The 30-Cent Tax Premium

In a study published last week by the Laffer Center, my colleagues Wayne Winegarden, John Childs and I 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. And this is not even a complete accounting of the costs of tax complexity.

David Keating of the National Taxpayers Union provides a useful perspective on how big the tax compliance industry is. According to his research, as of 2009 the income-tax industry employed "more workers than are employed at the five biggest employers among Fortune 500 companies—more than all the workers at Wal-Mart Stores, United Parcel Service, McDonald's, International Business Machines, and Citigroup combined."

“lost opportunities are impossible to measure but could be the largest cost of all”

Both as an IT consultant, and in my personal life, I see major decisions based not on what is best for the stockholder, nor on what is best for the employee, nor on what is best for the customer. No! The dominant criteria in decisions is how to game the tax code.

Consider its role in the housing debacle. The tax code was more important than CRA in causing irrational behavior. The mortgage interest deduction is an obvious one. But also important was the fact that the only way to avoid a tax on the sale of a house was to buy a more expensive house. There was a disincentive to invest that investment income in stocks, bonds or even apartment or commercial building.

Consider the impact if there were a similar disincentive in the stock market when upon selling a stock one had a disincentive to invest in not only a different type of investment, but also a disincentive to invest in a different type of stock.

Totally crazy when government uses the tax code to outfox the laws of economics. As with price controls, tax code that violates the laws of economics can delay the pain. But when the built up pain does occur, it will be a much greater pain.

Speaking strictly for myself, I spent approximately 15 or 20 hours over the course of the year in tax preparation. This includes organizing things, filing things, and getting everything I need ready for my tax preparer at H&R Block.

Then I spent an hour with her yesterday, and paid roughly $360 for my taxes to be done.

That's not an insignificant amount of time and money, as far as I'm concerned.

Mark

TurboTax. $40

Be careful! With Turbo Tax you could screw up your taxes so badly that you don't pay them at all and them become Secretary of the Treasury! Of course, if you're not Geitner with friends like Obama, you would just wind up in prison.

Mark

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