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Essay on Taxes (Macroeconomics)
At the beginning of the 20th century, federal taxes accounted for 3 percent of the nation’s gross domestic product, and the tax code and related regulations filled just a few hundred pages. Today, federal taxes account for 17 percent of GDP, rising to 20 percent of GDP by 2014 if recent tax cuts expire as scheduled. According to CCH Inc., federal tax rules and regulations spanned 60,044 pages in 2004—48 percent more pages than when the Republicans took over Congress in 1995.
The extraction of $2 trillion in federal taxes from families and businesses each year comes at an enormous cost. The most obvious cost is that Americans are left with less money to meet their needs for food, clothing, housing, and other items, and businesses are left with fewer funds to invest and build the economy. In addition, the tax system imposes large compliance burdens and ‘‘deadweight losses’’ on the economy.
Compliance burdensare the time and administrative costs of dealing with the tax system’s rules and paperwork. Deadweight lossesare created by taxes distorting the market economy by changing relative prices and altering the behavior of workers, investors, businesses, and entrepreneurs. Consider a workingwoman who is considering launching a small business on the side to earn more income. If the government raises marginal tax rates and dissuades her from those entrepreneurial plans, the nation loses the production and innovative ideas that she could have added to the economy.
Such economic damage increases more than proportionally as marginal tax rates rise. In particular, deadweight losses rise by the square of the tax wedge between pre-and post tax incomes. For example, a doubling of the tax wedge causes deadweight losses to quadruple. That is why a flatter tax structure with lower marginal rates would be much more efficient than the highly graduated rate structure that we have today................
