CIAO DATE: 11/2010
October 2010
A well-established principle of public finance holds that taxes impose costs on society beyond the amount of revenue government collects. Estimates vary depending on the type of tax, but the "marginal excess burden" of federal taxes most likely ranges from 14 to 52 cents per dollar of tax revenue, averaging about 44 cents for all federal taxes. The Patient Protection and Affordable Care Act provides a useful illustration. The Congressional Budget Office has projected the 10-year, on-budget cost of the law will be just over $1 trillion. This paper estimates PPACA will impose an additional, hidden cost of $157 billion to $494 billion in the form of reduced economic output. Related provisions (such as the so-called "doc fix") could drive the economic losses to $550 billion, or more than half of the bill's official cost estimates. Failing to account for this hidden tax multiplier biases legislative decisions toward more costly policies.
Resource link: Congress Should Account for the Excess Burden of Taxation [PDF] - 684K