The End of Taxation?
Payne, James L., The Public Interest
FOR A PEOPLE so ready to cast off ancient customs, Americans have been strangely reluctant to question the practice of taxation. Begun millennia ago, taxation developed as a method of exploitation. Instead of massacring defeated peoples, or taking them as slaves, conquerors realized that they could make a regular income by demanding wealth--with the threat of massacre as a prod. Of course the methods of taxation have been refined since those early days, but they still rest on the ugly foundation of force and the threat of force.
Yet philosophers and idealists, so eager to liberate the human race in other ways, have all but ignored taxation. Our culture's two outstanding thoughts on the subject are Benjamin Franklin's aphorism that "nothing is certain but death and taxes," and Supreme Court Justice Oliver Wendell Holmes's dictum that "taxes are what we pay for civilization." In other words, either you simply can't do away with taxes, or if you did, civilization would collapse. In the thrall of this received wisdom, generations of earnest reformers have accepted taxation, the legacy of Roman tyrants, as the only workable way to raise money for public purposes.
There are signs that this intellectual free ride is coming to an end. Sophisticated new research has begun to document what common sense long suggested, namely that taxation, far from being an efficient money machine, is an extremely wasteful way to raise money.
Since Adam Smith, scholars have known that taxation hurts the economy: It denies workers, entrepreneurs, and investors some of the fruits of their creativity and thus discourages their contributions. Only recently, however, have economists gotten around to measuring this disincentive effect. The first serious attempt appears to have been made by Michael Boskin in 1975. Since then, quite a number of studies have been done, both on specific taxes and for the tax system as a whole, and they show in all cases a significant depressing effect of taxation. One estimate for the entire tax system by Charles L. Ballard of Michigan State and his colleagues, published in the American Economic Review in 1985, found the disincentive effect to be 33.2 percent. That is, to raise $100 in taxes causes the waste of $33.20 in lost production. Another study, reported in 1990 by Harvard economists Dale W. Jorgenson and Kun-Young Yun, put the disincentive effect for the tax system even higher, at 38.3 percent of tax revenues.
Another area where research has revealed hitherto unmeasured burdens is compliance costs: recordkeeping, studying tax regulations and instructions, making calculations, and filling out forms and supplementary documents. It was not until the 1980s that systematic surveys were conducted to discover how much time taxpayers spent on these compliance activities. The most comprehensive of these surveys, which included both individual and business taxpayers, was released by the Arthur D. Little company in 1985. It found that the nation was wasting 5.4 billion man-hours a year in federal tax compliance work. This is the equivalent of having 2,900,000 people working all year long just to figure out and comply with federal tax regulations. In monetary terms, this burden amounted to $159 billion in 1985, or over 24 percent of tax revenues collected.
Further burdens of the tax system include the time and energy citizens spend grappling with IRS enforcement actions. There are some 20 million of these every year, including levies, liens, seizures, underreporter notices, non-filing notices, audits, and penalty assessments. Then there is the cost of tax litigation (190,000 cases in 1990), as well as the waste of resources devoted to tax avoidance and evasion devices (which range from investment tax shelters to offshore tax havens and money laundering schemes). When estimates of these costs are combined with the findings about compliance and disincentive costs, the conclusion emerges that, all told, the overhead cost of running the federal tax system appears to be about $65 for each $100 in tax collected (see table). …