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1 Robert Carroll, Towards Understanding the Full Burden of High Tax Rates 1 (2009)

handle is hein.taxfoundation/ffbigxz0001 and id is 1 raw text is: FOUNDATION August 2009 No. 186 FISCAL Towards Understanding the Full Burden of High Tax Rates By Robert Carroll Introduction When it comes to tax policy, the emphasis in Washington, DC, has once again turned to how to split up the economic pie rather than the effect of tax policy on its size. During the 2008 Presidential campaign, the focus on equity took the form of rolling back the Bush tax cuts increasing the top tax rates-for those with incomes above $250,000. Now it is clear that some policymakers want to go even further by adding a high-income surtax to partially finance health care reform, which would raise the top tax rate to more than 46 percent. While we ought to expect the distribution of the tax burden to be adjusted periodically with changes in the political winds, it is important that the Congress and the Obama Administration not lose sight of the economic consequences of these policies. A recent Tax Foundation Special Report, The Excess Burden of Taxes and the Economic Cost of High Tax Rates, estimates that the current income tax system already costs the economy between $1.10 and $1.15 for every dollar the government collects in tax revenues. The new tax proposals under consideration will add significantly more to this excess burden. An Additional Burden of Taxes: The Excess Burden When most people think of the burden associated with taxes, what comes to mind is the revenue that is transferred to the government. Taxes reduce peoples' disposable incomes. But taxes also result in a burden beyond what households transfer to the government as revenue, what economists call the excess burden or deadweight loss of taxes. Virtually every tax creates an excess burden.' Taxes distort choices and steer resources away from their best and highest use based purely on economic merit. When decisions are, in part, made for tax reasons, economic resources are wasted. The excess burden can be thought of as