Today’s Mallard Fillmore strip claims that 65% of tax money collected is used up operating the tax system. Knowing the strip I have no doubts this is a ridiculous untruth. But I’m curious what the small nugget of truth might have been that this claim was based upon.
My interpretation of the amount of money spent operating the tax system would be approximately the budget of the IRS. And I have doubts that the IRS budget is twice as large as the entire remainder of the federal budget.
James Payne in his article which the strip cites is referring to the total cost of government entitlements. He admits that this figure is a percentage that he came up with himself. A big part of the cost of government, in his opinion, comes from the sloshing about of tax revenues and government payouts making repeated passes through the tax system.
I checked James Payne and it seems to me he could have been an accountant at Enron.
One big whopper IMO is that he adds the cost of avoidance of taxes, both legal and illegal, (and that is a cost the private parties have, not the government) into the total cost of the tax system. Well, yes one could make that point, but a sincere approach would have to include the government and the seemingly clumsy way people use money to avoid paying money!
It does not give one confidence that his method of accounting for this waste is accurate when many other economists do not use it.
Mallard Fillmore then affirming it is only the government gobbling up the 65% is so inaccurate as to be close to a lie.
If you can’t get sound economic analysis from a comic-strip duck, where can you get it?!
Minor point, but tax evasion is illegal, avoidance isn’t?
Anyone have a link to Paynes’s article?
I think I had a bad choice of words there, but overall you will have to take it with Payne: he adds both legal and illegal ways of not paying taxes to the total cost.
I think this is the referred article:
http://www.libertyhaven.com/politicsandcurrentevents/taxesandtaxation/insidefederal.html
Ah, I see now what the unfunny duck forgot to report:
So in 1985 the entire budget of the IRS was about 4 billion dollars.
You can make your own calculations, 65% of tax money collected it ain’t.
The article makes the point that raising $100 in taxes takes more than just the $100 raised out of the economy. No economist would really dispute this. Individuals and business bear costs of tax compliance, and taxes create disincentives which lower production.
Some of the figuring in the article is dubious–for example, the costs of tax compliance rise in proportion to the complexity of the tax code, not the amount of money raised. Raising taxes tends to result in an increase in complexity–because high taxes increase political pressure for exemptions and loopholes–but the relationship is far from linear.
Nevertheless, the article is at least flogging a valid point. The cost to the economy of raising $100 in taxes might be $135 or it might be $165, but it is more than $100.
The comic strip completely mis-states this point, averring that costs associated with taxes “eat up” 65% of all dollars raised, which is palpable nonsense. Either the comic strip author didn’t read the original article, or (more likely) he was incapable of understanding it.
The IRS budget is lower today in inflation adjusted dollars than it was in 1985. Sometime in the 90’s there was some problem with overzealous IRS agents confiscating some taxpayer’s homes (IIRC, it turns out, most of these guys were tax cheats but the IRS is prohibited from sharing taxpayer information with anyone, even other branches of the government, so the Senate hearings were a bit one sided; there is good reason for all this confidentiality, Nixon used to collect tax information of his political enemies and try to use it against them) and the IRS budget got slashed. It has never recovered and since then tax cheats have proliferated.
Even if the contention was that the total cost to society represents 65% of total taxes collected, it wold be inaccurate.
The 65% consists of 35% worth of foregone production (IOW, because we have taxes, people work less because the money isn’t worth it for them and this is a cost to society, I am somewhat involved in tax policy and the effect of taxes on economic behaviour is notentirely understood, certainly not well enough to put a number on it); 25% worth of compliance costs (I don’t see how you can get to this number unless you count all time spent keeping track of money because the cost of tax preparation to the economy is significantly lower than that); 3% is spent by tax evaders in their efforts to hide their income; 2% is spent by the IRS trying to catch those evaders and the IRS represents 0.61% (frankly, even this number sounds high).
Computer programs have made the tax code much simpler for the average taxpayer. Furthermore, most of the complexity in the tax code for the average taxpayer (other than the AMT) is the result of complicated rules for deductions and other tax benefits not taxes imposed (not to say that this invalidates claims of complexity).
I wonder how they count things like mortgages - tax avoidance, in a sense, yet still of value to the economy. A lot of the tax code is designed to drive behavior, after all.
I also wonder how much of the so-called cost is actually a cost to the economy. If you pay a bit extra to a CPA, or more people buy TurboTax, some parts of the economy are growing. I’ll accept that the economy might be slightly less efficient, but not all the extra money is lost to it.
As for the duck - I think it is time to send Cheney out hunting again.
Keep in mind that not all compliance costs are borne by individuals; the tax code is even more complicated for businesses. I spent four years of my working life, every day 9 to 5, 50 weeks a year, maintaining the computer code for a business system that did nothing but track depreciation costs. The system was supported by a huge staff of accounting personnel with graduate degrees and CPA’s, doing nothing but tax compliance. I appreciated the secure job, but didn’t feel like I was producing much in a societal sense.
If I understand correctly, depreciation is not just an accounting gimmick, but reflects the actual decline in value of capital assets. If we didn’t have it, companies would probably buy fewer things, and that would hurt the economy as a whole.
Think how many people didn’t have to calculate depreciation by hand thanks to the code you maintained. Big companies with lots of assets makes for lots of paperwork. I once had to fill out the supporting information for the R&D Tax Credit - that’s majorly mind numbing. But, it has to get done, and since you saved people from the torture of drudgery, you’re a hero. 
Production disincentives might harm the economy, but otherwise the money spent to collect taxes is not taken “out of the economy.” It’s spent. That is, the IRS agents get government paychecks, and they spend them on goods and services, creating a market for businesses, etc.
That’s correct. I was too glib in saying that Payne was describing money “taken out of the economy”, but in my defense, there is no precise way to describe what Payne is measuring. His paper lacks economic rigor. He lumps together costs borne by the government (IRS), by taxpayers (compliance costs), and by the economy as a whole (disincentives).
Only the third effect directly reduces GDP; the other two result in some reduction in GDP due to “deadweight loss” and some redirection of production into goods and services (tax compliance) that people wouldn’t choose if left to their own devices. The balance between the two depends on the supply and demand curves for the goods and services being taxed.
I agree with Payne’s general thesis–taxes do impose an economic burden above and beyond the amount of money which actually moves from taxpayer to government hands. But I’m skeptical of his attempt to quantify it–for that, he would need more rigor.
And the Mallard cartoonist takes a calculation which was fuzzy to begin with, and butchers it out of all recognition.
Note that for most businesses, they would in any case have to do a full double entry set of books, by the GAAP guidelines. Once you spend all of that time and effort, going from those to the tax return is comparitively trivial. And of course, those that hate the tax system seem to always forget that, thinking perhaps that Microsoft will be able to keep their “books & records” in a shoebox. :rolleyes: :dubious: They keep their records as they are a publically traded company, and it’s the Law, taxes or no taxes. So- more bullshit form Mallard and co.
It’s true that for a Sole Prop, he might not need to keep that many records if it wasn’t for taxes. But even if we had no FIT, there would be State Income taxes and Sales taxes- all of which require lots of record keeping- but for many purpose one you keep enough records for the Feds, you have enough to make everyone happy.
Yes, and because of tax law, they have to keep two sets–one on a book basis, and one on a tax basis.
Pass actuarial exam #7, and I’ll believe that you’re qualified to describe how “comparatively trivial” it is in the insurance industry.
And let’s not forget MF’s other point, which is that the MSM is conspiring to keep this atrocity a secret.
That premise is far from axiomatic. If I earned $5000 an hour, I’d work harder – for the first year. Then I’d retire and my actual input to the productivity of the nation would be less than if I were paid a “normal” salary.
Judging from the behavior of athletes and entertainers, who actually make such salaries and keep laboring year after year, your behavior would be unusual.
In any case, it is indeed “axiomatic” among economists that more of a factor of production will be supplied as the return on that factor rises. With respect to labor, there’s more involved than simply hours worked. People face decisions at many points in their lives about whether to invest time and money in education, training, obtaining certifications, and so forth–all of which make them more productive. The return they’ll be able to achieve on their investment is a key factor in their decision, and taxes on both themselves and their potential employers are a key factor in that return.
