By Scott Sumner
Tyler Cowen directed me to an article on government efficiency in The Atlantic. The author tried to push back against the claim that state and local governments were more efficient than the Federal government:
Similarly, the Internal Revenue Service is a ruthlessly effective tax collector, when compared to those in other high-income countries and to the states. California spends 94 cents on overhead for every $100 of state tax revenue collected, for instance, with Great Britain spending 74 cents. The feds, on the other hand, spend less than 50 cents.
This is a narrow definition of ‘efficient’. In my view, state and local governments are far more efficient at collecting taxes than the federal government in two far more important dimensions:
1. The federal income tax is extremely complex. I spend about $1500 and more importantly lots of time each year complying with the federal income tax. State income taxes tend to be far simpler. In addition, my wife spends many hours complying with paperwork created by systems that owe their existence to the federal income tax, such as the tax free status of daily wear contact lens (but only if you buy them via a very complicated insurance scheme that forces you to jump through many hoops.) These paperwork and time costs dwarf the cost of managing the IRS.
2. Federal income taxes tend to radically distort economic activity. These taxes discourage saving, and more importantly they encourage behavior that avoids taxes. These distortions impose massive deadweight losses on the economy. For instance they encourage debt and discourage equity finance. Hmmm, was there a recent problem in America caused by too much debt and too little equity?
The problem is not that the collection of taxes is costly for the federal government, it’s that the collection of taxes is costly for the public.
States tend to rely relatively more on taxes on property, sales and gasoline. These also have their drawbacks, but in general create smaller distortions for the economy.