Wednesday, April 20, 2011

The cost of taxation

This is explained well by Laffer and summarised by the NCPA:

* To start with, individuals and businesses must pay the government the $1 in revenue plus the costs of their own time spent filing and complying with the tax code; plus the tax collection costs of the IRS; plus the tax compliance outlays that individuals and businesses pay to help them file their taxes.
* In a new study, Laffer and his colleagues 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.

If it is 30 percent in the US I can think of no reason why it would be any less here.

He then goes on to show how a simplified flat rate would add to economic growth:

* Consider a family that made $40,000 in the year 2000.
* If their income grew by 3.2 percent per year, the average long-term gross domestic product growth rate, their income by 2010 would be $53,110.
* Now imagine that the growth in the family's income was not 3.2 percent but 3.72 percent (the impact from halving the costs of our current complex tax system).
* Under this higher growth scenario, the family's annual income would have been $55,568 in 2010.
* The slight increase in the economic growth rate raises this family's purchasing power by 4.6 percent.


Do you think that the politicians and activists moaning about the rising costs of living could be interested in this counter-balance? In fact, the CPI would not be rising to the same degree if a flat tax were introduced, so you can add to the increased purchasing power the family would have. And not that I want to hold up government spending, but a lower flatter tax rate could be achieved without reducing revenue.

Just a thought that follows on as I muse about NZ's tax system, Peter Dunne, as Revenue Minister, is a waste of space. But imagine Hide in that role. And then imagine if Honest John actually told us who he wants as Ministers before the election.

3 comments:

Anonymous said...

In addition to all the taxes and excises and rates draining us we have our ETS (a tax on carbon dioxide). This extra on our petrol and power bills reduces available funds for all of us.
Maybe Hide would find balls instead of baubles if he had a 2nd chance.
Peter

Blair said...

From what I can tell, NZ taxes are a lot simpler to figure out than the US Federal ones. The cost of doing one's taxes is much much higher in the US.

Lindsay Mitchell said...

Your comment prompted me to have a further look Blair.

http://rogerkerr.wordpress.com/2011/03/18/friday-graph-the-deadweight-cost-of-taxation/

From Roger Kerr's blog;

"The marginal excess burden of many taxes is large. A 1994 Business Roundtable study found that it was around 18 cents for the marginal dollar of labour taxation and around 14 percent for the marginal dollar of consumption tax. More recently, the Treasury has recommended an MEB of 20 percent for cost benefit analysis of government projects."