Policy Analysis No. 669

Congress Should Account for the Excess Burden of Taxation

By Christopher J. Conover
October 13, 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.

For nearly two decades, the U.S. Office of Management and Budget has directed federal agencies to include an average marginal excess burden of 25 cents per dollar when conducting cost-benefit analyses of federal programs.

Congress should direct the Joint Committee on Taxation and Congressional Budget Office to incorporate the excess burden of taxation in their budget analyses, including cost estimates of legislation, baseline budget projections, and budget options. Making such costs visible will encourage policymakers to consider whether the benefits of federal programs equal or exceed the total costs, both visible and hidden. Since the legislation that the CBO analyzes represents marginal changes from an existing budget and tax baseline, marginal excess burdens would be the most appropriate measure.

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Christopher J. Conover is a research scholar with the Center for Health Policy and Inequalities Research at Duke University.