Optimal Taxation

VI. Key Issues: Financing and Delivery >> C. Health Financing (last update: 10.3.16)

Topic Outline

1 Theory
2 Excess Burden
- 2.1 Overview
- 2.2 Excess Burdens of Specific Taxes
3 Compliance Costs
4 Collection Costs
5 Distribution

Theory

Auerbach, A. J. (1985). The theory of excess burden and optimal taxation, in Alan J. Auerbach and Martin Feldstein, eds., Handbook of Public Economics, V. 1, North-Holland, Amsterdam, 61-127.
Aspen Gorry, Sita Nataraj Slavov. Marginal and Average Tax Rates in Optimal Tax Policy. Tax Notes, April 1, 2013.
Oberlander, Jonathan. The Politics of Paying for Health Reform: Zombies, Payroll Taxes, and the Holy Grail. Paper Prepared for FRESH-Thinking Workshop on Funding Health Care for All Americans, Stanford University, October 18-19th, 2007.
American Benefits Council. Incidence of Payroll Taxes is Fully on Employees. Payroll taxes ultimately are borne by workers even if nominally paid by employers. For example, the Joint Committee on Taxation has taken the position that “both the employee’s and employer’s share of the payroll tax is borne by the employee.” The Congressional Budget Office “assumes — as do most economists — that employers’ share of payroll taxes is passed on to employees in the form of lower wages than would otherwise be paid.” This report is a compilation of similar conclusions from a broad range of organizations and economists.

Excess Burden

Overview

Ballard, Charles L., John B. Shoven, and John Whalley (1985), The total welfare cost of the United States tax system: A general equilibrium approach. National Tax Journal 38:2, 125-140.
Conover, Christopher J. Congress Should Account for the Excess Burden of Taxation. Policy Analysis no. 669, Cato Institute, October 13, 2010. Provides estimates of marginal excess burden of losses related to various U.S. taxes (Table 1). On average, each dollar of additional federal taxes results in 44 cents in lost output.
Fichtner, Jason and Feldman, Jacob (2015). The Hidden Cost of Federal Tax Policy. Mercatus Center (2015). Based on a systematic review and critique of various studies, the analysis finds $148 to $609 billion in “economic costs” (deadweight losses) resulting from various federal taxes.
Government Accountability Office (2005). Tax Policy, Summary of Estimates of the Costs of the Federal Tax System. GAO-05-878. Summarizes findings of 6 studies of excess burden losses related to various U.S. taxes (Table 4).
Romer, Christina and David Romer. The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks. American Economic Review. Each dollar of tax increases to finance an increase in the size of government results in three dollars in lost output.
Laurence J. Kotlikoff and David Rapson. Does It Pay, at the Margin, to Work and Save? Measuring Effective Marginal Taxes on Americans’ Labor Supply and Saving

Excess Burdens of Specific Taxes

Corporate Income Tax. Austan Goolsbee, “Taxes, organizational form, and the deadweight loss of the corporate income tax,”Journal of Public Economics, 69(1998), pp.143-152. Deadweight losses amount to 5 to 10% of revenue.
Individual Income Tax. Martin Feldstein, “Tax Avoidance and the Deadweight Loss of the Income Tax,” The Review of Economics and Statistics, 81:4 (Nov., 1999), pp. 674-680. Deadweight losses amount to 32.2% of revenue.

Compliance Costs

Hodge, Scott. (2016). The Compliance Costs of IRS Regulations. Tax Foundation. Americans will spend more than 8.9 billion hours complying with IRS tax filing requirements in 2016. All in all, tax compliance will cost the U.S. economy $409 billion this year. According to the CBO (August 2016), total federal revenues in FY2016 will be $3.276 trillion; if so, compliance costs amount to 12.5 cents per dollar of federal tax revenue.
Fichtner, Jason and Feldman, Jacob (2015). The Hidden Cost of Federal Tax Policy. Mercatus Center (2015). Based on a systematic review and critique of various studies, the analysis finds $67 to $378 billion in “accounting costs” (time losses plus paid time for tax preparers) incurred by individuals and businesses to comply with various federal taxes.
Fichtner, Jason and Feldman, Jacob (2013). The Hidden Costs of Tax Compliance. Mercatus Center (5.20.13). We estimate that hidden costs of tax compliance range from $215 billion to $987 billion annually, and that part of the $452 billion revenue gap in 2012 unreported taxes was the result of tax code complexity. Taxpayers spent more than 6 billion hours complying with the tax code in 2011–equivalent to an annual workforce of 3. 4 million people.
Department of Treasury (2012). Taxpayer Compliance Costs for Corporations and Partnerships: A New Look. Estimates that corporations and partnerships spent $104 billion in 2009 complying with the tax code.
Government Accountability Office (2005). Tax Policy, Summary of Estimates of the Costs of the Federal Tax System. GAO-05-878. Summarizes findings of 3 studies of compliance costs for individuals (Table 2) and 4 studies of compliance costs for corporations (Table 3).
The Internal Revenue Service’s taxpayer advocate estimates that the total compliance cost of the federal individual and corporate income tax system was $168 billion in 2010 – or about 15 cents for every dollar of taxes collected.