Paying high taxes is just the start. This new study by The Joint Committee says the deadweight loss, in addtition to the actual amount of taxes, may be as high as 40%. In other words, for every $100 you pay in taxes there is a cost of $40 because of administrative costs, compliance costs, and the reduction in economic growth.
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Overall cost of taxation. The overall economic cost of the federal tax system above and beyond tax collections arises from three sources:
1. Administrative costs are the expenses that the U.S. government incurs in devising, administering, and enforcing its tax laws. In fiscal year 2006, the Internal Revenue Service spent $10.7 billion, or 0.5 percent of federal tax receipts.
2. Compliance costs are the value of time and the out-of-pocket expenses that individuals and firms must shoulder to learn tax requirements, keep records, and prepare returns, including accounting and legal fees. In 1999, compliance costs were estimated to be $100 billion, or about 9.4 percent of federal income tax receipts.1
3. Excess burden or deadweight loss is the reduction in potential output or economic welfare that occurs when taxes distort behavior. High marginal tax rates:
- discourage individuals from working and firms from undertaking investments that would increase GDP;
- cause individuals and firms to arrange their transactions in ways that minimize tax payments even though these arrangements may reduce GDP; and
- prompt individuals to increase their consumption of less valuable goods and