It's that time of year again
By Scott Sumner
I just paid someone $3500 to do my income taxes. And even with that expenditure, I had to spend a lot of time and aggravation on the project.
I just paid someone zero dollars to do my payroll taxes. And I spent zero hours on the project.
Is it any wonder that I prefer payroll taxes to income taxes? That $3500 and my foregone time is pure, 100% deadweight loss.
A new NBER study suggests that I’m not alone, they used a clever statistical technique to estimate the compliance costs of taxes:
Many Americans complain about how much of their earnings each year go to taxes. But in How Taxing Is Tax Filing? Using Revealed Preferences to Estimate Compliance Costs (NBER Working Paper No. 23903), Youssef Benzarti shows that many taxpayers forgo tax savings in order to save the time, effort, and other costs required to itemize deductions on their returns. . . . Aggregate compliance costs appear to have risen over time, from $150 billion in 1984 to $200 billion in 2006 (both figures in 2016 USD). This suggests that compliance costs are about 1.2 percent of GDP in recent years.
The following graph illustrates the intuition behind the study:
PS. Some on the left would suggest that I should stop complaining, as I was in the “top 1%” during 2017. That’s wrong. It’s true that the reported taxable income on my tax form put me in the top 1%, but that reported income was about three times my actual income. And that’s because the government forced me to include the (nominal) capital gain on the sale of my house, even though that gain represented housing inflation and even though I immediately turned around and bought another house of roughly equal value. From a “consumption” perspective, nothing changed.
In economics we assume that it’s consumption that determines utility, not income. But the IRS doesn’t agree; they insist I report that capital gain as “income”. Academics like Thomas Piketty then use that same highly misleading “income distribution” data to try to understand “inequality” in America.
BTW, one of silliest talking points I hear is: “Why would voter X oppose high capital gains taxes on the rich, given that his income is merely middle class?” Yes, it’s middle class, until you earn that big capital gain. Remember, 73% of Americans spend at least part of their life in the top 20%.