all argue over the crumbs in the corner.

Leave a Reply

knowledgeless-expediency